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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-28652
WASTE CONNECTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3283464
(State or other jurisdiction (I.R.S. Employer Identification)
of incorporation or organization)
35 Iron Point Circle
Suite 200
Folsom, California 95630
(Address of principal executive offices) (Zip Code)
(916) 608-8200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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 Regulation 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [_]
Aggregate market value of voting stock held by non-affiliates of registrant as
of June 30, 2003: $973,781,357
Number of shares of Common Stock outstanding as of February 29, 2004: 28,925,102
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2004 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
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WASTE CONNECTIONS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM NO. PAGE
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PART I
1. BUSINESS 1
2. PROPERTIES 20
3. LEGAL PROCEEDINGS 20
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 21
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 24
6. SELECTED FINANCIAL DATA 25
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 27
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 39
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 40
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 40
9A. CONTROLS AND PROCEDURES 41
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 77
11, 12, 13, 14. 77
PART IV
15. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS
ON FORM 8-K 77
SIGNATURES 78
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 79
EXHIBIT INDEX 80
PART I
Forward Looking Statements
Certain information contained in this Annual Report on Form 10-K,
including, without limitation, information appearing under Item 1, "Business,"
and Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," includes statements that are forward-looking in nature.
These statements can be identified by the use of forward-looking terminology
such as "believes", "expects", "may", "will", "should" or "anticipates" or the
negative thereof or comparable terminology, or by discussions of strategy. Our
business and operations are subject to a variety of risks and uncertainties and,
consequently, actual results may materially differ from those projected by any
forward-looking statements in this Annual Report on Form 10-K. Factors that
could cause actual results to differ from those projected include, but are not
limited to: (1) competition or unfavorable economic or industry conditions could
lead to a decrease in demand for our services and/or to a decline in prices we
realize for our services, (2) we depend in part on acquisitions for growth; we
may be required to pay higher prices for acquisitions, and we may experience
difficulty in integrating and deriving synergies from acquisitions, or finding
acquisition targets suitable to our growth strategy, (3) we may not always have
access to the additional capital that we require to execute our growth strategy
or our cost of capital may increase, (4) governmental regulations may require
increased capital expenditures or otherwise affect our business, (5) businesses
that we acquire could have undiscovered liabilities, (6) large, long-term
collection contracts on which we depend may not be replaced when they expire or
are terminated, (7) we are highly dependent on the services of our senior
management, who would be difficult or impossible to replace, and (8) we have a
substantial amount of goodwill; if indicators of impairment arise, a write-down
of our goodwill may be required, which could materially impair our net worth.
These risks and uncertainties, as well as others, are discussed in greater
detail in our other filings with the Securities and Exchange Commission. We make
no commitment to revise or update any forward-looking statement to reflect
events or circumstances after the date any such statement is made.
ITEM 1. BUSINESS
General
Waste Connections, Inc., a Delaware corporation organized in 1997, is an
integrated solid waste services company that provides solid waste collection,
transfer, disposal and recycling services in mostly secondary markets in the
Western and Southern U.S. As of December 31, 2003, we served more than one
million commercial, residential and industrial customers from operations in 23
states: Alabama, Arizona, California, Colorado, Georgia, Illinois, Iowa, Kansas,
Kentucky, Minnesota, Mississippi, Montana, Nebraska, New Mexico, Ohio, Oklahoma,
Oregon, South Dakota, Tennessee, Texas, Utah, Washington, and Wyoming. As of
that date, we owned or operated a network of 101 collection operations, 33
transfer stations, 34 municipal solid waste landfills, one construction and
demolition landfill and 26 recycling operations. We also owned one municipal
solid waste landfill site that is permitted for operation, but not constructed
as of December 31, 2003.
Our growth strategy focuses on expanding into secondary markets located
primarily in the Western and Southern U.S. that have strong demographic growth
trends and where competitive barriers to entry can be developed. We target
markets where we can either (1) provide waste collection services under
franchises, exclusive contracts or other arrangements, or (2) garner a leading
market position and provide vertically integrated collection and disposal
services. We generally seek to avoid operating in highly competitive, larger
urban markets. We are a leading provider of solid waste services in most of our
markets, and more than 50% of our revenues are derived from market areas where
we have franchise or exclusive rights to provide our services.
We have focused on secondary markets mostly in the Western and Southern
U.S. because we believe that in those areas: (1) there is a greater opportunity
to enter into exclusive arrangements; (2) there is less competition from larger
solid waste services companies; (3) strong economic and population growth rates
are projected; and (4) there remain a number of independent solid waste services
companies suitable for acquisition.
We have developed a two-pronged business strategy tailored to the
competitive and regulatory factors that affect our markets:
- Control the Waste Stream. In markets where waste collection services are
provided under exclusive arrangements, or where waste disposal is
municipally funded or available at multiple municipal sources, we believe
that controlling the waste stream by providing collection services is often
more important to our growth and profitability than owning or operating
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landfills. In addition, contracts in some western U.S. markets dictate the
disposal facility to be used. The large size of many western states
increases the cost of interstate and long haul disposal, heightening the
effects of regulations that direct waste disposal, which may make it more
difficult for a landfill to obtain the disposal volume necessary to operate
profitably. In markets with these characteristics, we believe that landfill
ownership or vertical integration is not as critical to our success.
- Provide Vertically Integrated Services. In markets where we believe that
owning landfills is a strategic element to a collection operation because
of competitive and regulatory factors, we generally focus on providing
integrated services, from collection through disposal of solid waste in
landfills that we own or operate. In December 2003, approximately 69% of
waste we collected in our markets was disposed of at landfills we owned or
operated.
Our senior management team has extensive experience in acquiring,
integrating and operating solid waste services businesses, and we intend to
continue to pursue an acquisition-based growth strategy. As of December 31,
2003, we had acquired 167 businesses since our inception in September 1997. We
anticipate that a substantial part of our future growth will come from acquiring
additional solid waste collection, transfer and disposal businesses and,
therefore, we expect additional acquisitions could continue to affect
period-to-period comparisons of our operating results.
Unless otherwise noted, all descriptions of our business in this Annual
Report on Form 10-K are as of December 31, 2003.
Industry Background
We estimate that the U.S. solid waste services industry generated revenues
of approximately $40 billion in 2003. The solid waste services industry has
undergone significant consolidation and integration since 1990. We believe that
the following factors have primarily caused this consolidation and integration:
- Increased Regulations. Industry regulations implemented in the early 1990s
caused operating and capital costs to rise. Many smaller industry
participants have found these costs difficult to bear and have closed their
operations or sold them to larger operators. In addition, Subtitle D
regulations require more stringent engineering of solid waste landfills and
mandate liner systems, leachate collection, treatment and monitoring
systems and gas collection and monitoring systems. These ongoing costs are
combined with increased financial reserve requirements for solid waste
landfill operators relating to closure and post-closure monitoring. As a
result, the number of solid waste landfills is declining while the average
size is increasing.
- Increased Integration of Collection and Disposal Operations. In certain
markets, competitive pressures are forcing operators to become more
efficient by establishing an integrated network of solid waste collection
operations and transfer stations, through which they secure solid waste
streams for disposal. Operators have adopted a variety of disposal
strategies, including owning landfills, establishing strategic
relationships to secure access to landfills and capture significant waste
stream volumes to gain leverage in negotiating lower landfill fees, and
securing long-term, most-favored-pricing contracts with high capacity
landfills.
- Pursuit of Economies of Scale. Larger operators achieve economies of scale
by vertically integrating their operations or by spreading their facility,
asset and management infrastructure over larger volumes. Larger solid waste
collection and disposal companies have become more cost-effective and
competitive by controlling a larger waste stream and by gaining access to
significant financial resources to make acquisitions.
In the Western U.S., we believe these factors did not accelerate
consolidation as much as in other regions because waste collection services in
these markets are provided largely under three types of contractual arrangements
which limit the impact of factors that have driven consolidation elsewhere in
the United States. These arrangements include certificates or permits, franchise
agreements and municipal contracts. Certificates of public convenience and
necessity or permits, such as governmental certificates awarded to solid waste
collection service providers in unincorporated areas and electing municipalities
in Washington state by the Washington Utilities and Transportation Commission
(the "WUTC"), typically grant the holder the exclusive and perpetual right to
provide specific residential, commercial and/or industrial waste services in a
defined territory at specified rates. See "G certificates" on page 8. Franchise
agreements typically provide an exclusive service period of five to ten years or
longer and specify the service territory, a broad range of services to be
provided, and rates for the services. They also often give the service provider
a right of first refusal to extend the term of the agreement. Municipal
contracts typically provide a shorter service period and a more limited scope of
services than franchise agreements and generally require competitive bidding at
the end of the contract term. Unless customers within the areas covered by
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certain governmental certificates, franchise agreements and municipal contracts
elect not to receive any waste collection services, they are required to pay
collection fees to the company providing these services in their area. These
exclusive rights and contractual arrangements create barriers to entry that can
be overcome mostly by the acquisition of the company with such exclusive rights
or contractual arrangements.
The solid waste services industry remains very regional in nature with
acquisition opportunities available in selected markets. Due to the prevalence
of exclusive arrangements and the reduced pace of consolidation, we believe the
Western markets contain the largest and most attractive number of acquisition
opportunities. We expect the consolidation trend in the solid waste industry to
continue, but at a slowing pace. Some of the remaining independent landfill and
collection operators lack the capital resources, management skills and technical
expertise necessary to comply with stringent environmental and other
governmental regulations and to compete with larger, more efficient, integrated
operators. In addition, many of the remaining independent operators may wish to
sell their businesses to achieve liquidity in their personal finances or as part
of their estate planning.
GROWTH STRATEGY
- Internal Growth. To generate continued internal revenue growth, we focus on
increasing market penetration in our current and adjacent markets,
soliciting new commercial, industrial, and residential customers in markets
where such customers may elect whether or not to receive waste collection
services, marketing upgraded or additional services (such as compaction or
automated collection) to existing customers and, where appropriate, raising
prices. Where possible, we intend to leverage our franchise-based platforms
to expand our customer base beyond our exclusive market territories. As
customers are added in existing markets, our revenue per routed truck
increases, which generally increases our collection efficiencies and
profitability. In markets in which we have exclusive contracts, franchises
and certificates, we expect internal volume growth generally to track
population and business growth.
- Exclusive Arrangements. We derive a significant portion of our revenues
from arrangements, including franchise agreements, municipal contracts and
governmental certificates, under which we are the exclusive service
provider in a specified market. We intend to devote significant resources
to securing additional franchise agreements and municipal contracts through
competitive bidding and additional governmental certificates by acquiring
other companies. In bidding for franchises and municipal contracts and
evaluating acquisition candidates holding governmental certificates, our
management team draws on its experience in the waste industry and its
knowledge of local service areas in existing and target markets. Our
district managers maintain relationships with local governmental officials
within their service areas, and sales representatives may be assigned to
cover specific municipalities. These personnel focus on maintaining,
renewing and renegotiating existing franchise agreements and municipal
contracts and on securing additional agreements and contracts while
maintaining acceptable financial returns.
- Expansion Through Acquisitions. We intend to expand the scope of our
operations by continuing to acquire solid waste operations in new markets
and in existing or adjacent markets that are combined with or "tucked in"
to our existing operations. We focus our acquisition efforts on markets
that we believe provide significant growth opportunities for a
well-capitalized market entrant and where we can create economic and
operational barriers to entry by new competitors. We believe that our
experienced management, decentralized operating strategy, financial
strength, size and public company status make us an attractive buyer to
certain solid waste collection and disposal acquisition candidates. We have
developed an acquisition discipline based on a set of financial, market and
management criteria to evaluate opportunities. Once an acquisition is
closed, we seek to integrate it and to minimize disruption to the ongoing
operations of both Waste Connections and the acquired business.
In new markets, we often use an initial acquisition as an operating base
and seek to strengthen the acquired operation's presence in that market by
providing additional services, adding new customers and making "tuck-in"
acquisitions. We next seek to broaden our regional presence by adding
additional operations in markets adjacent to the new location. We believe
that many suitable "tuck-in" acquisition opportunities exist within our
current and targeted market areas that provide us with opportunities to
increase our market share and route density.
OPERATING STRATEGY
- Decentralized Operations. We manage our operations on a decentralized
basis. This places decision-making authority close to the customer,
enabling us to identify customers' needs quickly and to address those needs
in a cost-effective manner. We believe that decentralization provides a
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low-overhead, highly efficient operational structure that allows us to
expand into geographically contiguous markets and operate in relatively
small communities that larger competitors may not find attractive. We
believe that this structure gives us a strategic competitive advantage,
given the relatively rural nature of much of the Western and Southern U.S.,
and makes us an attractive buyer to many potential acquisition candidates.
We currently deliver our services from approximately 118 operating
locations grouped into the following four regions: Pacific Northwest,
Western, Central and Eastern. We organized our business into these four
regions on the basis of their respective geographic characteristics,
interstate waste flow, revenue base, employee base, regulatory structure
and acquisition opportunities. Each region has a regional vice president
and a regional controller, reporting directly to the corporate management.
They are responsible for operations and accounting in their respective
region and supervise a regional staff.
Each operating location has a district manager with autonomous service and
decision-making authority for their operations and who is responsible for
maintaining service quality, promoting safety, implementing marketing
programs, and overseeing day-to-day operations, including contract
administration. District managers also help identify acquisition candidates
and are responsible for integrating acquired businesses into our operations
and obtaining the permits and other governmental approvals required for us
to operate them.
- Operating Enhancements. We develop company-wide operating standards, which
are tailored for each of our markets based on industry standards and local
conditions. Upon closing an acquisition, we implement cost controls and
employee training and safety procedures, and establish a sales and
marketing plan for each market. We use a wide area information system
network, implement financial controls, and consolidate certain accounting,
personnel and customer service functions. While regional and district
management operate with a high degree of autonomy, our senior officers
monitor regional and district operations and require adherence to our
accounting, purchasing, marketing and internal control policies,
particularly with respect to financial matters. Our executive officers
regularly review the performance of district managers and operations. We
believe that by establishing operating standards, closely monitoring
performance and streamlining certain administrative functions, we can
improve the profitability of existing and newly acquired operations.
If we can internalize the waste stream of acquired operations, we can
further increase operating efficiencies and improve capital utilization.
Where not restricted by exclusive agreements, contracts, permits or
certificates, we also solicit new commercial, industrial and residential
customers in areas within and surrounding the markets served by acquired
collection operations, to further improve economies of scale and increase
collection volumes.
SERVICES
Commercial, Industrial and Residential Collection Services
We serve more than one million commercial, industrial and residential
customers from operations in 23 states. Our services are generally provided
under one of the following arrangements: (1) governmental certificates; (2)
exclusive franchise agreements; (3) exclusive municipal contracts; (4)
commercial and industrial service agreements; (5) residential subscriptions; and
(6) residential contracts.
Governmental certificates, exclusive franchise agreements and exclusive
municipal contracts grant us rights to provide services within specified areas
at established rates. We currently have in excess of 650 such exclusive
arrangements, which vary in both size and duration. Governmental certificates
are unique to the State of Washington and are generally perpetual in duration.
Generally, franchise agreements with government entities tend to be larger and
of longer duration than municipal contracts. We continue to provide service
under some municipal contracts that have expired, while new agreements are being
negotiated. We do not expect that the loss of any current contracts in
negotiation for renewal or contracts likely to terminate in 2004 would have a
material adverse affect on our revenues or cash flows. No individual contract or
customer accounted for more than 5% of our total revenues for the year ended
December 31, 2003.
We provide commercial and industrial services, other than those we perform
under exclusive arrangements, under service agreements generally ranging from
one to three years. We determine fees under these agreements by such factors as
collection frequency, level of service, route density, the type, volume and
weight of the waste collected, type of equipment and containers furnished, the
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distance to the disposal or processing facility, the cost of disposal or
processing and prices charged in our markets for similar services. Collection of
larger volumes associated with commercial and industrial waste streams generally
help improve our operating efficiencies, and consolidation of these volumes
allows us to negotiate more favorable disposal prices. Our commercial and
industrial customers use portable containers for storage, enabling us to service
many customers with fewer collection vehicles. Commercial and industrial
collection vehicles normally require one operator. We provide one to ten cubic
yard containers to commercial customers, 10 to 50 cubic yard containers to
industrial customers, and 30 to 96 gallon carts to residential customers. For an
additional fee, we install on the premises of large volume customers stationary
compactors that compact waste prior to collection.
We provide residential waste services, other than those we perform under
exclusive arrangements, under contracts with homeowners' associations, apartment
owners or mobile home park operators, or on a subscription basis with individual
households. We set base residential fees on a contract basis primarily based on
route density, the frequency and level of service, the distance to the disposal
or processing facility, weight and type of waste collected, type of equipment
and containers furnished, the cost of disposal or processing and prices charged
by competitors in that market for similar services. Collection fees are paid
either by the municipalities from tax revenues or directly by the residents
receiving the services.
Landfills
Currently, solid waste landfills in the United States must be designed,
permitted, operated, closed and maintained after closure in compliance with
federal, state and local regulations pursuant to Subtitle D of the Resource
Conservation and Recovery Act of 1976, as amended ("RCRA"). Operating a solid
waste landfill involves excavating, constructing liners and final caps,
continually spreading and compacting waste, covering waste with earth or other
inert material at least once a day to maintain sanitary conditions, using the
airspace effectively and preparing the site so it can ultimately be used for
other purposes.
We seek to identify solid waste landfill acquisition candidates to achieve
vertical integration in markets where the economic and regulatory environment
makes landfill acquisitions attractive. In some markets, acquiring landfills
provides opportunities to vertically integrate our collection, transfer and
disposal operations while improving operating margins. When we have vertical
integration, we eliminate third party disposal costs and generally are able to
realize higher margins and stronger operating cash flows. The fees charged at
disposal facilities, which are known as "tipping fees," are based on market
factors and take into account the type and weight or volume of solid waste
deposited and the type and size of the vehicles used to transport waste. We
evaluate landfill acquisition candidates by determining, among other factors,
whether access to the landfill is economically feasible from our existing market
areas either directly or through transfer stations, the amount and disposal cost
of waste we currently dispose of at a facility owned by a third party that could
be diverted to the landfill, the expected life of the landfill, the potential
for expanding the landfill and the potential for material environmental
liabilities at the landfill.
Our municipal solid waste landfill facilities consisted of the following at
December 31, 2003:
Owned and operated landfills 20
Operated landfills under limited-term operating agreements 9
Operated landfills under life-of-site operating agreements 5
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34
======
We also own one municipal solid waste landfill site that is permitted for
operation, but not constructed as of December 31, 2003. Currently, we own
landfills in California, Colorado, Illinois, Kansas, Minnesota, Nebraska, New
Mexico, Oklahoma, Oregon, Tennessee and Washington. In addition, we operate, but
do not own, landfills in California, Colorado, Georgia, Mississippi, Nebraska
and New Mexico. With the exception of one landfill located in Tennessee that
only accepts construction and demolition waste, all landfills that we own or
operate are municipal solid waste landfills. In January 2004, we also acquired a
company operating a construction and demolition landfill in Kentucky. For
landfill operating agreements, the owner of the property, generally a
municipality, usually owns the permit and we operate the landfill for a
contracted term, which may be the life of the landfill. Under our operating
agreements for which the contracted term is not the life of the landfill, the
property owner is generally responsible for closure and post-closure
obligations. We are operating at reduced disposal volumes at one of our operated
landfills under a limited-term operating agreement, for which we had no closure
or post-closure obligations. The limited term operating agreement for another of
our landfills is set to expire in July 2004 from which we generate approximately
$0.7 million of annualized revenues. The loss of these two limited-term
5
operating agreements is not expected to have a material financial impact. We are
responsible for all closure and post-closure liabilities at four of our five
operated landfills for which we have life-of-site operating agreements.
Based on remaining permitted capacity as of December 31, 2003, and
projected annual disposal volumes, the average remaining landfill life for our
owned and operated landfills and landfills operated, but not owned, under
life-of-site operating agreements, is estimated to be approximately 49 years.
Many of our existing landfills have the potential for expanded disposal capacity
beyond the amount currently permitted. We monitor the available permitted
in-place disposal capacity of our landfills on an ongoing basis and evaluate
whether to seek to expand this capacity. In making this evaluation, we consider
various factors, including the volume of waste projected to be disposed of at
the landfill, the size of the unpermitted acreage included in the landfill, the
likelihood that we will be able to obtain the necessary approvals and permits
required for the expansion, and the costs that would be involved in developing
the additional capacity. We also regularly consider whether it is advisable, in
light of changing market conditions and/or regulatory requirements, to seek to
expand or change the permitted waste streams or to seek other permit
modifications. We are currently seeking to expand permitted capacity at 11 of
our landfills for which we consider expansions to be probable. Although we
cannot be certain that all future expansions will be permitted as designed, the
average remaining landfill life for our owned and operated landfills and
landfills operated, but not owned, under life-of-site operating agreements is
estimated to be approximately 63 years when considering remaining permitted
capacity, probable expansion capacity and projected annual disposal volume. The
operating contracts for which the contracted term is not the life of the
landfill have expiration dates from 2004 to 2013. The following table reflects
estimated landfill capacity and airspace changes, as measured in tons, for owned
and operated landfills and landfills operated, but not owned, under life-of-site
operating agreements (in thousands):
2002 2003
------------------------------------------ ------------------------------------------
Probable Probable
Permitted Expansion Total Permitted Expansion Total
---------- ---------- ---------- ---------- ---------- ----------
Balance, beginning of year 271,139 21,890 293,029 290,942 47,542 338,484
Acquisitions and new life-of-site
operating agreements 16,195 -- 16,195 9,561 1,400 10,961
New expansions pursued -- 34,901 34,901 -- 29,548 29,548
Permits granted 6,133 (6,133) -- 550 (550) --
Airspace consumed (5,454) -- (5,454) (5,894) -- (5,894)
Changes in engineering estimates 2,929 (3,116) (187) (6,367) 5,358 (1,009)
---------- ---------- ---------- ---------- ---------- ----------
Balance, end of year 290,942 47,542 338,484 288,792 83,298 372,090
========== ========== ========== ========== ========== ==========
The estimated remaining operating lives for our owned and operated
landfills and landfills operated, but not owned, under life-of-site operating
agreements, based on remaining permitted and probable expansion capacity and
projected annual disposal volume, in years, as of December 31, 2002, was as
follows:
0 to 10 11 to 20 21 to 40 41 to 50 51 + Total
-------- -------- -------- -------- -------- --------
Owned and operated
landfills 2 2 4 1 11 20
Operated landfills under
life-of-site operating
agreements -- -- -- 1 2 3
-------- -------- -------- -------- -------- --------
2 2 4 2 13 23
======== ======== ======== ======== ======== ========
6
The estimated remaining operating lives for our owned and operated
landfills and landfills operated, but not owned, under life-of-site operating
agreements, based on remaining permitted and probable expansion capacity and
projected annual disposal volume, in years, as of December 31, 2003, was as
follows:
0 to 10 11 to 20 21 to 40 41 to 50 51 + Total
-------- -------- -------- -------- -------- --------
Owned and operated
landfills 2 2 3 4 9 20
Operated landfills under
life-of-site operating
agreements -- -- 2 1 2 5
-------- -------- -------- -------- -------- --------
2 2 5 5 11 25
======== ======== ======== ======== ======== ========
The disposal tonnage that we received in 2002 and 2003 at all of our
municipal solid waste landfills is shown below (tons in thousands):
2002 2003
------------------- -------------------
Number of Total Number of Total
Sites Tons Sites Tons
--------- -------- --------- --------
Owned and operated
landfills 20 5,057 20 5,335
Operated landfills under 7 610 9 896
limited-term operating
agreements
Operated landfills under
life-of-site operating 3 397 5 559
agreements
--------- -------- --------- --------
30 6,064 34 6,790
--------- -------- --------- --------
Transfer Station Services
We have an active program to acquire, develop, own and operate transfer
stations in markets proximate to our collection operations. Transfer stations
extend our direct-haul reach and link disparate collection operations with
disposal facilities that we own, operate or have under contract. We owned or
operated 33 transfer stations at December 31, 2003. Currently, we own transfer
stations in Colorado, Georgia, Kansas, Montana, Nebraska, Oklahoma, Oregon,
Tennessee and Washington. In addition, we operate, but do not own, transfer
stations in California, Kentucky, Nebraska, and Washington. Transfer stations
receive, compact, and load solid waste onto larger vehicles to be transported to
landfills. We believe that transfer stations benefit us by:
- concentrating the waste stream from a wider area, which increases the
volume of disposal at our landfill facilities and gives us greater
leverage in negotiating for more favorable disposal rates at other
landfills;
- improving utilization of collection personnel and equipment; and
- building relationships with municipalities and private operators that
deliver waste, which can lead to additional growth opportunities.
Recycling Services
We offer municipal, commercial, industrial and residential customers
recycling services for a variety of recyclable materials, including cardboard,
office paper, plastic containers, glass bottles and ferrous and aluminum metals.
We own or operate 26 recycling processing operations and sell other collected
recyclable materials to third parties for processing before resale. We often
7
share the profits from our resale of recycled materials with other parties to
our recycling contracts. For example, certain of our municipal recycling
contracts in Washington, negotiated before we acquired those businesses, specify
certain benchmark resale prices for recycled commodities. To the extent the
prices we actually receive for the processed recycled commodities collected
under those contracts exceed the prices specified in the contracts, we share the
excess with the municipality, after recovering any previous shortfalls resulting
from actual market prices falling below the prices specified in the contracts.
To reduce our exposure to commodity price volatility and risk with respect to
recycled materials, we have adopted a pricing strategy of charging collection
and processing fees for recycling volume collected from third parties. We
believe that recycling will continue to be an important component of local and
state solid waste management plans due to the public's increasing environmental
awareness and expanding regulations that mandate or encourage recycling.
G CERTIFICATES
A substantial portion of our Washington collection business is performed
under governmental certificates (referred to as "G certificates") awarded by the
WUTC. G certificates apply only to unincorporated areas of Washington and
municipalities that have elected to have their solid waste collection overseen
by the WUTC. G certificates generally grant the holder the exclusive and
perpetual right to provide certain solid waste collection and transportation
services in a specified territory. The WUTC has repeatedly determined that, in
enacting the statute authorizing G certificates, the Washington legislature
intended to favor grants of exclusive, rather than overlapping, service rights
for conventional solid waste services. Accordingly, most G certificates
currently grant exclusive solid waste collection and transportation rights for
conventional solid waste services in specified territories.
SALES AND MARKETING
In many of our existing markets, we provide waste collection, transfer and
disposal services to municipalities and governmental authorities under exclusive
arrangements, and, therefore, do not contract directly with individual
customers. In addition, because we have grown primarily through acquisitions, we
have generally assumed existing franchise agreements, municipal contracts and G
certificates from the acquired companies, rather than obtaining new contracts.
For these reasons, our sales and marketing efforts to date have been narrowly
focused. We have added sales and marketing personnel as necessary to extend or
renew existing contracts, solicit new contracts or customers in markets where we
are not the exclusive provider of solid waste services, expand our presence into
areas adjacent to or contiguous with our existing markets, and market additional
services to existing customers.
COMPETITION
The solid waste services industry is highly competitive and requires
substantial labor and capital resources. The industry presently includes three
large national waste companies: Allied Waste Industries, Inc., Republic
Services, Inc., and Waste Management, Inc. Casella Waste Systems, Inc., and
Waste Industries USA, Inc. are two other public companies with a regional focus
and annual revenues in excess of $200 million. Certain of the markets in which
we compete or will likely compete are served by one or more large, national
solid waste companies, as well as by numerous privately held regional and local
solid waste companies of varying sizes and resources, some of which have
accumulated substantial goodwill in their markets. We also compete with
operators of alternative disposal facilities, including incinerators, and with
counties, municipalities, and solid waste districts that maintain their own
waste collection and disposal operations. Public sector operators may have
financial advantages over us, because of their access to user fees and similar
charges, tax revenues and tax-exempt financing.
We compete for collection, transfer and disposal volume based primarily on
the price and quality of our services. From time to time, competitors may reduce
the price of their services in an effort to expand their market shares or
service areas or to win competitively bid municipal contracts. These practices
may cause us to reduce the price of our services or, if we elect not to do so,
to lose business. We provide a substantial portion of our residential,
commercial and industrial collection services under exclusive franchise and
municipal contracts and certificates, some of which are subject to periodic
competitive bidding. We provide the balance of our services under subscription
agreements with individual households and one to three year service contracts
with commercial and industrial customers.
The solid waste collection and disposal industry has undergone significant
consolidation, and we encounter competition in our efforts to acquire landfills,
transfer and collection operations. Intense competition exists not only for
collection, transfer and disposal volume, but also for remaining acquisition
candidates. We generally compete for acquisition candidates with publicly owned
8
regional and large national waste management companies. Competition in the
disposal industry is also affected by the increasing national emphasis on
recycling and other waste reduction programs, which may reduce the volume of
waste deposited in landfills. Accordingly, it may become uneconomical for us to
make further acquisitions or we may be unable to locate or acquire suitable
acquisition candidates at price levels and on terms and conditions that we
consider appropriate, particularly in markets we do not already serve.
REGULATION
Introduction
Our landfill operations and non-landfill operations, including waste
transportation, transfer stations, vehicle maintenance shops and fueling
facilities, are all subject to extensive and evolving federal, state and local
environmental laws and regulations, the enforcement of which has become
increasingly stringent. The environmental regulations that affect us are
administered by the EPA and other federal, state and local environmental,
zoning, health and safety agencies. The WUTC regulates the portion of our
collection business in Washington performed under G certificates, which
generally grant us perpetual and exclusive collection rights in certain areas.
We are currently in substantial compliance with applicable federal, state and
local environmental laws, permits, orders and regulations. We do not currently
anticipate any material costs necessary to bring our operations into
environmental compliance (although there can be no assurance in this regard). We
attempt to anticipate future regulatory requirements and to plan in advance as
necessary to comply with them.
The principal federal, state and local statutes and regulations that apply
to our operations are described below. All of the federal statutes described
below contain provisions that authorize, under certain circumstances, lawsuits
by private citizens to enforce the provisions of the statutes. In addition to
penalties, some of those statutes authorize an award of attorneys' fees to
parties that successfully bring such an action. Enforcement actions under these
statutes may include both civil and criminal penalties, as well as injunctive
relief in some instances.
The Resource Conservation and Recovery Act of 1976 ("RCRA")
RCRA regulates the generation, treatment, storage, handling, transportation
and disposal of solid waste and requires states to develop programs to ensure
the safe disposal of solid waste. RCRA divides solid waste into two groups,
hazardous and nonhazardous. Wastes are generally classified as hazardous if they
either (i) are specifically included on a list of hazardous wastes, or (ii)
exhibit certain characteristics defined as hazardous. Household wastes are
specifically designated as nonhazardous. Wastes classified as hazardous under
RCRA are subject to much stricter regulation than wastes classified as
nonhazardous, and businesses that deal with hazardous waste are subject to
regulatory obligations in addition to those imposed on handlers of nonhazardous
waste. From the date of inception through December 31, 2003, we did not, to our
knowledge, transport hazardous wastes under circumstances that would subject us
to hazardous waste regulations under RCRA. Some of our ancillary operations
(e.g., vehicle maintenance operations) may generate hazardous wastes. We manage
these wastes in substantial compliance with applicable laws.
In October 1991, the Environmental Protection Agency adopted the Subtitle D
Regulations governing solid waste landfills. The Subtitle D Regulations, which
generally became effective in October 1993, include location restrictions,
facility design standards, operating criteria, closure and post-closure
requirements, financial assurance requirements, groundwater monitoring
requirements, groundwater remediation standards and corrective action
requirements. In addition, the Subtitle D Regulations require that new landfill
sites meet more stringent liner design criteria (typically, composite soil and
synthetic liners or two or more synthetic liners) intended to keep leachate out
of groundwater and have extensive collection systems to carry away leachate for
treatment prior to disposal. Groundwater monitoring wells must also be installed
at virtually all landfills to monitor groundwater quality and, indirectly, the
effectiveness of the leachate collection system. The Subtitle D Regulations also
require, where certain regulatory thresholds are exceeded, that facility owners
or operators control emissions of methane gas generated at landfills in a manner
intended to protect human health and the environment. Each state is required to
revise its landfill regulations to meet these requirements or such requirements
will be automatically imposed by the EPA on landfill owners and operators in
that state. Each state is also required to adopt and implement a permit program
or other appropriate system to ensure that landfills in the state comply with
the Subtitle D Regulations. Various states in which we operate or in which we
may operate in the future have adopted regulations or programs as stringent as,
or more stringent than, the Subtitle D Regulations.
9
RCRA also regulates underground storage of petroleum and other regulated
materials. RCRA requires registration, compliance with technical standards for
tanks, release detection and reporting, and corrective action, among other
things. Certain of our facilities and operations are subject to these
requirements.
The Federal Water Pollution Control Act of 1972 (the "Clean Water Act")
The Clean Water Act regulates the discharge of pollutants from a variety of
sources, including solid waste disposal sites and transfer stations, into waters
of the United States. If run-off from our owned or operated transfer stations or
run-off or collected leachate from our owned or operated landfills is discharged
into streams, rivers or other surface waters, the Clean Water Act would require
us to apply for and obtain a discharge permit, conduct sampling and monitoring
and, under certain circumstances, reduce the quantity of pollutants in such
discharge. Also, virtually all landfills are required to comply with the EPA's
storm water regulations issued in November 1990, which are designed to prevent
contaminated landfill storm water runoff from flowing into surface waters. We
believe that our facilities comply in all material respects with the Clean Water
Act requirements. Various states in which we operate or in which we may operate
in the future have been delegated authority to implement the Clean Water Act
permitting requirements, and some of these states have adopted regulations that
are more stringent than the federal requirements. For example, states often
require permits for discharges to ground water as well as surface water.
The Comprehensive Environmental Response, Compensation, and Liability Act of
1980 ("CERCLA")
CERCLA established a regulatory and remedial program intended to provide
for the investigation and cleanup of facilities where or from which a release of
any hazardous substance into the environment has occurred or is threatened.
CERCLA's primary mechanism for remedying such problems is to impose strict joint
and several liability for cleanup of facilities on current owners and operators
of the site, former owners and operators of the site at the time of the disposal
of the hazardous substances, any person who arranges for the transportation,
disposal or treatment of the hazardous substances, and the transporters who
select the disposal and treatment facilities. CERCLA also imposes liability for
the cost of evaluating and remedying any damage to natural resources. The costs
of CERCLA investigation and cleanup can be very substantial. Liability under
CERCLA does not depend on the existence or disposal of "hazardous waste" as
defined by RCRA; it can also be based on the existence of even very small
amounts of the more than 700 "hazardous substances" listed by the EPA, many of
which can be found in household waste. In addition, the definition of "hazardous
substances" in CERCLA incorporates substances designated as hazardous or toxic
under the federal Clean Water Act, Clear Air Act and Toxic Substances Control
Act. If we were found to be a responsible party for a CERCLA cleanup, the
enforcing agency could hold us, or any other generator, transporter or the owner
or operator of the contaminated facility, responsible for all investigative and
remedial costs, even if others were also liable. CERCLA also authorizes the
imposition of a lien in favor of the United States on all real property subject
to, or affected by, a remedial action for all costs for which a party is liable.
CERCLA gives a responsible party the right to bring a contribution action
against other responsible parties for their allocable shares of investigative
and remedial costs. Our ability to obtain reimbursement from others for their
allocable shares of such costs would be limited by our ability to find other
responsible parties and prove the extent of their responsibility and by the
financial resources of such other parties. Various state laws also impose
liability for investigation, cleanup and other damages associated with hazardous
substance releases.
The Clean Air Act
The Clean Air Act generally, through state implementation of federal
requirements, regulates emissions of air pollutants from certain landfills based
on factors such as the date of the landfill construction and tons per year of
emissions of regulated pollutants. Larger landfills and landfills located in
areas where the ambient air does not meet certain requirements of the Clean Air
Act may be subject to even more extensive air pollution controls and emission
limitations. In addition, the EPA has issued standards regulating the disposal
of asbestos-containing materials. Air permits may be required to construct gas
collection and flaring systems, and operating permits may be required, depending
on the potential air emissions. State air regulatory programs may implement the
federal requirements but may impose additional restrictions. For example, some
state air programs uniquely regulate odor and the emission of toxic air
pollutants.
The Occupational Safety and Health Act of 1970 (the "OSH Act")
The OSH Act is administered by the Occupational Safety and Health
Administration ("OSHA"), and in many states by state agencies whose programs
have been approved by OSHA. The OSH Act establishes employer responsibilities
10
for worker health and safety, including the obligation to maintain a workplace
free of recognized hazards likely to cause death or serious injury, to comply
with adopted worker protection standards, to maintain certain records, to
provide workers with required disclosures and to implement certain health and
safety training programs. Various OSHA standards may apply to our operations,
including standards concerning notices of hazards, safety in excavation and
demolition work, the handling of asbestos and asbestos-containing materials, and
worker training and emergency response programs.
Flow Control/Interstate Waste Restrictions
Certain permits and approvals, as well as certain state and local
regulations, may limit a landfill or transfer station to accepting waste that
originates from specified geographic areas, restrict the importation of
out-of-state waste or wastes originating outside the local jurisdictions or
otherwise discriminate against non-local waste. These restrictions, generally
known as flow control restrictions, are controversial, and some courts have held
that some flow control schemes violate constitutional limits on state or local
regulation of interstate commerce. From time to time, federal legislation is
proposed that would allow some local flow control restrictions. Although no such
federal legislation has been enacted to date, if such federal legislation should
be enacted in the future, states in which we own or operate landfills could
limit or prohibit the importation of out-of-state waste or direct that wastes be
handled at specified facilities. Such state actions could adversely affect our
landfills. These restrictions could also result in higher disposal costs for our
collection operations. If we were unable to pass such higher costs through to
our customers, our business, financial condition and operating results could be
adversely affected.
Certain state and local jurisdictions may also seek to enforce flow control
restrictions through local legislation or contractually. In certain cases, we
may elect not to challenge such restrictions. These restrictions could reduce
the volume of waste going to landfills in certain areas, which may prevent us
from operating our landfills at their full capacity and/or reduce the prices
that we can charge for landfill disposal services. These restrictions may also
result in higher disposal costs for our collection operations. If we were unable
to pass such higher costs through to our customers, our business, financial
condition and operating results could be adversely affected.
State and Local Regulation
Each state in which we now operate or may operate in the future has laws
and regulations governing the generation, storage, treatment, handling,
transportation and disposal of solid waste, occupational safety and health,
water and air pollution and, in most cases, the siting, design, operation,
maintenance, closure and post-closure maintenance of landfills and transfer
stations. State and local permits and approval for these operations may be
required and may be subject to periodic renewal, modification or revocation by
the issuing agencies. In addition, many states have adopted statutes comparable
to, and in some cases more stringent than, CERCLA. These statutes impose
requirements for investigation and cleanup of contaminated sites and liability
for costs and damages associated with such sites, and some provide for the
imposition of liens on property owned by responsible parties. Furthermore, many
municipalities also have ordinances, local laws and regulations affecting our
operations. These include zoning and health measures that limit solid waste
management activities to specified sites or activities, flow control provisions
that direct or restrict the delivery of solid wastes to specific facilities,
laws that grant the right to establish franchises for collection services and
then put such franchises out for bid, and bans or other restrictions on the
movement of solid wastes into a municipality.
Permits or other land use approvals with respect to a landfill, as well as
state or local laws and regulations, may specify the quantity of waste that may
be accepted at the landfill during a given time period, and/or specify the types
of waste that may be accepted at the landfill. Once an operating permit for a
landfill is obtained, it must generally be renewed periodically.
There has been an increasing trend at the state and local level to mandate
and encourage waste reduction at the source and waste recycling, and to prohibit
or restrict the disposal in landfills of certain types of solid wastes, such as
yard wastes, leaves and tires. The enactment of regulations reducing the volume
and types of wastes available for transport to and disposal in landfills could
prevent us from operating our facilities at their full capacity.
Some state and local authorities enforce certain federal laws in addition
to state and local laws and regulations. For example, in some states, RCRA, the
OSH Act, parts of the Clean Air Act and parts of the Clean Water Act are
enforced by local or state authorities instead of by the EPA, and in some states
those laws are enforced jointly by state or local and federal authorities.
11
Public Utility Regulation
In many states, public authorities regulate the rates that landfill
operators may charge. The adoption of rate regulation or the reduction of
current rates in states in which we own or operate landfills could adversely
affect our business, financial condition and operating results.
Solid waste collection services in all unincorporated areas of Washington
and in electing municipalities in Washington are provided under G certificates
awarded by the WUTC. The WUTC also sets rates for regulated solid waste
collection services in Washington.
RISK MANAGEMENT, INSURANCE AND FINANCIAL SURETY BONDS
Risk Management
We maintain environmental and other risk management programs appropriate
for our business. Our environmental risk management program includes evaluating
existing facilities and potential acquisitions for environmental law compliance.
We do not presently expect environmental compliance costs to increase materially
above current levels, but we cannot predict whether future acquisitions will
cause such costs to increase. We also maintain a worker safety program that
encourages safe practices in the workplace. Operating practices at our
operations emphasize minimizing the possibility of environmental contamination
and litigation. Our facilities comply in all material respects with applicable
federal and state regulations.
Insurance
Beginning August 1, 2002, we significantly changed our insurance programs
for automobile liability, property, general liability, workers' compensation and
employer's liability. Prior to this date, each of these areas was third-party
insured with a per incident deductible of up to $5,000. Under our current
insurance program, we carry per incident deductibles of $2 million for
automobile liability claims, $1.5 million for workers' compensation and
employer's liability claims, and $1 million for general liability claims.
During a 12 month period, our automobile liability policy will pay up to $3
million in the aggregate per incident, after we pay the $2 million deductible.
Additionally, we have an umbrella policy with a third party insurance company
for automobile liability, general liability and employer's liability that will
pay, during a 12 month period, up to an aggregate of $25 million of claims in
excess of the $5 million limit for automobile claims and in excess of the $1
million limit for general liability and $1.5 million limit for employer's
liability claims. Since workers' compensation is a statutory coverage limited
only by the various state jurisdictions, the umbrella coverage is not
applicable. Also, our umbrella policy does not cover property claims, as the
insurance limits for these claims are in accordance with the replacement values
of the insured property.
In November 2002, we purchased environmental protection insurance under a
three-year policy with limits of $10 million per occurrence, with a $20 million
aggregate limit. This insurance covers all owned or operated landfills and
transfer stations and all owned materials recycling operations. Under our
policy, insurance is guaranteed for acquired and newly constructed facilities,
but each addition to the policy is underwritten on a site-specific basis and the
premium is set according to the conditions found at the site. Our policy
provides insurance for new pollution conditions that originate after the
commencement of our coverage. Pollution conditions existing prior to the
commencement of our coverage, if found, could be excluded from coverage.
Financial Surety Bonds
We use financial surety bonds for a variety of corporate guarantees. The
two largest uses of financial surety bonds are for municipal contract
performance guarantees and landfill closure and post-closure financial assurance
required under certain environmental regulations. Environmental regulations
require demonstrated financial assurance to meet closure and post-closure
requirements for landfills. In addition to surety bonds, these requirements may
also be met through alternative financial assurance instruments, including
insurance, letters of credit and restricted cash deposits.
In August 2003, we paid $5.3 million to acquire a 9.9% interest in a
company that, among other activities, issues financial surety bonds to secure
landfill closure and post-closure obligations for companies operating in the
solid waste sector.
12
EMPLOYEES
At December 31, 2003, we employed 3,541 full-time employees, including 409
employees classified as professionals or managers, 2,671 employees involved in
collection, transfer, disposal and recycling operations, and 461 sales,
clerical, data processing or other administrative employees.
Approximately 308 of our drivers, mechanics, equipment operators and
sorters in various locations are employed under collective bargaining agreements
primarily with the Teamsters Union. These employees are subject to labor
agreements that are subject to renegotiation periodically.
We do not expect any significant disruption in our business in 2004 as a
result of labor negotiations or employee strikes. We are not aware of any
organizational efforts among our employees and we believe that our relations
with our employees are good. Approximately 30 of our gate clerks and operators
at one of our majority-owned subsidiaries in Pierce County, Washington are
represented by the Teamsters and the Operating Engineers Unions. On August 31,
2003, the labor agreement with these employees expired, and the employees have
continued to work under the terms of the expired labor agreement. We are
currently negotiating a new labor agreement with these employees and have no
reason to believe that we will not be successful in reaching a mutually
acceptable agreement.
AVAILABLE INFORMATION
Our internet website address is http://wasteconnections.com. We make our
reports on Forms 10-K, 10-Q and 8-K available on our website free of charge
after we file them with the SEC.
13
RISK FACTORS
Outlined below are some of the risks that we face and that could affect our
business and financial statements for 2004 and beyond. However, they are not the
only risks that we face. There may be additional risks that we do not presently
know of or that we currently believe are immaterial that could also impair our
business.
RISKS RELATED TO OUR BUSINESS
Difficulties in making acquisitions, acquiring exclusive contracts and
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generating internal growth may cause our growth to be slower than expected.
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Our growth strategy includes expanding through acquisitions, acquiring
additional exclusive arrangements and generating internal growth. Most of our
growth has been through acquisitions. From inception through December 31, 2003,
we acquired 167 solid waste services related businesses. Although we have
identified numerous acquisition candidates that we believe are suitable, we may
not be able to acquire them at prices or on terms and conditions favorable to
us. Our ability to grow also depends on several other factors, including:
- the availability of capital to support our growth;
- our ability to compete with existing and emerging companies;
- our ability to maintain profit margins in the face of competitive
pressures;
- our ability to continue to recruit, train and retain qualified
employees; and
- continued strong demand for our services.
Difficulties in any of these areas could hinder our growth.
Our growth and future financial performance depend significantly on our ability
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to integrate acquired businesses into our organization and operations.
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Part of our strategy is to achieve economies of scale and operating
efficiencies by growing through acquisitions. We may not achieve these goals
unless we effectively combine the operations of acquired businesses with our
existing operations. Our senior management team may not be able to integrate our
completed and future acquisitions. Any difficulties we encounter in the
integration process could interfere with our operations and reduce our operating
margins.
Our acquisitions may not be successful, resulting in changes in strategy,
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operating losses or a loss on sale of the business acquired.
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Even if we are able to make acquisitions on advantageous terms and are able
to integrate them successfully into our operations and organization, some may
not fulfill our strategy in a given market due to factors that we cannot
control, such as market position or customer base. As a result, operating
margins could be less than we originally anticipated when we made those
acquisitions. We then may change our strategy with respect to that market or
those businesses and decide to sell the operations at a loss, or keep those
operations and recognize an impairment of goodwill and/or intangible assets.
We compete for acquisition candidates with other purchasers, some of which have
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greater financial resources than we do. These competitors may be able to offer
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more favorable acquisition terms, thus limiting our ability to grow through
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acquisition.
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Other companies have adopted or will probably adopt our strategy of
acquiring and consolidating regional and local businesses. We expect that
increased consolidation in the solid waste services industry will increase
competitive pressures. Increased competition for acquisition candidates may make
fewer acquisition opportunities available to us, and may cause us to make
acquisitions on less attractive terms, such as higher purchase prices.
Acquisition costs may increase to levels beyond our financial capability or to
levels that would adversely affect our operating results and financial
condition.
14
Timing of acquisitions may cause fluctuations in our quarterly results, which
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may cause our stock price to decline.
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We are not always able to control the timing of our acquisitions. Obtaining
third-party consents and regulatory approvals, completing due diligence on the
acquired businesses, and finalizing transaction terms and documents are not
entirely within our control and may take longer than we anticipate, causing
certain transactions to be delayed. Our inability to complete acquisitions in
the time frames that we expect may cause our operating results to be less
favorable than expected, which could cause our stock price to decline.
Rapid growth may strain our management, operational, financial and other
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resources.
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To maintain and manage our growth, we will need to expand our management
information systems capabilities and our operational and financial systems and
controls. We will also need to attract, train, motivate, retain and manage
additional senior managers, technical professionals and other employees. Failure
to do any of these things would restrict our ability to maintain and improve our
profitability while continuing to grow.
We may be unable to compete effectively with governmental service providers and
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larger and better capitalized companies, which may result in reduced revenues
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and lower profits.
------------------
Our industry is highly competitive and requires substantial labor and
capital resources. Some of the markets in which we compete or will likely
compete are served by one or more large, national solid waste companies, as well
as by regional and local solid waste companies of varying sizes and resources,
some of which have accumulated substantial goodwill in their markets.
We also compete with counties, municipalities and solid waste districts
that maintain their own waste collection and disposal operations. These
operators may have financial advantages over us because of their access to user
fees and similar charges, tax revenues and tax-exempt financing. Some of our
competitors may also be better capitalized than we are, have greater name
recognition than we do or be able to provide or be willing to bid their services
at a lower price than we may be willing to offer.
We may lose contracts through competitive bidding, early termination or
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governmental action, which would cause our revenues to decline.
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We derive a substantial portion of our revenue from services provided under
exclusive municipal contracts, franchise agreements and governmental
certificates. Many of these will be subject to competitive bidding at some time
in the future. For example, we have approximately 47 municipal contracts,
representing annual revenues of approximately $4.2 million, that could expire in
the next 12 months and have no renewal provisions. We also intend to bid on
additional municipal contracts and franchise agreements. We may not be the
successful bidder. In addition, some of our customers may terminate their
contracts with us before the end of the contract term. Municipalities may annex
unincorporated areas within counties where we provide collection services; as a
result, our customers in annexed areas may be required to obtain services from
competitors that have been franchised by the annexing municipalities to provide
those services. Municipalities in which services are currently provided on a
competitive basis may elect to franchise collection services. Unless we are
awarded franchises by these municipalities, we will lose customers.
Municipalities may decide to provide services to their residents themselves on
an optional or mandatory basis, causing us to lose customers. Municipalities in
Washington may by law annex unincorporated territory, which would likely remove
such territory from the area covered by governmental certificates issued to us
by the Washington Utility and Transportation Commission. Annexation would reduce
the areas covered by our governmental certificates and subject more of our
Washington operations to competitive bidding in the future. Moreover,
legislative action could amend or repeal the laws governing WUTC regulation,
which could harm our competitive position by subjecting more areas to
competitive bidding. If we are not able to replace revenues from contracts lost
through competitive bidding or early termination or from the renegotiation of
existing contracts with other revenues within a reasonable time period, our
revenues will decline.
We depend significantly on the services of the members of our senior management
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team, and the departure of any of those persons could cause our operating
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results to suffer.
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Our success depends significantly on the continued individual and
collective contributions of our senior and district management team. Key members
of our management have entered into employment agreements, but we may not be
able to enforce these agreements. The loss of the services of any member of our
15
senior or district management or the inability to hire and retain experienced
management personnel could harm our operating results.
Our decentralized decision-making structure could allow local managers to make
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decisions that adversely affect our operating results.
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We manage our operations on a decentralized basis. Local managers have the
authority to make many decisions concerning their operations without obtaining
prior approval from executive officers, subject to compliance with general
company-wide policies. Poor decisions by local managers could result in loss of
customers or increases in costs, in either case adversely affecting operating
results.
Efforts by labor unions to organize our employees could divert management
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attention and increase our operating expenses.
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From time to time, labor unions attempt to organize our employees, and
these efforts will likely continue in the future. Some groups of our employees
are represented by unions, and we have negotiated collective bargaining
agreements with some of these groups. Additional groups of employees may seek
union representation in the future, and negotiating collective bargaining
agreements with these groups 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 any labor
disruptions, our operating expenses could increase significantly, which could
adversely affect our financial condition, results of operations and cash flows.
The geographic concentration of our business makes our results vulnerable to
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factors affecting the regions in which we operate, and seasonal fluctuations may
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cause our business and financial results to vary among quarters, which could
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create volatility in our stock price.
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Our business and financial results would be harmed by downturns in the
general economy of the regions in which we operate and other factors affecting
the regions, such as state regulations affecting the solid waste services
industry and severe weather conditions. Based on historic trends experienced by
the businesses we have acquired, we expect our operating results to vary
seasonally, with revenues typically lowest in the first quarter, higher in the
second and third quarters, and lower in the fourth quarter than in the second
and third quarters. We expect the fluctuation in our revenues between our
highest and lowest quarters to be in the range of approximately 10% to 12%. This
seasonality reflects the lower volume of solid waste generated during the late
fall, winter and early spring months because of decreased construction and
demolition activities during the winter months. In addition, some of our
operating costs may be higher in the winter months. Adverse winter weather
conditions slow waste collection activities, resulting in higher labor and
operational costs. Greater precipitation in the winter increases the weight of
collected waste, resulting in higher disposal costs, which are calculated on a
per ton basis. Because of these factors, we expect operating income to be
generally lower in the winter months, and our stock price may be negatively
affected by these variations.
Unusually adverse weather conditions may interfere with our operations, harming
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our operating results.
----------------------
Our collection and landfill operations could be adversely affected, beyond
the normal seasonal variations described above, by unusually long periods of
inclement weather, which could interfere with collection and landfill
operations, reduce the volume of waste generated by our customers and delay the
development of landfill capacity. Periods of particularly harsh weather may
force us to temporarily suspend some of our operations.
Increases in the costs of labor, disposal, fuel or energy could reduce operating
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margins.
--------
Our continued success will depend on our ability to attract and retain
qualified personnel. We compete with other businesses in our markets for
qualified employees. From time to time, the labor supply is tight in some of our
markets. A shortage of qualified employees would require us to enhance our wage
and benefits packages to compete more effectively for employees or to hire more
expensive temporary employees. Labor is one of our largest costs, and even
relatively small increases in labor costs per employee could materially affect
our cost structure. If we fail to attract and retain qualified employees, to
control our labor costs, or to recover any increased labor costs through
increased prices we charge for our services or otherwise offset such increases
with cost savings in other areas, our operating margins could suffer. If we
incur increased disposal costs in areas where we do not dispose of solid waste
at landfills that we own or operate or if we incur increased disposal costs at
16
landfills that we do own or operate and if, in either case, we are unable to
pass these costs on to our customers, our operating results would suffer.
Although fuel and energy costs account for a relatively small portion of our
total operating expenses, the price of fuel and energy is volatile, and
shortages sometimes occur. Significant increases in the cost of fuel or energy,
or shortages of fuel or energy, could interrupt or curtail our operations and
lower our operating margins.
Decreased availability of surety bonds could require us to obtain other means of
--------------------------------------------------------------------------------
financial assurance, which could result in additional capital outlays and
-------------------------------------------------------------------------
increased expense and cause a reduction in our operating margins.
-----------------------------------------------------------------
We use financial surety bonds for a variety of corporate guarantees. The
two largest uses of financial surety bonds are for municipal contract
performance guarantees and landfill closure and post-closure financial assurance
required under certain environmental regulations. Environmental regulations
require demonstrated financial assurance to meet closure and post-closure
requirements for landfills. In addition to surety bonds, these requirements may
also be met through alternative financial assurance instruments, including
insurance, letters of credit and restricted cash deposits.
If our current bond underwriters are unwilling to issue additional bonds,
renew existing bonds when such bonds expire, or increase their total bond
commitment, or if we are unable to obtain surety bonds through new underwriters
as such needs arise, we would need to arrange other means of financial
assurance, such as a cash trust or a letter of credit, to secure contract
performance or meet closure and post-closure requirements. Such alternate
financial assurance may not be readily available, and may result in additional
expense or capital outlays.
Increases in insurance costs and in the amount that we self-insure for various
------------------------------------------------------------------------------
risks could reduce our operating margins and reported earnings.
---------------------------------------------------------------
We maintain insurance programs for employee group health, automobile
liability, property, general liability, workers' compensation, employer's
liability, environmental protection and directors and officers' liability. To
control rising insurance costs, beginning August 2002, we became effectively
self-insured by increasing our per incident deductibles. We carry umbrella
policies for certain types of claims to provide excess coverage over the
underlying policies and per incident deductibles. The increased amounts that we
self-insure could cause significant volatility in our operating margins and
reported earnings based on the occurrence and claim costs of incidents,
accidents and injuries. Our insurance accruals are based on claims filed and
estimates of claims incurred but not reported and are developed by our
management with assistance from our third-party actuary and our third-party
claims administrator. To the extent these estimates are inaccurate, we may
recognize substantial additional expenses in future periods that would reduce
operating margins and reported earnings. Significant increases in premiums on
insurance that we retain also could reduce our margins.
Each business that we acquire or have acquired may have liabilities that we fail
--------------------------------------------------------------------------------
or are unable to discover, including liabilities that arise from prior owners'
------------------------------------------------------------------------------
failure to comply with environmental laws, which may harm our financial
-----------------------------------------------------------------------
condition.
----------
As a successor owner, we may be legally responsible for liabilities that
arise from businesses that we acquire. Even if we obtain legally enforceable
representations, warranties and indemnities from the sellers of such businesses,
they may not cover the liabilities fully. Some environmental liabilities, even
if we do not expressly assume them, may be imposed on us under various legal
theories. Our insurance program does not cover liabilities associated with some
environmental issues that may exist prior to attachment of coverage. A
successful uninsured claim against us could harm our financial condition.
Our growth may be limited by the inability to obtain new landfills and expand
-----------------------------------------------------------------------------
existing ones.
--------------
We currently own and/or operate a number of landfills. Our ability to meet
our growth objectives may depend in part on our ability to acquire, lease and
expand landfills and develop new landfill sites. We may not be able to obtain
new landfill sites or expand the permitted capacity of our landfills when
necessary. Obtaining new landfill sites is important to our expansion into new
non-exclusive markets; if we do not believe that we can obtain a landfill site
in a non-exclusive market, we may choose not to enter that market. Expanding
existing landfill sites is important in those markets where the remaining lives
of our landfills are relatively short. We may choose to forego acquisitions and
internal growth in these markets because increased volumes would further shorten
the lives of these landfills. Either of these circumstances could result in
slower growth.
17
In some areas in which we operate, suitable land for new sites or expansion of
------------------------------------------------------------------------------
existing landfill sites may be unavailable, which could increase our disposal
-----------------------------------------------------------------------------
costs and reduce our operating margins.
---------------------------------------
Operating permits for landfills in states where we operate must generally
be renewed every five to ten years. It has become increasingly difficult and
expensive to obtain required permits and approvals to build, operate and expand
solid waste management facilities, including landfills and transfer stations.
The process often takes several years, requires numerous hearings and compliance
with zoning, environmental and other requirements, and is frequently resisted by
citizen, public interest and other groups. We may not be able to obtain or
maintain the permits we require to expand, and such permits may contain
burdensome terms and conditions. Even when granted, final permits to expand are
often not approved until the remaining permitted disposal capacity of a landfill
is very low. Local laws and ordinances also may affect our ability to obtain
permits to expand landfills. If we were to exhaust our permitted capacity at a
landfill, our ability to expand internally would be limited, and we could be
required to cap and close that landfill and be forced to dispose of collected
waste at more distant landfills or at landfills operated by our competitors. The
resulting increased costs would reduce our operating margins.
Our accruals for our landfill closure and post-closure costs may be inadequate,
-------------------------------------------------------------------------------
and our earnings would be lower if we are required to pay additional amounts.
-----------------------------------------------------------------------------
We will generally be required to pay closure and post-closure costs for
landfills and disposal facilities that we own or operate under a life-of-site
operating agreement. Closure and post-closure costs are generally paid for a
term of 30 years after final closure of a landfill, and accrued during the
operating life of the landfill based on engineering estimates of future
requirements associated with the final landfill design, final landfill capping
and closure and post-closure process. Our obligations to pay closure or
post-closure costs may exceed the amount we accrued and reserved and other
amounts available from funds or reserves established to pay such costs. Paying
additional amounts would lower our earnings and could cause our stock price to
decline.
We may incur additional charges related to capitalized expenditures, which would
--------------------------------------------------------------------------------
lower our earnings.
-------------------
In accordance with accounting principles generally accepted in the United
States, we capitalize some expenditures and advances relating to acquisitions,
pending acquisitions and landfill development projects. We expense indirect
acquisition costs such as executive salaries, general corporate overhead, public
affairs and other corporate services as we incur those costs. We charge against
earnings any unamortized capitalized expenditures and advances (net of any
amount that we estimate we will recover, through sale or otherwise) that relate
to any operation that is permanently shut down or determined to be impaired, any
pending acquisition that is not consummated and any landfill development project
that we do not expect to complete. Any such charges against earnings could lower
our stock price.
Recent accounting pronouncements may require a write-down of our goodwill, which
--------------------------------------------------------------------------------
could materially impair our net worth.
--------------------------------------
As a result of our acquisition strategy, we have a material amount of
goodwill recorded on our financial statements. Under SFAS No. 142, effective
January 1, 2002, we no longer amortize our existing goodwill. We are required to
test goodwill for impairment using the two-step process prescribed in SFAS No.
142. The first step is a screen for potential impairment, while the second step
measures the amount of the impairment, if any. We perform the first of the
required impairment tests of goodwill and indefinite-lived intangible assets
annually on October 1. To date, no events or changes in circumstances have
occurred that indicated the potential existence of goodwill or indefinite-lived
intangible asset impairment and it has not been necessary to write down any of
our goodwill or indefinite-lived intangible assets. If, as a result of
performing impairment tests, we are required to write down any of our goodwill
or indefinite-lived intangible assets, our operating results would be negatively
impacted and our net worth would be reduced. Our credit agreement contains a
covenant requiring us to maintain a minimum net worth. A reduction in net worth,
therefore, if substantial, could limit the amount that we can borrow under our
credit agreement and any failure to comply with the agreement could result in an
event of default under the credit agreement.
If we fail to comply with covenants and conditions in our credit facility, we
-----------------------------------------------------------------------------
may be unable to make acquisitions and may be required to repay our debt early,
-------------------------------------------------------------------------------
which could harm our financial results.
---------------------------------------
Our credit facility requires us to obtain the consent of the lending banks
before acquiring any other business for more than $100 million in cash and
assumed debt. If we are not able to obtain our banks' consent to acquisitions of
18
this size, we may not be able to complete them, which could inhibit our growth.
Our credit facility also contains financial covenants based on our current and
projected financial condition after completing an acquisition. If we are not
able to satisfy these financial covenants on a pro forma basis upon completing
an acquisition, we would not be able to complete the acquisition without a
waiver from our lending banks. Whether or not a waiver is needed, if the results
of our future operations differ materially from what we expect, we may no longer
be able to comply with the covenants in the credit facility. Our failure to
comply with these covenants may result in a default under the credit facility,
which would allow our lending banks to accelerate the date for repayment of debt
incurred under the credit facility and could harm our business and financial
results.
Provisions in our charter and bylaws may deter changes in control that could
----------------------------------------------------------------------------
benefit our stockholders.
-------------------------
Provisions in our Certificate of Incorporation and By-Laws, and in the
Delaware General Corporation Law, may deter tender offers and hostile takeovers
and delay or prevent changes in control or management of Waste Connections,
including transactions in which stockholders might be paid more than current
market prices for their shares. These provisions may also limit our
stockholders' ability to approve transactions that they believe are in their
best interests.
We face uncertainties relating to pending litigation.
-----------------------------------------------------
We and some of our subsidiaries are currently involved in civil litigation
relating to the conduct of our business. The timing and final resolution of
these matters are uncertain. Additionally, the possible outcomes or resolutions
of these matters could include judgments against us or settlements, either of
which could require substantial payments by us, adversely affecting our
operating results.
RISKS RELATED TO OUR INDUSTRY
Extensive and evolving environmental laws and regulations may restrict our
--------------------------------------------------------------------------
operations and growth and increase our costs.
---------------------------------------------
Environmental laws and regulations have been enforced more and more
stringently in recent years because of greater public interest in protecting the
environment. These laws and regulations impose substantial costs on us and
affect our business in many ways, including as described below. In addition,
federal, state and local governments may change the rights they grant to, and
the restrictions they impose on, solid waste services companies, and those
changes could restrict our operations and growth.
We may be unable to obtain and maintain licenses or permits and zoning,
-----------------------------------------------------------------------
environmental and/or other land use approvals that we need to own and operate
-----------------------------------------------------------------------------
our landfills.
--------------
These licenses or permits and approvals are difficult and time-consuming to
obtain and renew, and elected officials and citizens' groups frequently oppose
them. Failure to obtain and maintain the permits and approvals we need to own or
operate landfills (including increasing their capacity) could force us to
dispose of collected waste at more distant landfills or at landfills owned by
our competitors, thus increasing our disposal costs and reducing our operating
margins.
Extensive regulations that govern the design, operation and closure of landfills
--------------------------------------------------------------------------------
may restrict our landfill operations or increase our costs of operating
-----------------------------------------------------------------------
landfills.
----------
Regulations that govern landfill operations include the regulations that
establish minimum federal requirements adopted by the EPA in October 1991 under
Subtitle D of the RCRA. If we fail to comply with these regulations, we could be
required to undertake investigatory or remedial activities, curtail operations
or close landfills temporarily or permanently. Future changes to these
regulations may require us to modify, supplement or replace equipment or
facilities at substantial costs. If regulatory agencies fail to enforce these
regulations vigorously or consistently, our competitors whose facilities do not
comply with the Subtitle D regulations or their state counterparts may obtain an
advantage over us. Our financial obligations arising from any failure to comply
with these regulations could harm our business and earnings.
19
We may be subject in the normal course of business to judicial and
------------------------------------------------------------------
administrative proceedings involving federal, state or local agencies or
------------------------------------------------------------------------
citizens' groups, which could interrupt our operations, require expensive
-------------------------------------------------------------------------
remediation and create negative publicity.
------------------------------------------
Governmental agencies may impose fines or penalties on us. They may also
attempt to revoke or deny renewal of our operating permits, franchises or
licenses for violations or alleged violations of environmental laws or
regulations, or require us to remediate potential environmental problems
relating to waste that we or our predecessors collected, transported, disposed
of or stored. Individuals or community groups might also bring actions against
us in connection with our operations. Any adverse outcome in these proceedings
could harm our operations and financial results and create adverse publicity,
which could damage our competitive position and stock price.
Liabilities for environmental damage may adversely affect our business and
--------------------------------------------------------------------------
earnings.
---------
We are liable for any environmental damage that our solid waste facilities
cause, including damage to neighboring landowners or residents, particularly as
a result of the contamination of soil, groundwater or surface water, and
especially drinking water. We may be liable for damage resulting from conditions
existing before we acquired these facilities. We may also be liable for any
on-site environmental contamination caused by pollutants or hazardous substances
whose transportation, treatment or disposal we or our predecessors arranged. We
have limited insurance coverage to compensate us for damages associated with
environmental conditions. If we were to incur liability for environmental
damage, environmental cleanups, corrective action or damage not covered by
insurance or in excess of the amount of our coverage, our financial condition
could be materially and adversely affected.
Fluctuations in prices for recycled commodities that we sell may cause our
--------------------------------------------------------------------------
revenues and operating results to decline.
------------------------------------------
We provide recycling services to some of our customers. The sale prices of
and demand for recyclable materials, particularly paper products, are frequently
volatile and when they decline our revenues and operating results may decline.
Future changes in laws regulating the flow of solid waste in interstate commerce
--------------------------------------------------------------------------------
could adversely affect our operating results.
---------------------------------------------
The U.S. Supreme Court has held that states may not regulate the flow of
solid waste in interstate commerce if the effect would be to discriminate
between interstate and intrastate commerce. If legislation is enacted that
overturns or modifies this decision, and if one or more of the states in which
we dispose of interstate waste takes action that would prohibit or increase the
costs of our continued disposal of interstate waste, our operating results could
be adversely affected.
ITEM 2. PROPERTIES
As of December 31, 2003, we owned 101 collection operations, 26 transfer
stations, 20 municipal solid waste landfills, one construction and demolition
landfill and 26 recycling operations and operated, but did not own, an
additional seven transfer stations and 14 municipal solid waste landfills. We
also own one municipal solid waste landfill site which was permitted for
operation, but not constructed as of December 31, 2003. We lease various offices
and facilities, including our corporate offices in Folsom, California. We own
various equipment, including waste collection and transportation vehicles,
related support vehicles, carts, containers, and heavy equipment used in
landfill operations. We believe that our existing facilities and equipment are
generally adequate for our current operations. However, we expect to make
additional investments in property and equipment for expansion and replacement
of assets and in connection with future acquisitions.
Our corporate headquarters is located in Folsom, California, where we lease
approximately 31,000 square feet of space.
ITEM 3. LEGAL PROCEEDINGS
We own undeveloped property in Harper County, Kansas, where we are seeking
permits to construct and operate a municipal solid waste landfill. In 2002, we
received a special use permit from Harper County for zoning the landfill and in
2003 we received a draft permit from the Kansas Department of Health and
Environment to construct and operate the landfill. In July 2003, the District
Court of Harper County invalidated the previously issued zoning permit. We have
appealed the District Court's decision to invalidate the zoning permit. The
Kansas Department of Health and Environment has notified us that it will not
issue a final permit to construct and operate the landfill until the zoning
matter is resolved. At December 31, 2003, we had $3.9 million of capitalized
20
expenditures related to this landfill development project. Based on the advice
of counsel, we believe that we will prevail in this matter and do not believe
that an impairment of the capitalized expenditures exists. If we do not prevail
on appeal, however, we will be required to expense in a future period the $3.9
million of capitalized expenditures, less the recoverable value of the
undeveloped property and other amounts recovered, which would likely have a
material adverse effect on our reported income for that period.
We are primarily self-insured for automobile liability, general liability
and workers' compensation claims. We are a party to various claims and suits
pending for alleged damages to persons and property and alleged liabilities
occurring during the normal operations of our solid waste management business.
On October 31, 2003, our subsidiary, Waste Connections of Nebraska, Inc. was
named as a defendant in the case of KAREN COLLERAN, CONSERVATOR OF THE ESTATE OF
ROBERT ROONEY V. WASTE CONNECTIONS OF NEBRASKA, INC. The plaintiff seeks
recovery for damages allegedly suffered by Father Robert Rooney when the bicycle
he was riding collided with one of our garbage trucks. The complaint alleges
that Father Rooney suffered serious bodily injury, including traumatic brain
injury. The plaintiff seeks recovery of past medical expenses of approximately
$430,000 and an unspecified amount for future medical expenses and home
healthcare, past pain and suffering, future pain and suffering, lost income,
loss of earning capacity, and permanent injury and disability. Our primary
defense is that the plaintiff is not entitled to any damages under Nebraska law,
where the accident occurred, because the negligence of Father Rooney was equal
to or greater than any negligence on the part of our driver, and we intend to
defend this case vigorously on these and other grounds. This case is in the
preliminary stages of discovery, and we have not accrued any potential loss as
of December 31, 2003; however, an adverse outcome in this case coupled with a
significant award to the plaintiff could have a material adverse effect on our
reported income in the period incurred.
Additionally, we are a party to various legal proceedings resulting from
the ordinary course of business and the extensive governmental regulation of the
solid waste industry. Our management does not believe that these proceedings,
either individually or in the aggregate, are likely to have a material adverse
effect on our business, financial condition, operating results or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 2003.
EXECUTIVE OFFICERS
The following table sets forth certain information concerning our executive
officers as of March 1, 2004:
NAME AGE POSITIONS
---- --- ---------
Ronald J. Mittelstaedt (1) 40 President, Chief Executive Officer and Chairman
Steven F. Bouck 47 Executive Vice President and Chief Financial Officer
Darrell W. Chambliss 39 Executive Vice President and Chief Operating Officer
Robert D. Evans 57 Executive Vice President, General Counsel and Secretary
Kenneth O. Rose 55 Senior Vice President - Administration
David G. Eddie 34 Vice President - Corporate Controller
Michael R. Foos 38 Vice President - Chief Information Officer
David M. Hall 46 Vice President - Business Development
Eric O. Hansen 39 Vice President - Information Technology
Jerri L. Hunt 52 Vice President - Human Resources
Worthing F. Jackman 39 Vice President - Finance and Investor Relations
James M. Little 42 Vice President - Engineering
(1) Member of the Executive Committee of the Board of Directors.
Ronald J. Mittelstaedt has been President, Chief Executive Officer and a
director since Waste Connections was formed, and was elected Chairman in January
1998. Mr. Mittelstaedt has more than 15 years of experience in the solid waste
industry. He served as a consultant to United Waste Systems, Inc., with the
title of Executive Vice President, from January 1997 to August 1997, where he
was responsible for corporate development for all states west of Colorado. As
Regional Vice President of USA Waste Services, Inc. (including Sanifill, Inc.,
which was acquired by USA Waste Services, Inc.) from November 1993 to January
1997, he was responsible for all operations in 16 states and Canada. Mr.
Mittelstaedt held various positions at Browning-Ferris Industries, Inc. ("BFI")
from August 1988 to November 1993, most recently as Division Vice President in
northern California, overseeing the San Jose market. Previously he was the
21
District Manager responsible for BFI's operations in Sacramento and the
surrounding areas. He holds a B.S. degree in Finance from the University of
California at Santa Barbara.
Steven F. Bouck has been Executive Vice President and Chief Financial
Officer since February 1998. Mr. Bouck held various positions with First
Analysis Corporation from 1986 to 1998, including most recently as Managing
Director coordinating corporate finance. In that capacity, he provided merger
and acquisition advisory services to companies in the environmental industry.
Mr. Bouck was also responsible for investing venture capital funds focused on
the environmental industry that were managed by First Analysis. In connection
with those investments, he served on the boards of directors of several
companies. Mr. Bouck holds B.S. and M.S. degrees in mechanical engineering from
Rensselaer Polytechnic Institute and an M.B.A. in Finance from the Wharton
School. He has been a Chartered Financial Analyst since 1990.
Darrell W. Chambliss has been Executive Vice President and Chief Operating
Officer since October 2003. From October 1, 1997 to that date, he served as
Executive Vice President - Operations. Mr. Chambliss held various management
positions at USA Waste Services, Inc. (including Sanifill, Inc. and United
Waste, Inc., both of which were acquired by USA Waste Services, Inc.) from April
1995 to September 1997, including most recently Division Manager in Corning,
California, where he was responsible for the operations of 19 operating
companies as well as supervising and integrating acquisitions. From July 1989 to
April 1995, he held various management positions with BFI, including serving as
Assistant District Manager in San Jose, California, where he was responsible for
a significant hauling operation, and serving as District Manager in Tucson,
Arizona for more than three years. Mr. Chambliss holds a B.S. degree in Business
Administration from the University of Arkansas.
Robert D. Evans has been Executive Vice President, General Counsel and
Secretary of Waste Connections since June 2002. From 1978 until he joined the
company, Mr. Evans was a partner in the San Francisco law firm of Shartsis,
Friese & Ginsburg LLP, where he was also a member of the Management Committee.
Mr. Evans' practice included representing companies in mergers and acquisitions
and corporate finance transactions. Prior to joining Waste Connections, Mr.
Evans had been the Company's primary outside counsel since its formation. Mr.
Evans holds a B.A. degree in Economics and a J.D. degree from the University of
California at Berkeley.
Kenneth O. Rose has been Senior Vice President - Administration since May
2002. He also served as a consultant to Waste Connections in March and April
2002. From May 2000 to March 2002, he provided consulting services to
WorldOil.Com, Inc. and Gulf Publishing Company. As Vice President -
Administration for Coach USA, Inc., from October 1996 to April 2000, Mr. Rose
was responsible for all corporate administrative activities in the United
States, Canada and Mexico. Mr. Rose has over seven years experience in the solid
waste industry obtained primarily with USA Waste Services, Inc. (including
Sanifill, Inc., which was acquired by USA Waste Services, Inc.) where he held
the position of Corporate Director - Administration from December 1990 to
September 1996. From August 1989 to November 1990, Mr. Rose provided consulting
and personnel services to BSI, Inc., a solid waste services company in Houston,
Texas acquired by Sanifill, Inc. Prior to joining the waste industry, Mr. Rose
held various administrative positions in the oil and offshore drilling
industries from 1971 to 1989 with Standard Oil Company-Indiana, Gulf Oil
Corporation and Chevron Corporation. Mr. Rose holds a B.S. degree in Accounting
from the University of Wyoming.
David G. Eddie has been Vice President -Corporate Controller since March
2004. From April 2003 to February 2004, Mr. Eddie served as Waste Connections'
Vice President - Public Reporting and Compliance. From May 2001 to March 2003,
Mr. Eddie served as Waste Connections' Director of Finance. Mr. Eddie served as
Corporate Controller for International Fibercom, Inc. from April 2000 to May
2001. From September 1999 to April 2000, Mr. Eddie served as Waste Connections'
Manager of Financial Reporting. From September 1994 to September 1999, Mr. Eddie
held various positions, including Audit Manager, for PricewaterhouseCoopers LLP.
Mr. Eddie is a Certified Public Accountant and holds a B.S. degree in Accounting
from California State University, Sacramento.
Michael R. Foos has been Vice President - Chief Information Officer since
April 2003. From October 1999 to March 2003, Mr. Foos served as Vice President -
Finance and Chief Accounting Officer of Waste Connections. From October 1997 to
September 1999, Mr. Foos served as Vice President and Corporate Controller of
Waste Connections. Mr. Foos served as Division Controller of USA Waste Services,
Inc. (including Sanifill, Inc., which was acquired by USA Waste Services, Inc.)
from October 1996 to September 1997, where he was responsible for financial
compilation and reporting and acquisition due diligence for a seven-state
region. Mr. Foos served as Assistant Regional Controller at USA Waste Services,
Inc. from August 1995 to September 1996, where he was responsible for internal
financial reporting for operations in six states and Canada. Mr. Foos also
22
served as District Controller for Waste Management, Inc. from February 1990 to
July 1995, and was a member of the audit staff of Deloitte & Touche from 1987 to
1990. Mr. Foos holds a B.S. degree in Accounting from Ferris State University.
David M. Hall has been Vice President - Business Development since August
1, 1998. Mr. Hall has more than 17 years of experience in the solid waste
industry with extensive operating and marketing experience in the Western U.S.
From October, 1995 to July 1998, Mr. Hall was the Divisional Vice President of
USA Waste Services, Inc., Rocky Mountain Division (including Sanifill, Inc.
which was acquired by USA Waste Services, Inc.). In that position, he oversaw
all operations and business development in six Rocky Mountain states. Prior to
his employment with Sanifill, Mr. Hall held various management positions with
BFI from October 1986 to October 1995, including Vice President of Sales for the
Western United States. Mr. Hall was employed from 1979 to 1986 in a variety of
sales and marketing management positions in the high technology sector. Mr. Hall
received a B.S. degree in Management and Marketing from Southwest Missouri State
University.
Eric O. Hansen has been Vice President - Information Technology since
January 2001. From April 1998 to December 2000, Mr. Hansen served as Waste
Connections' Director of Management Information Systems. Mr. Hansen served as
Information Systems Manager with Fibres International from October 1997 to April
1998. Mr. Hansen held various positions including NT Administrator for the
Multnomah Athletic Club in Portland, Oregon from August 1989 to October 1997.
Mr. Hansen holds a B.S degree from Portland State University.
Jerri L. Hunt has been Vice President - Human Resources since December
1999. Ms. Hunt also served as Vice President - Human Resources and Risk
Management from December 1999 to May 2002. From 1994 to 1999, Ms. Hunt held
various positions with First Union National Bank (including the Money Store,
which was acquired by First Union National Bank), most recently Vice President
of Human Resources in which she managed all aspects of human resources for over
5,000 employees located throughout the United States. From 1989 to 1994, Ms.
Hunt served as Manager of Human Resources and Risk Management for BFI, where she
was responsible for all aspects of human resources and safety and environmental
compliance matters. Ms. Hunt also served as a Human Resources Supervisor for
United Parcel Service from 1976 to 1989. She holds a B.S. degree from California
State University, Sacramento and a master's degree in Human Resources from
Golden Gate University.
Worthing F. Jackman has been Vice President - Finance and Investor
Relations since April 2003. Mr. Jackman held various investment banking
positions with Alex. Brown & Sons, now Deutsche Bank Securities, Inc., from 1991
through 2003, including most recently as a Managing Director within the Global
Industrial & Environmental Services Group. In that capacity, he provided capital
markets and strategic advisory services to companies in a variety of sectors,
including solid waste services. Mr. Jackman holds a B.S. in Finance from
Syracuse University and an M.B.A. from the Harvard Business School.
James M. Little has been Vice President - Engineering since September 1999.
Mr. Little held various management positions with Waste Management, Inc.
(formerly USA Waste Services, Inc., which was acquired by Waste Management, Inc.
and Chambers Development Co. Inc., which was acquired by USA Waste Services,
Inc.) from April 1990 to September 1999, including Regional Environmental
Manager and Regional Landfill Manager, and most recently Division Manager in
Ohio, where he was responsible for the operations of ten operating companies in
the Northern Ohio area. Mr. Little is a certified professional geologist and
holds a B.S. degree in Geology from Slippery Rock University.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on the New York Stock Exchange under the symbol
"WCN". The following table sets forth, for the periods indicated, the high and
low prices per share of our common stock, as reported on The Nasdaq Stock
Market(R) - National Market for the periods indicated through October 23, 2002,
and as reported on the New York Stock Exchange beginning October 24, 2002.
HIGH LOW
-------- --------
2002
First Quarter $ 34.26 $ 23.49
Second Quarter 37.68 30.60
Third Quarter 36.24 25.60
Fourth Quarter 39.56 29.73
2003
First Quarter $ 39.98 $ 30.75
Second Quarter 37.20 31.78
Third Quarter 36.90 31.57
Fourth Quarter 38.08 31.90
2004
First Quarter (through March 1, 2004) $ 40.75 $ 36.41
On March 1, 2004, there were 79 record holders of Waste Connections' common
stock.
We have never paid cash dividends on our common stock and do not currently
anticipate paying any cash dividends on our common stock. We intend to retain
all earnings to fund the operation and expansion of our business. In addition,
our existing credit facility limits the amount of cash dividends we can pay.
The following is a summary of all of our equity compensation plans,
including plans that were assumed through acquisitions and individual
arrangements that provide for the issuance of equity securities as compensation,
as of December 31, 2003. See Note 10 to the consolidated financial statements
for additional discussion.
(c)
Number of securities
(a) (b) remaining available for
Number of securities to Weighted-average future issuance under
be issued upon exercise exercise price of equity compensation plans
of outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
------------- ------------------- ------------------- ------------------------
Equity compensation plans approved by
security holders 2,222,089 $27.20 1,949,006
Equity compensation plans not approved
by security holders 1,568,972 $28.95 1,492,256
--------- ---------
Total 3,791,061 $27.92 3,441,262
========= =========
24
ITEM 6. SELECTED FINANCIAL DATA
This table sets forth selected financial data of Waste Connections, in
thousands, except share and per share amounts, for the periods indicated. This
data should be read in conjunction with and is qualified by reference to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7 in this Annual Report on Form 10-K and our
audited consolidated financial statements, including the notes thereto and the
independent auditors' report thereon and the other financial information
included in Item 8 in this Form 10-K. The selected data in this section are not
intended to replace the consolidated financial statements included in this
Report.
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 (a) 2000 (b) 2001 (c) 2002 (c) 2003 (c)
------------ ------------ ------------ ------------ ------------
STATEMENT OF OPERATIONS DATA:
Revenues $ 184,225 $ 304,355 $ 377,533 $ 498,661 $ 563,509
Operating expenses:
Cost of operations 112,838 174,724 211,064 282,187 316,841
Selling, general and administrative 16,019 25,579 32,007 47,366 54,367
Depreciation and amortization 14,769 27,195 36,138 38,977 47,347
Loss on disposal of operations -- 833 4,879 -- --
Acquisition-related expenses 9,003 150 -- -- --
------------ ------------ ------------ ------------ ------------
Income from operations 31,596 75,874 93,445 130,131 144,954
Interest expense (11,379) (28,491) (29,571) (31,372) (31,666)
Other income (expense), net (66) 116 (6,196) (813) (192)
------------ ------------ ------------ ------------ ------------
Income before income tax provision
and minority interests 20,151 47,499 57,678 97,946 113,096
Minority interests -- -- (7,338) (9,367) (10,549)
------------ ------------ ------------ ------------ ------------
Income before income tax provision 20,151 47,499 50,340 88,579 102,547
Income tax provision (10,924) (19,310) (19,812) (33,113) (37,233)
------------ ------------ ------------ ------------ ------------
Income before effect of accounting change 9,227 28,189 30,528 55,466 65,314
Cumulative effect of change in accounting
principle, net of tax expense of $166 -- -- -- -- 282
------------ ------------ ------------ ------------ ------------
Net income $ 9,227 $ 28,189 $ 30,528 $ 55,466 $ 65,596
============ ============ ============ ============ ============
Basic earnings per common share:
Income before cumulative effect of change in
accounting principle $ 0.49 $ 1.21 $ 1.13 $ 2.00 $ 2.31
Cumulative effect of change in accounting principle -- -- -- -- .01
------------ ------------ ------------ ------------ ------------
Net income per common share $ 0.49 $ 1.21 $ 1.13 $ 2.00 $ 2.32
============ ============ ============ ============ ============
Diluted earnings per common share:
Income before cumulative effect of change in
accounting principle $ 0.46 $ 1.17 $ 1.10 $ 1.90 $ 2.17
Cumulative effect of change in accounting principle -- -- -- -- .01
------------ ------------ ------------ ------------ ------------
Net income per common share $ 0.46 $ 1.17 $ 1.10 $ 1.90 $ 2.18
============ ============ ============ ============ ============
Shares used in calculating basic income per share 18,655,801 23,301,358 27,069,685 27,750,642 28,327,296
============ ============ ============ ============ ============
Shares used in calculating diluted income per share 19,929,539 23,994,994 27,675,639 32,325,624 32,871,652
============ ============ ============ ============ ============
25
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1999 (a) 2000 (b) 2001 (c) 2002 (c) 2003 (c)
------------ ------------ ------------ ------------ ------------
BALANCE SHEET DATA:
Cash and equivalents $ 2,393 $ 2,461 $ 7,279 $ 4,067 $ 5,276
Working capital (deficit) (10,149) (10,398) (4,825) (23,048) (15,060)
Property and equipment, net 335,260 384,237 465,806 578,040 613,225
Total assets 617,958 810,104 979,353 1,261,882 1,395,952
Long-term debt 275,145 334,194 416,171 578,481 601,891
Total stockholders' equity 218,521 334,208 379,805 451,712 537,494
(a) Acquisition-related expenses in 1999 related to the expenses resulting from
13 acquisitions that were accounted for using the pooling-of-interests
method.
(b) Loss on disposal of operations in 2000 related to a pre-tax loss recognized
on the sale of our Idaho operations. Acquisition-related expenses in 2000
related to expenses for commissions, professional fees, and other direct
costs resulting from the one acquisition that was accounted for using the
pooling-of-interests method.
(c) For more information regarding this financial data, see the Management's
Discussion and Analysis of Financial Condition and Results of Operations
section included in this report. For disclosures associated with the impact
of the adoption of new accounting pronouncements and the comparability of
this information, see Note 1 of the consolidated financial statements.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial and Operating Data," our Consolidated Financial Statements and the
notes thereto included elsewhere herein.
INDUSTRY OVERVIEW
The solid waste industry is a very local and competitive business,
requiring substantial labor and capital resources. The participants compete for
collection accounts primarily on the basis of price and the quality of service
and compete for landfill business on the basis of tipping fees, geographic
location and quality of operations. The solid waste industry has been
consolidating and continues to consolidate as a result of a number of factors,
including the increasing costs and complexity associated with waste management
operations and regulatory compliance. Many small independent operators and
municipalities lack the capital resources, management, operating skills and
technical expertise necessary to operate effectively in such an environment. The
consolidation trend has caused solid waste companies to operate larger landfills
that have complementary collection routes that can use company-owned disposal
capacity. Controlling the point of transfer from haulers to landfills has become
increasingly important as landfills continue to close and disposal capacity
moves further from collection markets.
Generally, the most profitable industry operators are those companies that
are vertically integrated or enter into long-term collection contracts. A
vertically integrated operator will benefit from (1) the internalization of
waste (bringing waste to a company-owned landfill); (2) the ability to charge
third-party haulers tipping fees either at landfills or at transfer stations;
and (3) the efficiencies gained by being able to aggregate and process waste at
a transfer station prior to landfilling.
The solid waste industry is experiencing continuing consolidation as
companies seek to take advantage of economies of scale by increasing route
densities and market share in hauling operations, and by reducing disposal
expenses by owning landfill operations.
Waste Connections, Inc. is an integrated solid waste services company that
provides solid waste collection, transfer, disposal and recycling services in
mostly secondary markets in the Western and Southern U.S. To meet the
competitive and regulatory pressures within the solid waste services industry,
we have developed a two-pronged strategy. In markets where we believe that
owning landfills is a strategic element to a collection operation because of
competitive and regulatory factors, we generally focus on providing integrated
services, from collection through disposal of solid waste in landfills that we
own or operate. In markets where waste collection services are provided under
exclusive arrangements, or where waste disposal is municipally funded or
available at multiple municipal sources, we believe that controlling the waste
stream by providing collection services under exclusive arrangements is often
more important to our growth and profitability than owning or operating
landfills.
EXECUTIVE OVERVIEW
In 2003, we continued to execute our strategy of growth through
acquisitions with tightly defined parameters for acquisition candidates. Despite
a number of challenges, including a poor economy, negative internal volume
growth in the first three quarters, and weather in certain markets that impacted
operations, we maintained relatively consistent operating margins for the full
year. Our 13.0% revenue growth year-over-year was the result of acquisitions
completed during 2003, as well as the rollover effect from acquisitions closed
in 2002 and price increases implemented in our base business. The majority of
acquisitions in 2003 occurred in the second half of the year, which resulted in
approximately $20 million of revenue growth in 2003 from acquisitions closed in
2003. We estimate that these acquisitions should contribute approximately $45
million of rollover revenue growth in 2004. In general, acquired companies
initially have lower operating margins than our consolidated average. As such
they tend to increase net income and earnings per share but initially reduce
operating margins.
Internal volume growth was negative in the first three quarters of 2003
primarily as a result of lower revenues from one-time, event-based projects
relative to 2002. Volume growth turned positive in the fourth quarter and is
expected to be positive for full year 2004. In addition to the negative internal
volume growth, some of our operations were adversely affected by weather in
2003, which affected our ability to bring certain projects on-line, further
impacting volume growth and internalization efforts. Pricing is budgeted to be
marginally stronger for the full year 2004 than experienced in 2003.
27
Throughout 2003, we continued to increase internalization of waste we
collected by disposing it at landfills we owned or operated. We increased our
internalization rate from 63% in the first quarter to over 69% in the fourth
quarter. Higher levels of internalization tend to drive higher gross margins,
higher levels of depletion expense and higher capital expenditures. We expect
our internalization rate to remain fairly constant at 70% in 2004, absent the
influence of additional acquisitions completed in 2004. We invested $70 million
in capital expenditures in 2003 to upgrade and expand facilities, build more
landfill capacity, automate routes in certain markets, and reduce the overall
average life of our fleet. Despite the increased levels of capital expenditures,
cash flow from operations exceeded capital expenditures and represented an
increased portion of the consideration we paid for acquisitions. We expect this
trend to continue in 2004.
We also expanded management infrastructure to help ensure commitments made
by employees in 2004 budgets are implemented and to help improve
under-performing locations. Management infrastructure was also expanded in
support of various regulatory and accounting oversight measures, in particular,
the implementation of requirements under the Sarbanes-Oxley Act. Some of these
additions occurred late in 2003, which, combined with higher expected incentive
compensation in 2004, will result in higher overall SG&A expenses in 2004,
though SG&A as a percentage of revenue should remain about the same as in 2003.
In addition, with safety incentives and management infrastructure put in place
in 2002 and at the beginning of 2003, we increased our focus on employee health
and safety programs to reduce the frequency of incidents and contain risk
management costs, which we effectively self-insure.
Two high-rate interest rate swaps expired in early December 2003, and we
executed two lower-rate interest rate swaps that began February 2004. The
expiration of our high-rate interest rate swaps should result in reduced
interest expense in 2004, absent a significant increase in overall interest
rates this year or an acceleration of our acquisition program. In addition, we
refinanced our senior credit facility that was due in May 2005 and was scheduled
to become current debt in May 2004. This refinancing also provided us with
additional capacity to fund our growth strategy and the flexibility to call our
$150 million of 5.5% Convertible Subordinated Notes due April 2006, which are
first callable beginning April 2004. These notes are convertible into
approximately 3.944 million shares of common stock at a conversion price of
$38.03 and have an initial early call premium of 102.2%. These shares are
included in our fully diluted share count used to calculate reported diluted
earnings per share numbers. Our lenders have pre-approved our ability to call
the notes early. On March 3, 2004, we announced that on April 15, 2004, we
intend to redeem the notes in full. If the holders elect to redeem their notes
for cash, our diluted share count would decrease, which would increase our
diluted earnings per share. If the holders elect to convert the notes into
common stock, our cash interest expense will decline by approximately $8.3
million. Conversion would further strengthen our balance sheet and have no
significant earnings impact as the conversion shares are already included in our
diluted earnings per share calculation.
CRITICAL ACCOUNTING ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally
accepted accounting principles requires estimates and assumptions that affect
the reported amounts of assets and liabilities, revenues and expenses, and
related disclosures of contingent assets and liabilities in the consolidated
financial statements. As described by the Securities and Exchange Commission,
critical accounting estimates and assumptions are those that may be material due
to the levels of subjectivity and judgment necessary to account for highly
uncertain matters or the susceptibility of such matters to change, and that have
a material impact on the financial condition or operating performance of the
company. Based on this definition, we believe the following are our critical
accounting estimates.
Self-insurance liabilities. During 2002, we increased our scope of
high-deductible insurance, adding automobile liability, general liability and
workers' compensation claims. Previously, our high-deductible insurance program
covered only automobile collision and employee group health claims. Our
insurance accruals are based on claims filed and estimates of claims incurred
but not reported and are developed by our management with assistance from our
third-party actuary and our third-party claims administrator. The insurance
accruals are influenced by our past claims experience factors, which have a
limited history, and by published industry development factors. If we experience
insurance claims or costs above or below our historically evaluated levels, our
estimates could be materially affected. The frequency and amount of claims or
incidents could vary significantly over time, which could materially affect our
self-insurance liabilities. Additionally, the actual costs to settle the
self-insurance liabilities could materially differ from the original estimates
and cause us to revise our estimates of future costs.
Accounting for landfills. Our adoption of SFAS No. 143 on January 1, 2003
resulted in a significant change to our accounting policies for landfill closure
and post-closure obligations. For additional information and analyses of the
impact that adopting SFAS No. 143 had on our balance sheet and our results of
28
operations for the year ended December 31, 2003, see Note 1 to our Consolidated
Financial Statements included in this Form 10-K.
We recognize landfill depletion expense as airspace of the landfill is
consumed. Our landfill depletion rates are based on the remaining disposal
capacity at our landfills, considering both permitted and deemed permitted
airspace. Landfill closure and post-closure liabilities are calculated by
estimating the total obligation in current dollars, inflating the
obligation based upon the expected date of the expenditure and discounting
the inflated total to its present value using a credit-adjusted risk-free
rate. The resulting closure and post-closure obligation is recorded on the
balance sheet as the landfill's total airspace is consumed. The accounting
methods discussed below require us to make certain estimates and
assumptions. Changes to these estimates and assumptions could have a
material effect on our financial position and results of operations. Any
changes to our estimates are applied prospectively.
Landfill development costs. Landfill development costs include the costs of
acquisition, construction associated with excavation, liners, site berms,
groundwater monitoring wells and leachate collection systems. We estimate
the total costs associated with developing each landfill site to its final
capacity. Total landfill costs include the development costs associated
with "deemed" permitted airspace. Deemed permitted airspace is described
below. Landfill development costs depend on future events and thus actual
costs could vary significantly from our estimates. Material differences
between estimated and actual development costs may affect our cash flows by
increasing our capital expenditures and thus affect our results of
operations by increasing our landfill depletion expense.
Closure and post-closure obligations. We reserve for estimated closure and
post-closure maintenance obligations at the landfills we own and certain
landfills that we operate, but do not own, under life-of-site operating
contracts. Final capping costs are included in the calculation of closure
and post-closure liabilities. We could have additional material financial
obligations relating to closure and post-closure costs at other disposal
facilities that we currently own or operate or that we may own or operate
in the future. In 2003, we calculated the net present value of our closure
and post closure commitments assuming a 3.0% inflation rate and an 8.5%
discount rate. Effective January 1, 2004, the inflation rate and discount
rate that we will apply to changes in our estimated closure and
post-closure commitments are 2.5% and 7.5%, respectively. The resulting
closure and post-closure obligation is recorded on the balance sheet as an
addition to site costs and amortized as depletion expense as the landfill's
total airspace is consumed. Significant reductions in our estimates of the
remaining lives of our landfills, or significant increases in our estimates
of the landfill closure and post-closure maintenance costs could have a
material adverse effect on our financial condition and results of
operations. Additionally, changes in regulatory or legislative requirements
could increase our costs related to our landfills and result in a material
adverse effect on our financial condition and results of operations.
Disposal capacity. Our internal and third-party engineers perform surveys
at least annually to estimate the remaining disposal capacity at our
landfills. Our landfill depletion rates are based on the remaining disposal
capacity, considering both permitted and deemed permitted airspace, at the
landfills that we own and at the landfills that we operate, but do not own,
under life-of-site operating contracts. Deemed permitted airspace consists
of additional disposal capacity being pursued through means of an
expansion. Deemed permitted airspace that meets certain internal criteria
is included in our estimate of total landfill airspace. The internal
criteria we use to determine when deemed permitted airspace may be included
as disposal capacity are as follows:
(1) The land where the expansion is being sought is contiguous to the
current disposal site, and we either own it or the property is under
option, purchase, operating or other agreement;
(2) Total development costs, final capping costs, and closure/post-closure
costs have been determined;
(3) Internal personnel have performed a financial analysis of the proposed
expansion site and have determined that it has a positive financial
and operational impact;
(4) Internal or external personnel are actively working to obtain the
necessary approvals to obtain the landfill expansion permit;
(5) We consider it probable that we will achieve the expansion. For a
pursued expansion to be considered probable, there must be no
significant known technical, legal, community, business, or political
restrictions or similar issues existing that could impair the success
of the expansion; and
(6) The land where the expansion is being sought has the proper zoning or
proper zoning can readily be obtained.
29
We may be unsuccessful in obtaining permits for deemed permitted disposal
capacity at our landfills. In such case, we will charge the previously
capitalized development costs to expense. This will adversely affect our
operating results and cash flows and could result in greater landfill
depletion expense being recognized on a prospective basis.
We periodically evaluate our landfill sites for potential impairment
indicators. Our judgments regarding the existence of impairment indicators
are based on regulatory factors, market conditions and operational
performance of our landfills. Future events could cause us to conclude that
impairment indicators exist and that our landfill carrying costs are
impaired. Any resulting impairment loss could have a material adverse
effect on our financial condition and results of operations.
Impairment of intangible assets. We periodically evaluate acquired assets for
potential impairment indicators. Our judgments regarding the existence of
impairment indicators are based on regulatory factors, market conditions,
anticipated cash flows and operational performance of our acquired assets.
Future events could cause us to conclude that impairment indicators exist and
that goodwill or other intangibles associated with our acquired businesses are
impaired. Any resulting impairment loss could reduce our net worth and have a
material adverse effect on our financial condition and results of operations.
Additionally, our credit agreement contains a covenant requiring us to maintain
a minimum net worth. A reduction in net worth, if substantial, could limit the
amount that we can borrow under our credit agreement and any failure to comply
with the agreement could result in an event of default under the credit
agreement. As of December 31, 2003, goodwill and intangible assets represented
46.9% of our total assets.
Allocation of acquisition purchase price. We allocate acquisition purchase
prices to identified intangible assets and tangible assets acquired and
liabilities assumed based on their estimated fair values at the dates of
acquisition, with any residual amounts allocated to goodwill.
We deem the total remaining permitted and deemed permitted airspace of an
acquired landfill to be a tangible asset. Therefore, for acquired landfills, we
initially allocate the purchase price to identified intangible and tangible
assets acquired, excluding landfill airspace, and liabilities assumed based on
their estimated fair values at the date of acquisition. Any residual amount is
allocated to landfill airspace.
We often consummate single acquisitions that include a combination of
collection operations and landfills. For each separately identified collection
operation and landfill acquired in a single acquisition, we perform an initial
allocation of total purchase price to the identified collection operations and
landfills based on their relative fair values. Following this initial allocation
of total purchase price to the identified collection operations and landfills,
we further allocate the identified intangible assets and tangible assets
acquired and liabilities assumed for each collection operation and landfill
based on their estimated fair values at the dates of acquisition, with any
residual amounts allocated to either goodwill or landfill site costs, as
discussed above.
GENERAL
Our revenues consist mainly of fees we charge customers for solid waste
collection, transfer, disposal and recycling services. Our collection business
also generates revenues from the sale of recyclable commodities, which have
significant variability. A large part of our collection revenues comes from
providing commercial, industrial and residential services. We frequently perform
these services under service agreements, municipal contracts or franchise
agreements with governmental entities. Our existing franchise agreements and all
of our existing municipal contracts give us the exclusive right to provide
specified waste services in the specified territory during the contract term.
These exclusive arrangements are awarded, at least initially, on a competitive
bid basis and subsequently on a bid or negotiated basis. We also provide
residential collection services on a subscription basis with individual
households. More than 50% of our revenues for the year ended December 31, 2003
were derived from market areas where services are provided predominantly under
exclusive franchise agreements, long-term municipal contracts and governmental
certificates. Governmental certificates grant us perpetual and exclusive
collection rights in the covered areas. Contracts with counties and
municipalities and governmental certificates provide relatively consistent cash
flow during the terms of the contracts. Because we bill most residential
customers quarterly, subscription agreements also provide a stable source of
revenues for us.
30
The table below shows for the periods indicated the percentage of our total
reported revenues attributable to services provided, prior to intercompany
eliminations.
Year Ended December 31,
--------------------------------
2001 2002 2003
-------- -------- --------
Collection 67.9% 65.9% 65.6%
Disposal and transfer 28.3 30.6 30.7
Recycling 3.4 3.3 3.4
Other 0.4 0.2 0.3
-------- -------- --------
100.0% 100.0% 100.0%
======== ======== ========
We charge transfer station and landfill customers a tipping fee on a per
ton and/or per yard basis for disposing of their solid waste at the transfer
stations and landfill facilities. Many of our transfer and landfill customers
have entered into one to ten year disposal contracts with us, most of which
provide for annual indexed price increases.
We derive a substantial portion of our revenues from services provided
under exclusive municipal contracts and franchise agreements. No single contract
or customer accounted for more than 5% of our revenues for the years ended
December 31, 2001, 2002 and 2003.
We typically determine the prices of our solid waste services by the
collection frequency and level of service, route density, volume, weight and
type of waste collected, type of equipment and containers furnished, the
distance to the disposal or processing facility, the cost of disposal or
processing, and prices charged by competitors for similar services. The terms of
our contracts sometimes limit our ability to pass on price increases. Long-term
solid waste collection contracts often contain a formula, generally based on a
published price index, that automatically adjusts fees to cover increases in
some, but not all, operating costs, or that limit increases to less than 100% of
the increase in the applicable price index.
Cost of operations include labor and benefits, tipping fees paid to
third-party disposal facilities, equipment maintenance, workers' compensation,
vehicle insurance, claims expense, third-party transportation expense, fuel, the
cost of materials we purchase for recycling, district and state taxes and host
community fees and royalties. Our single largest cost is labor, followed by
third-party disposal, cost of vehicle maintenance, taxes and fees and fuel. We
use a number of programs to reduce overall cost of operations, including
increasing the use of automated routes to reduce labor and workman's
compensation exposure, comprehensive maintenance and health and safety programs,
and increasing the use of transfer stations to further enhance internalization
rates. During 2002, we increased our scope of high-deductible insurance, adding
automobile liability, general liability and workers' compensation claims.
Previously, our high-deductible insurance program covered only automobile
collision and employee group health claims. If we experience insurance claims or
costs above or below our historically evaluated levels, our estimates could be
materially affected.
Selling, general and administrative ("SG&A") expenses include management,
sales force, clerical and administrative employee compensation and benefits,
legal, accounting and other professional services, bad debt expense, and rent
expense for our corporate headquarters.
Depreciation expense includes depreciation of fixed assets over their
estimated useful lives using the straight-line method. Depletion expense
includes depletion of landfill site costs and total future development costs as
remaining airspace of the landfill is consumed. Remaining airspace at our
landfills includes both permitted and deemed permitted airspace. Amortization
expense includes the amortization of definite-lived intangible assets,
consisting primarily of long-term franchise agreements and contracts and
non-competition agreements, over their estimated useful lives using the
straight-line method. Goodwill and indefinite-lived intangible assets,
consisting primarily of certain perpetual rights to provide solid waste
collection and transportation services in specified territories, are not
amortized.
We capitalize some third-party expenditures related to pending acquisitions
or development projects, such as legal, engineering and interest expenses. We
expense indirect acquisition costs, such as executive and corporate overhead,
public relations and other corporate services, as we incur them. We charge
against net income any unamortized capitalized expenditures and advances (net of
any portion that we believe we may recover, through sale or otherwise) that may
31
become impaired, such as those that relate to any operation that is permanently
shut down and any pending acquisition or landfill development project that we
believe will not be completed. We routinely evaluate all capitalized costs, and
expense those related to projects that we believe are not likely to succeed. At
December 31, 2003, we had $0.3 million in capitalized expenditures relating to
pending acquisitions. We own undeveloped property in Harper County, Kansas where
we are seeking permits to construct and operate a municipal solid waste
landfill. In 2002, we received a special use permit from Harper County for
zoning the landfill and in 2003 we received a draft permit from the Kansas
Department of Health and Environment to construct and operate the landfill. In
July 2003, the District Court of Harper County invalidated the previously issued
zoning permit. We have appealed the District Court's decision to invalidate the
zoning permit. The Kansas Department of Health and Environment has notified us
that it will not issue a final permit to construct and operate the landfill
until the zoning matter is resolved. At December 31, 2003, we had $3.9 million
of capitalized expenditures related to this landfill development project. Based
on the advice of counsel, we believe that we will prevail in this matter and do
not believe that an impairment of the capitalized expenditures exists. If we do
not prevail on appeal, however, we will be required to expense in a future
period the $3.9 million of capitalized expenditures, less the recoverable value
of the undeveloped property and other amounts recovered, which would likely have
a material adverse effect on our reported income for that period.
We continually evaluate the value and future benefits of our intangible
assets, including goodwill. We assess the recoverability from future operations
using cash flows and income from operations of the related acquired businesses
as measures. Under this approach, the carrying value is reduced if it becomes
probable that our best estimate for expected future cash flows of the related
business would be less than the carrying amount of the intangible assets. As of
December 31, 2003, there have been no adjustments to the carrying amounts of
intangibles, including goodwill, resulting from these evaluations. As of
December 31, 2003, goodwill and other intangible assets represented 46.9% of
total assets and 121.8% of stockholders' equity.
RESULTS OF OPERATIONS
The following table sets forth items in our consolidated statement of
operations in thousands and as a percentage of revenues for the periods
indicated:
Year Ended December 31,
--------------------------------------------------------------------------------
As a % As a % As a %
of 2001 of 2002 of 2003
2001 Revenues 2002 Revenues 2003 Revenues
---------- ---------- ---------- ---------- ---------- ----------
Revenues $ 377,533 100.0% $ 498,661 100.0% $ 563,509 100.0%
Cost of operations 211,064 56.0 282,187 56.6 316,841 56.3
Selling, general and administrative 32,007 8.5 47,366 9.5 54,367 9.6
Depreciation and amortization 36,138 9.5 38,977 7.8 47,347 8.4
Loss on disposal of operations 4,879 1.3 -- -- -- --
Income from operations 93,445 24.7 130,131 26.1 144,954 25.7
Interest expense, net (29,571) (7.8) (31,372) (6.3) (31,666) (5.6)
Other income (expense), net (6,196) (1.6) (813) (0.2) (192) (0.1)
Minority interests (7,338) (1.9) (9,367) (1.9) (10,549) (1.9)
Income tax provision (19,812) (5.3) (33,113) (6.6) (37,233) (6.6)
Cumulative effect of change in
accounting principle, net of tax -- -- -- -- 282 0.1
---------- ---------- ---------- ---------- ---------- ----------
Net income $ 30,528 8.1% $ 55,466 11.1% $ 65,596 11.6%
========== ========== ========== ========== ========== ==========
Years Ended December 31, 2003 and 2002
Revenues. Total revenues for the year ended December 31, 2003 increased
$64.8 million, or 13.0%, to $563.5 million from $498.7 million for the year
ended December 31, 2002. Revenues in the year ended December 31, 2003 from
acquisitions closed in 2003 as well as the inclusion in 2003 of 12 months of
revenues from businesses acquired in 2002 totaled approximately $60.4 million,
or 93.2% of the increase. Of the remaining increase in revenues, $10.1 million
was attributable to selected price increases and $1.0 million was due to
32
improved recyclable commodity prices offset by a decline in volumes in our
existing business of $6.7 million. The volume reductions were primarily the
result of the inclusion of one-time projects in 2002 that were not repeated in
2003 and decreased volume at our transfer station in Wichita, Kansas. Revenue
resulting from one-time projects varies from year to year and generally is
influenced by clean-ups from weather and other natural phenomena and the volume
of construction activity in our markets. The decreased volume at our transfer
station in Wichita, Kansas was a permanent reduction in revenues resulting from
a loss of volumes from a competitor who had temporarily used our transfer
station in the prior year.
Cost of Operations. Total cost of operations increased $34.6 million, or
12.3%, to $316.8 million for the year ended December 31, 2003 from $282.2
million for the year ended December 31, 2002. The increase was almost entirely
attributable to acquisitions closed in 2003 and the inclusion in 2003 of 12
months of operating costs from businesses acquired in 2002. Exclusive of the
impact of acquisitions, total cost of operations increased $0.5 million due to
increases in vehicle maintenance and insurance, offset by lower disposal expense
driven by higher levels of internalization and lower labor costs. The decline in
labor costs in the base business was primarily attributable to the incurrence in
2002 of $1.4 million of non-recurring costs resulting from an employee labor
strike at our facilities in Pierce County, Washington.
Total cost of operations as a percentage of revenues for the year ended
December 31, 2003 decreased 0.3 percentage points to 56.3% from 56.6% for the
year ended December 31, 2002. The decrease as a percentage of revenues was
primarily attributable to the incurrence in 2002 of $1.4 million of
non-recurring costs resulting from an employee labor strike at our facilities in
Pierce County, Washington and greater integration in 2003 of collection volumes
into landfills we own or operate, partially offset by increased insurance costs.
SG&A. Total SG&A increased $7.0 million, or 14.8%, to $54.4 million for the
year ended December 31, 2003 from $47.4 million for the year ended December 31,
2002. The increase was primarily attributable to additional personnel from
acquisitions closed in 2003 and the inclusion in 2003 of 12 months of SG&A costs
from businesses acquired in 2002. Exclusive of the impact of acquisitions, SG&A
expenses were almost unchanged. During 2002, SG&A expenses included $1.3 million
of nonrecurring employment-related expenses associated with the termination of
our search for a chief operating officer and the hiring of two new corporate
officers, $0.3 million of nonrecurring costs associated with the listing of our
common stock on the New York Stock Exchange and $0.4 million of expense
associated with the relocation of our corporate office. Excluding these
nonrecurring items, SG&A expenses increased due to the inclusion in 2003 of
costs from additional corporate, regional and district level personnel,
increased legal and accounting expenses related to the new corporate governance
requirements, and higher director and officer liability insurance costs. In
2004, we expect our SG&A expenses to continue to increase as a result of the
full year impact of acquisitions closed in 2003 and our expanded management
infrastructure, the issuance to employees of $2.2 million of restricted stock in
2004 that will be amortized to expense over its three-year vesting term, and an
expected increase in full year incentive compensation expense.
SG&A as a percentage of revenues for the year ended December 31, 2003
increased 0.1 percentage point to 9.6% from 9.5% for the year ended December 31,
2002. The increase in SG&A as a percentage of revenues resulted from the
addition of corporate, regional and district level personnel, increased legal
and accounting expenses related to the new corporate governance requirements and
higher director and officer liability insurance costs, partially offset by the
incurrence in 2002 of $1.3 million of nonrecurring employment-related expenses
associated with the termination of our search for a chief operating officer and
the hiring of two new corporate officers, costs associated with listing our
common stock on the New York Stock Exchange and our corporate office relocation.
SG&A expenses in 2004 are expected to be flat as a percentage of revenues.
Depreciation and Amortization. Depreciation and amortization expenses for
the year ended December 31, 2003 increased $8.3 million, or 21.5%, to $47.3
million from $39.0 million for the year ended December 31, 2002. The increase
resulted primarily from increased depreciation expense associated primarily with
acquisitions closed in 2003, the inclusion in 2003 of 12 months of depreciation
from businesses acquired in 2002, additional intangible amortization resulting
from acquisitions and increased depreciation in our base business. The increased
depreciation in our base business is primarily the result of capital
expenditures running at levels significantly higher than depreciation.
Depreciation and amortization as a percentage of revenues for the year
ended December 31, 2003 increased 0.6 percentage points to 8.4% from 7.8% for
the year ended December 31, 2002. The increase in depreciation and amortization
as a percentage of revenues resulted from the significant capital expenditures
in 2003 as well as an increase in contract amortization associated with
contracts acquired in 2003.
33
Operating Income. Operating income for the year ended December 31, 2003
increased $14.9 million, or 11.4%, to $145.0 million from $130.1 million for the
year ended December 31, 2002. The increase was primarily attributable to the
growth in revenues, partially offset by higher operating costs, depreciation,
amortization and SG&A expenses.
Operating income as a percentage of revenues for the year ended December
31, 2003 decreased 0.4 percentage points to 25.7% from 26.1% for the year ended
December 31, 2002. The decrease in operating income as a percentage of revenues
was primarily attributable to an increase in depreciation and amortization
offset partially by lower cost of operations.
Interest Expense. Interest expense for the year ended December 31, 2003
increased $0.3 million, or 0.9%, to $31.7 million from $31.4 million for the
year ended December 31, 2002. The increase was primarily attributable to higher
debt levels incurred to fund our acquisitions, partially offset by a lower
average borrowing cost. Additionally, the expiration of our two high-rate
interest rate swap agreements in December 2003 resulted in savings in the month
of December of approximately $0.5 million. At December 31, 2003, we had $265.1
million of net floating rate balances, including floating rate debt under our
credit facility, our Floating Rate Convertible Subordinated Notes due 2022,
various floating rate notes payable to third parties and floating rate municipal
bond obligations, offset by our debt effectively fixed under interest rate swap
agreements scheduled to commence in February 2004. Should interest rates rise,
our interest costs on these borrowings would increase. A one percent increase in
interest rates would result in a $2.7 million increase in interest expense.
Other Expense. Other expense decreased to $0.2 million for the year ended
December 31, 2003 from $0.8 million for the year ended December 31, 2002. The
primary component of other expense for the year ended December 31, 2003 was net
losses on the disposal of certain assets.
Minority Interests. Minority interests increased $1.1 million, or 12.6%, to
$10.5 million for the year ended December 31, 2003, from $9.4 million for the
year ended December 31, 2002. The increase was attributable to increased
earnings by our majority-owned subsidiaries.
Provision for Income Taxes. Income taxes increased $4.1 million, or 12.4%,
to $37.2 million for the year ended December 31, 2003, from $33.1 million for
the year ended December 31, 2002. This increase was due to increased pre-tax
earnings, partially offset by a 0.7 percentage point reduction in our effective
tax rate due to the reversal of state tax liabilities associated with
contingencies that expired in 2003 as well as an overall decline in our
effective state tax rate due to changes in the apportionment of our earnings.
The effective income tax rate for the year ended December 31, 2003 was 36.3%,
which is above the federal statutory rate of 35.0% primarily due to state and
local taxes, partially offset by a reduction in our effective tax rate due to
the reversal of tax liabilities associated with contingencies that were resolved
in 2003. We analyze our tax reserves periodically (but not less frequently than
annually) and adjustments are made as events occur to warrant adjustments to the
reserve. For example, if the statutory period for assessing tax on a given tax
return or period lapses, the reserve associated with that period will be
reduced.
Cumulative Effect of Change in Accounting Principle. The cumulative effect
of change in accounting principle, net of tax, was due to the adoption of SFAS
No. 143 on January 1, 2003. See Note 1 to our Consolidated Financial Statements
for further discussion of the impact of adopting SFAS No. 143.
Net Income. Net income increased $10.1 million, or 18.3%, to $65.6 million
for the year ended December 31, 2003, from $55.5 million for the year ended
December 31, 2002. The increase was primarily attributable to increased
operating income in 2003, partially offset by higher income tax expense and
higher minority interests.
Years Ended December 31, 2002 and 2001
Our adoption of SFAS No. 143 resulted in the reclassification of accretion
expense from interest expense to cost of operations. The amounts reclassified
were $0.9 million and $0.5 million for the years ended December 31, 2002 and
2001, respectively. The discussion below reflects this reclassification.
Revenues. Total revenues for the year ended December 31, 2002 increased
$121.2 million, or 32.1%, to $498.7 million from $377.5 million for the year
ended December 31, 2001. Revenues in the year ended December 31, 2002 from
34
acquisitions closed in 2002 as well as the inclusion in 2002 of 12 months of
revenues from businesses acquired in 2001 totaled approximately $94.9 million,
or 78.4% of the increase. For the remaining increase in revenues, $15.5 million
was attributable to selected price increases, $2.3 million was due to improved
recyclable commodity prices and $8.5 million was the result of volume growth in
our existing business.
Cost of Operations. Total cost of operations increased $71.1 million, or
33.7%, to $282.2 million for the year ended December 31, 2002 from $211.1
million for the year ended December 31, 2001. The increase was primarily
attributable to acquisitions closed in 2002, the inclusion in 2002 of 12 months
of operating costs from businesses acquired in 2001, $1.4 million of costs
incurred resulting from an employee labor strike at our facilities in Pierce
County, Washington, growth in our existing business and higher insurance costs,
partially offset by greater integration of collection volumes into landfills we
owned or operated.
Total cost of operations as a percentage of revenues for the year ended
December 31, 2002 increased 0.6 percentage points to 56.6% from 56.0% for the
year ended December 31, 2001. The increase as a percentage of revenues was
primarily attributable to the mix of revenues associated with acquisitions
closed in 2002, which had gross margins below our company average, higher
insurance costs, and costs resulting from a labor strike in Pierce County,
Washington, partially offset by greater integration of collection volumes into
landfills we owned or operated.
SG&A. Total SG&A increased $15.4 million, or 48.0%, to $47.4 million for
the year ended December 31, 2002 from $32.0 million for the year ended December
31, 2001. The increase was primarily attributable to additional personnel from
acquisitions closed in 2002, the inclusion in 2002 of 12 months of SG&A costs
from businesses acquired in 2001, additional corporate, regional and district
level overhead, $1.3 million of employment-related expenses associated with the
termination of our search for a chief operating officer and the hiring of two
new corporate officers, higher relocation expenses associated with new hires and
transfers of existing employees, increased bad debt expense, increased legal
expenses, higher insurance costs, stock compensation expense related to the
issuance of restricted stock to district-level personnel in 2002, $0.4 million
expense associated with the relocation of our headquarters and early termination
of our former corporate headquarters property lease and $0.3 million of costs
associated with the listing of our common stock on the New York Stock Exchange.
During the year ended December 31, 2001, we recognized $0.9 million of expenses
related to the termination of negotiations and due diligence for a large
potential acquisition.
SG&A as a percentage of revenues for the year ended December 31, 2002
increased 1.0 percentage point to 9.5% from 8.5% for the year ended December 31,
2001. The increase in SG&A as a percentage of revenues resulted from
acquisitions closed in 2002 having SG&A costs as a percentage of revenues above
our company average, additional corporate, regional and district level overhead
to accommodate our current and future growth, employment-related expenses
associated with the termination of our search for a chief operating officer and
the hiring of two new corporate officers, higher employee relocation expenses
related to new hires and transfers of existing employees, increased bad debt
expense, increased legal expenses, stock compensation expense related to
restricted stock issued to district-level personnel in 2002, the accrual of an
expense associated with the relocation of our headquarters and early termination
of our former corporate headquarters property lease and costs associated with
the listing of our common stock on the New York Stock Exchange. The increase in
SG&A as a percentage of revenues was partially offset by the recognition during
2001 of expenses related to the termination of negotiations and due diligence
for a large potential acquisition.
Depreciation and Amortization. Depreciation and amortization expenses for
the year ended December 31, 2002 increased $2.9 million, or 7.9%, to $39.0
million from $36.1 million for the year ended December 31, 2001. The increase
resulted primarily from increased depletion due to higher volumes of waste
disposed at our landfills, depreciation and depletion associated with
acquisitions closed in 2002 and the inclusion in 2002 of 12 months of
depreciation and depletion from businesses acquired in 2001, and increased
depreciation expense resulting from new equipment acquired to support our base
operations, partially offset by decreased amortization expense from not
amortizing goodwill during the year ended December 31, 2002, due to the
application of the nonamortization provisions of SFAS No. 142. Total goodwill
amortization expense recognized in the year ended December 31, 2001 was $9.6
million. No goodwill amortization expense was recognized in the year ended
December 31, 2002.
Depreciation and amortization as a percentage of revenues for the year
ended December 31, 2002 decreased 1.7 percentage points to 7.8% from 9.5% for
the year ended December 31, 2001. The decrease in depreciation and amortization
as a percentage of revenues was the result of applying the nonamortization
provisions of SFAS No. 142, partially offset by increased depletion due to
higher volumes of waste disposed at our landfills and increased depreciation
expense associated with new equipment acquired in 2002. Goodwill amortization
expense as a percentage of revenues for the year ended December 31, 2001 was
2.5%.
35
Loss on Disposal of Operations. During the year ended December 31, 2001, we
sold some of our Utah operations that were deemed to no longer be of strategic
importance. We recognized a non-cash pre-tax loss of $4.9 million from this
sale.
Operating Income. Operating income for the year ended December 31, 2002
increased $36.7 million, or 39.3%, to $130.1 million from $93.4 million for the
year ended December 31, 2001. The increase was primarily attributable to the
growth in revenues, applying the nonamortization provisions of SFAS No. 142 and
the absence of the prior year loss associated with the disposal of some of our
Utah operations, partially offset by higher operating costs, depreciation,
depletion and SG&A expenses.
Operating income as a percentage of revenues for the year ended December
31, 2002 increased 1.4 percentage points to 26.1% from 24.7% for the year ended
December 31, 2001. The increase in operating income as a percentage of revenues
was attributable to applying the nonamortization provisions of SFAS No. 142 and
not incurring losses on the disposal of operations, partially offset by declines
in gross margins, higher depreciation and depletion expenses and an increase in
SG&A expenses as a percentage of revenues.
Interest Expense. Interest expense for the year ended December 31, 2002
increased $1.8 million, or 6.1%, to $31.4 million from $29.6 million for the
year ended December 31, 2001. The increase was primarily attributable to higher
debt levels incurred to fund our acquisitions, partially offset by lower
interest rates on our revolving credit facility and our replacing a portion of
the borrowings under our revolving credit facility with lower interest
subordinated debt obligations. At December 31, 2002, we had $76.0 million of
floating rate borrowings under our credit facility, $175.0 million of Floating
Rate Convertible Subordinated Notes due 2022 and $18.0 million of other floating
rate debt.
Other Expense. Other expense decreased to $0.8 million for the year ended
December 31, 2002 from $6.2 million for the year ended December 31, 2001. The
primary component of other expense for the year ended December 31, 2001 was $6.3
million of expenses resulting from cash payments for the early termination of an
interest rate swap. During the first quarter of 2001, we determined that the
debt, the specific cash flows of which an interest rate swap was designated as
hedging, would be repaid prior to its due date from the net proceeds of our
convertible subordinated debt offering; therefore, it was probable that the
future variable interest payments under the related debt (the hedged
transactions) would not occur. The remaining components of other expense for
2002 and 2001 were net losses incurred on the disposal of certain assets.
Minority Interests. Minority interests increased $2.1 million, or 27.7%, to
$9.4 million for the year ended December 31, 2002, from $7.3 million for the
year ended December 31, 2001. The increase was attributable to increased
earnings by our majority-owned subsidiaries, as well as our owning majority
interests in those entities, acquired in February 2001, for the entire 12 months
ended December 31, 2002, compared to owning them for approximately eleven months
in the year ended December 31, 2001.
Provision for Income Taxes. Income taxes increased $13.3 million, or 67.1%,
to $33.1 million for the year ended December 31, 2002, from $19.8 million for
the year ended December 31, 2001. This increase was due to increased pre-tax
earnings, partially offset by a 1.5 percentage point reduction in our effective
tax rate due to the elimination of non-deductible goodwill. The effective income
tax rate for the year ended December 31, 2002 was 37.4%, which is above the
federal statutory rate of 35.0% primarily due to state and local taxes.
Net Income. Net income increased $25.0 million, or 81.7%, to $55.5 million
for the year ended December 31, 2002, from $30.5 million for the year ended
December 31, 2001. The increase was primarily attributable to increased
operating income in 2002, and the absence of prior year losses associated with
the disposal of some of our Utah operations and the termination of an interest
rate swap in 2001, partially offset by increases in interest expense, higher
income tax expense and higher minority interests.
LIQUIDITY AND CAPITAL RESOURCES
Our business is capital intensive. Our capital requirements include
acquisitions and fixed asset purchases. We expect that we will also make capital
expenditures for landfill cell construction, landfill development and landfill
closure activities in the future. We plan to meet our capital needs through
various financing sources, including internally generated funds, debt and equity
financings.
As of December 31, 2003, we had a working capital deficit of $15.1 million,
including cash and equivalents of $5.3 million. Our working capital deficit
decreased $7.9 million from $23.0 million at December 31, 2002. Our strategy in
managing our working capital is generally to apply the cash generated from our
operations that remains after satisfying our working capital and capital
36
expenditure requirements to reduce our indebtedness under our credit facility
and to minimize our cash balances. The decrease in our working capital deficit
from the prior year resulted primarily from an increase in accounts receivable
related to increased revenues, combined with a decrease in accrued liabilities
due primarily to a decrease in the unrealized loss on our interest rate swaps of
$4.0 million, as well as a decrease in acquisition-related accounts due to the
payment of purchase price holdbacks.
In April 2001, we sold $150 million of 5.5% Convertible Subordinated Notes
due April 2006 (the "2006 Notes") in a Rule 144A private placement. The 2006
Notes are unsecured, rank junior to existing and future Senior Indebtedness, as
defined in the indenture governing the notes, and are convertible at any time at
the option of the holder into common stock at a conversion price of $38.03 per
share. We received proceeds of approximately $144.4 million from our private
placement of these notes and used these proceeds to repay certain outstanding
indebtedness under our credit facility. On March 3, 2004, we announced that on
April 15, 2004, we intend to redeem the 2006 Notes in full. Holders of the 2006
Notes may elect to receive either cash or our common stock in exchange for their
notes. If holders of the 2006 Notes elect to receive cash, the source of the
redemption proceeds will be our revolving credit facility.
In April 2002, we sold $175 million of Floating Rate Convertible
Subordinated Notes due 2022 (the "2022 Notes"). The 2022 Notes bear interest at
the 3-month LIBOR rate plus 50 basis points, payable quarterly. The 2022 Notes
are unsecured and rank pari passu with the 2006 Notes and junior to all existing
and future senior indebtedness, as defined in the indenture governing the notes.
Upon the incurrence of certain conditions, the 2022 Notes are convertible into
common stock at 20.6654 shares per $1,000 principal amount of notes, or $48.39
per share. Our issuance of the 2022 Notes did not result in any change in
material covenants or in the committed amount under our credit facility. We
received proceeds of approximately $169.0 million from our sale of the 2022
Notes and used the proceeds to repay a portion of the outstanding indebtedness
under our credit facility.
As of December 31, 2002, we had a $435 million revolving credit facility
with a syndicate of banks for which Fleet Boston Financial Corporation acted as
agent. In October 2003, we amended our credit facility to increase the maximum
borrowings to $575 million. This new credit facility consists of a $400 million
senior secured revolving credit facility with a syndicate of banks for which
Fleet National Bank acts as agent, and a $175 million senior secured term loan.
In March 2004, the senior secured term loan was refinanced to increase the total
borrowing to $200 million. As of December 31, 2002, we had an aggregate of $216
million outstanding under our credit facility, exclusive of outstanding stand-by
letters of credit of $23.6 million. As of December 31, 2003, $228 million was
outstanding under our credit facility as follows: $175 million was outstanding
under our senior secured term loan and $53.0 million was outstanding under our
senior secured revolving credit facility, exclusive of outstanding stand-by
letters of credit of $45.9 million. The senior secured revolving credit facility
requires monthly interest payments and matures in October 2008. The senior
secured term loan requires annual principal payments equal to 1% of the notional
balance at the end of years one through six with all remaining outstanding
amounts due October 2010. Under the new credit facility, there is no maximum
amount of stand-by letters of credit that can be issued; however, the issuance
of stand-by letters of credit reduces the amount of total borrowings available.
The new credit facility requires us to pay a commitment fee ranging from 0.25%
to 0.50% of the unused portion of the new credit facility. We are able to
increase the maximum borrowings under the new credit facility to $675 million,
although no existing lender will have any obligation to increase its commitment,
provided that no event of default, as defined in the new credit facility, has
occurred. The borrowings under the new credit facility bear interest at a rate
per annum equal to, at our discretion, either the Fleet National Bank Base Rate
plus applicable margin or the LIBOR rate plus applicable margin. The applicable
margin under the revolving credit facility varies depending on our leverage
ratio. The applicable margin on the term loan is 50 basis points in the case of
loans based on the Fleet National Base Rate and 200 basis points in the case of
loans based on the LIBOR rate. Virtually all of our assets, including our
interest in the equity securities of our subsidiaries, secure our obligations
under the new credit facility. The new credit facility places certain business,
financial and operating limitations on us relating to, among other things, the
incurrence of additional indebtedness, investments, acquisitions, asset sales,
mergers, dividends, distributions and repurchases and redemption of capital
stock. The new credit facility permits redemption of the 2006 Notes for cash.
The new credit facility also requires that specified financial ratios and
balances be maintained. As of December 31, 2002 and 2003, we were in compliance
with all applicable covenants in our then outstanding credit facility. The
credit facility also requires the lenders' approval of acquisitions in certain
circumstances. We use the credit facility for acquisitions, capital
expenditures, working capital, standby letters of credit and general corporate
purposes. The $12 million increase in outstanding borrowings under our credit
facility in 2003 was primarily due to funding new acquisitions and capital
expenditures, partially offset by cash generated from operations and the
proceeds from stock option exercises. If we are unable to incur additional
indebtedness under our credit facility or obtain additional capital through
future debt or equity financings, our rate of growth through acquisitions may
decline.
37
As of December 31, 2003, we had the following contractual obligations (in
thousands):
Payments Due by Period
----------------------
Less Than
Recorded Obligations Total 1 Year 1 to 3 Years 4 to 5 Years Over 5 Years
-------------------- ------------ ------------ ------------ ------------ ------------
Long-term debt (1) $ 611,631 $ 9,740 $ 165,266 $ 72,960 $ 363,665
------------ ------------ ------------ ------------ ------------
Total recorded obligations $ 611,631 $ 9,740 $ 165,266 $ 72,960 $ 363,665
============ ============ ============ ============ ============
(1) Long-term debt payments include $53 million in principal payments due
2008 related to our senior secured revolving credit facility and $175 million in
principal payments due 2010 related to our senior secured term loan, both under
our new credit facility. As of December 31, 2003, our credit facility allowed us
to borrow up to $575 million.
Amount of Commitment Expiration Per Period
------------------------------------------
Less Than
Unrecorded Obligations Total 1 Year 1 to 3 Years 4 to 5 Years Over 5 Years
---------------------- ------------ ------------ ------------ ------------ ------------
Operating leases (2) $ 27,056 $ 3,980 $ 6,272 $ 4,613 $ 12,191
Unconditional purchase
Obligations (2) 20,526 9,725 10,801 -- --
------------ ------------ ------------ ------------ ------------
Total unrecorded obligations $ 47,582 $ 13,705 $ 17,073 $ 4,613 $ 12,191
============ ============ ============ ============ ============
(2) We are party to operating lease agreements and unconditional purchase
obligations as discussed in Note 9 to the consolidated financial statements.
These lease agreements and purchase obligations are established in the ordinary
course of our business and are designed to provide us with access to facilities
and products at competitive, market-driven prices. These arrangements have not
materially affected our financial position, results of operations or liquidity
during the year ended December 31, 2003 nor are they expected to have a material
impact on our future financial position, results of operations or liquidity.
We are party to stand-by letters of credit as discussed in Note 8 to the
consolidated financial statements and financial surety bonds as discussed in
Note 9 to the consolidated financial statements. These stand-by letters of
credit and financial surety bonds are generally established to support our
financial assurance needs and landfill operations. These arrangements have not
materially affected our financial position, results of operations or liquidity
during the year ended December 31, 2003 nor are they expected to have a material
impact on our future financial position, results of operations or liquidity.
The minority interest holders of a majority-owned subsidiary of Waste
Connections have a currently exercisable option (the put option) to require
Waste Connections to complete the acquisition of this majority-owned subsidiary
by purchasing their minority ownership interests for fair market value. The put
option calculates the fair market value of the subsidiary based on its current
operating income before depreciation and amortization, as defined in the put
option agreement. The put option does not have a stated termination date. At
December 31, 2003, the minority interest holders' pro rata share of the
subsidiary's fair market value is estimated to be worth between $65 million and
$80 million. Because the put is required at fair market value, no amounts have
been accrued relative to the put option.
For the year ended December 31, 2003, net cash provided by operations was
approximately $157.2 million. Of this, $0.1 million was provided by working
capital for the period. The primary components of the reconciliation of net
income to net cash provided by operations for the year ended December 31, 2003
consist of non-cash expenses including $47.3 million of depreciation and
amortization, $10.5 million of minority interest expense, $2.4 million of debt
issuance cost amortization, and the deferral of $27.9 million of income tax
expense resulting from temporary differences between the recognition of income
and expenses for financial reporting and income tax purposes.
For the year ended December 31, 2003, net cash used in investing activities
was $161.0 million. Of this, $84.9 million was used to fund the cash portion of
acquisitions and to pay a portion of acquisition costs that were included as a
component of accrued liabilities at December 31, 2002. Cash used for capital
expenditures was $70.2 million, which was primarily for investments in fixed
assets, consisting of trucks, containers, other equipment and landfill
development. Other cash inflows from investing activities include $1.5 million
received from the disposal of assets. Other cash outflows from investing
activities include $3.6 million of restricted cash funding in 2003 for our
38
landfill closure and post-closure obligations and $5.3 million paid to acquire a
9.9% interest in a company that issues surety bonds for landfill closure and
post-closure obligations.
For the year ended December 31, 2003, net cash provided by financing
activities was $4.9 million, which included $6.5 million of net borrowings under
our various debt arrangements for the funding of capital expenditures and
acquisitions and $12.3 million of proceeds from stock option and warrant
exercises, less $9.7 million of cash distributions to minority interest holders
and $4.1 million of debt issuance costs, primarily related to our amended credit
facility.
We made approximately $70.2 million in capital expenditures during the year
ended December 31, 2003. We expect to make capital expenditures of approximately
$70 million in 2004 in connection with our existing business. We intend to fund
our planned 2004 capital expenditures principally through existing cash,
internally generated funds, and borrowings under our existing credit facility.
In addition, we may make substantial additional capital expenditures in
acquiring solid waste collection and disposal businesses. If we acquire
additional landfill disposal facilities, we may also have to make significant
expenditures to bring them into compliance with applicable regulatory
requirements, obtain permits or expand our available disposal capacity. We
cannot currently determine the amount of these expenditures because they will
depend on the number, nature, condition and permitted status of any acquired
landfill disposal facilities. We believe that our credit facility and the funds
we expect to generate from operations will provide adequate cash to fund our
working capital and other cash needs for the foreseeable future.
From time to time we evaluate our existing operations and their strategic
importance to Waste Connections. If we determine that a given operating unit
does not have future strategic importance, we may sell or otherwise dispose of
those operations. Although we believe our operations would not be impaired by
such dispositions, we could incur losses on them.
NEW ACCOUNTING PRONOUNCEMENTS
For a description of the new accounting standards that affect us, see Note
1 to our Consolidated Financial Statements included in this Form 10-K.
INFLATION
To date, inflation has not materially affected our operations. Consistent
with industry practice, many of our contracts allow us to pass through certain
costs to our customers, including increases in landfill tipping fees and, in
some cases, fuel costs. Therefore, we believe that we should be able to increase
prices to offset many cost increases that result from inflation. However,
competitive pressures may require us to absorb at least part of these cost
increases. Management's estimates associated with inflation have an impact on
our accounting for landfill liabilities.
SEASONALITY
Based on historic trends experienced by the businesses we have acquired, we
expect our operating results to vary seasonally, with revenues typically lowest
in the first quarter, higher in the second and third quarters and lower in the
fourth quarter than in the second and third quarters. We expect the fluctuation
in our revenues between our highest and lowest quarters to be approximately 10%
to 12%. This seasonality reflects the lower volume of solid waste generated
during the late fall, winter and early spring months because of decreased
construction and demolition activities during the winter months in the U.S. In
addition, some of our operating costs may be higher in the winter months.
Adverse winter weather conditions slow waste collection activities, resulting in
higher labor and operational costs. Greater precipitation in the winter
increases the weight of collected waste, resulting in higher disposal costs,
which are calculated on a per ton basis.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the normal course of business, we are exposed to market risk, including
changes in interest rates and certain commodity prices. We use hedge agreements
to manage a portion of our risks related to interest rates. While we are exposed
to credit risk in the event of non-performance by counterparties to our hedge
agreements, in all cases such counterparties are highly rated financial
institutions and we do not anticipate non-performance. We do not hold or issue
derivative financial instruments for trading purposes. We monitor our hedge
positions by regularly evaluating the positions at market and by performing
sensitivity analyses.
39
In December 2000, the Company restructured two existing interest rate swap
agreements, extending their maturity through December 2003 and removing the
embedded option features of the agreements. As of December 31, 2000, the Fleet
Boston swap had a notional amount of $125 million at a fixed rate of 6.17% plus
applicable margin and the Union Bank of California swap had a notional amount of
$125 million at a fixed rate of 7.01% plus applicable margin. In March 2001,
$110 million of the notional amount under the Union Bank of California swap was
terminated because the Company used the proceeds from its Convertible
Subordinated Notes offering to repay $110 million of the LIBOR note the cash
flows of which this swap was designated to hedge. The Company made a cash
payment of $6.3 million to terminate the swap prior to its due date.
In May 2003, we entered into two forward-starting interest rate swap
agreements. Each interest rate swap agreement has a notional amount of $87.5
million and effectively fixes the interest rate on the notional amount at
interest rates ranging from 2.67% to 2.68%, plus applicable margin. The
effective date of the swap agreements is February 2004 and each swap agreement
expires in February 2007. These interest rate swap agreements are effective as
cash flow hedges for a portion of our variable rate debt and we apply hedge
accounting pursuant to SFAS No. 133 to account for these instruments. The
notional amounts and all other significant terms of the swap agreements are
matched to the provisions and terms of the variable rate debt being hedged.
We have performed sensitivity analyses to determine how market rate changes
will affect the fair value of our market risk sensitive hedge positions and all
other debt. Such an analysis is inherently limited in that it reflects a
singular, hypothetical set of assumptions. Actual market movements may vary
significantly from our assumptions. Fair value sensitivity is not necessarily
indicative of the ultimate cash flow or earnings effect we would recognize from
the assumed market rate movements. We are exposed to cash flow risk due to
changes in interest rates with respect to the net floating rate balances owed at
December 31, 2002 and 2003 of $269.0 million and $265.1 million, respectively,
including floating rate debt under our credit facility, our 2022 Notes, various
floating rate notes payable to third parties and floating rate municipal bond
obligations, offset by our debt effectively fixed under interest rate swap
agreements. A one percent increase in interest rates on our variable-rate debt
as of December 31, 2002 and 2003 would decrease our annual pre-tax income by
approximately $2.7 million in both years. All of our remaining debt instruments
are at fixed rates, or effectively fixed under the interest rate swap agreements
described above; therefore, changes in market interest rates under these
instruments would not significantly impact our cash flows or results of
operations.
We market a variety of recyclable materials, including cardboard, office
paper, plastic containers, glass bottles and ferrous and aluminum metals. We own
and operate 26 recycling processing operations and sell other collected
recyclable materials to third parties for processing before resale. We often
share the profits from our resale of recycled materials with other parties to
our recycling contracts. For example, certain of our municipal recycling
contracts in Washington, negotiated before we acquired those businesses, specify
benchmark resale prices for recycled commodities. If the prices we actually
receive for the processed recycled commodities collected under the contract
exceed the prices specified in the contract, we share the excess with the
municipality, after recovering any previous shortfalls resulting from actual
market prices falling below the prices specified in the contract. To reduce our
exposure to commodity price risk with respect to recycled materials, we have
adopted a pricing strategy of charging collection and processing fees for
recycling volume collected from third parties. Although there can be no
assurance of market recoveries, in the event of a decline, because of the
provisions within certain of our contracts that pass commodity risk along to the
customers, we believe, given historical trends and fluctuations in the recycling
commodities market, that a 10% decrease in average recycled commodity prices
from the prices that were in effect at December 31, 2002 and 2003 would not
materially affect our cash flows or pre-tax income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See page 40 of this Report for an index to our financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
40
ITEM 9A. CONTROLS AND PROCEDURES
As of December 31, 2003, our management, including our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the design
and operation of our disclosure controls and procedures, as defined in Rules
13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934 (the
"Exchange Act"). Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective, in all material respects, to ensure that information required to be
disclosed in the reports we file and submit under the Exchange Act is recorded,
processed, summarized and reported as and when required.
During the three months ended December 31, 2003, there were no significant
changes (including corrective actions with regard to significant deficiencies
and material weaknesses) in our internal control over financial reporting or in
other factors that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
41
INDEX TO FINANCIAL STATEMENTS
WASTE CONNECTIONS, INC.
Page
----
Report of Ernst & Young LLP, Independent Auditors 43
Consolidated Balance Sheets as of December 31, 2002 and 2003 44
Consolidated Statements of Income for the years ended
December 31, 2001, 2002 and 2003 45
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the years ended December 31, 2001, 2002 and 2003 46
Consolidated Statements of Cash Flows for the years ended
December 31, 2001, 2002 and 2003 47
Notes to Consolidated Financial Statements 49
42
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Waste Connections, Inc.
We have audited the accompanying consolidated balance sheets of Waste
Connections, Inc. as of December 31, 2002 and 2003, and the related consolidated
statements of income, stockholders' equity and comprehensive income, and cash
flows for each of the three years in the period ended December 31, 2003. Our
audits also included the financial statement schedule listed in Item 15.(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 audit
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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Waste Connections,
Inc. at December 31, 2002 and 2003, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2003 the Company adopted Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" and effective January 1,
2002, the Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets."
ERNST & YOUNG LLP
Sacramento, California
February 13, 2004, except for
paragraph 1 of Note 16, as to
which the date is March 2, 2004
and paragraph 2 of Note 16, as
to which the date is March 3, 2004
43
WASTE CONNECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
------------------------------
2002 2003
------------ ------------
ASSETS
Current assets:
Cash and equivalents $ 4,067 $ 5,276
Accounts receivable, net of allowance for doubtful accounts of $2,509
and $2,570 at December 31, 2002 and 2003, respectively 63,488 72,474
Prepaid expenses and other current assets 8,652 11,270
------------ ------------
Total current assets 76,207 89,020
Property and equipment, net 578,040 613,225
Goodwill, net 548,975 590,054
Intangible assets, net 33,498 64,784
Other assets, net 25,162 38,869
------------ ------------
$ 1,261,882 $ 1,395,952
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 30,688 $ 38,682
Accrued liabilities 45,905 31,920
Deferred revenue 19,016 23,738
Current portion of long-term debt and notes payable 3,646 9,740
------------ ------------
Total current liabilities 99,255 104,080
Long-term debt and notes payable 578,481 601,891
Other long-term liabilities 14,813 8,400
Deferred income taxes 94,543 120,162
------------ ------------
Total liabilities 787,092 834,533
Commitments and contingencies
Minority interests 23,078 23,925
Stockholders' equity:
Preferred stock: $0.01 par value; 7,500,000 shares authorized;
none issued and outstanding -- --
Common stock: $0.01 par value; 50,000,000 shares authorized;
28,046,535 and 28,666,788 shares issued and outstanding
at December 31, 2002 and 2003, respectively 280 287
Additional paid-in capital 332,705 348,146
Deferred stock compensation (775) (436)
Retained earnings 123,498 189,094
Accumulated other comprehensive (loss) income (3,996) 403
------------ ------------
Total stockholders' equity 451,712 537,494
------------ ------------
$ 1,261,882 $ 1,395,952
============ ============
See accompanying notes.
44
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------------------------
2001 2002 2003
------------ ------------ ------------
Revenues $ 377,533 $ 498,661 $ 563,509
Operating expenses:
Cost of operations 211,064 282,187 316,841
Selling, general and administrative 32,007 47,366 54,367
Depreciation and amortization 36,138 38,977 47,347
Loss on disposal of operations 4,879 -- --
------------ ------------ ------------
Income from operations 93,445 130,131 144,954
Interest expense (29,571) (31,372) (31,666)
Other income (expense), net (6,196) (813) (192)
------------ ------------ ------------
Income before income tax provision and minority interests 57,678 97,946 113,096
Minority interests (7,338) (9,367) (10,549)
------------ ------------ ------------
Income before income tax provision 50,340 88,579 102,547
Income tax provision (19,812) (33,113) (37,233)
------------ ------------ ------------
Income before cumulative effect of change in accounting principle 30,528 55,466 65,314
Cumulative effect of change in accounting principle, net of tax
expense of $166 -- -- 282
------------ ------------ ------------
Net income $ 30,528 $ 55,466 $ 65,596
============ ============ ============
Basic income per common share:
Income before cumulative effect of change in accounting principle $ 1.13 $ 2.00 $ 2.31
Cumulative effect of change in accounting principle -- -- .01
------------ ------------ ------------
Net income per common share $ 1.13 $ 2.00 $ 2.32
============ ============ ============
Diluted income per common share:
Income before cumulative effect of change in accounting principle $ 1.10 $ 1.90 $ 2.17
Cumulative effect of change in accounting principle -- -- .01
------------ ------------ ------------
Net income per common share $ 1.10 $ 1.90 $ 2.18
============ ============ ============
Shares used in calculating basic income per share 27,069,685 27,750,642 28,327,296
============ ============ ============
Shares used in calculating diluted income per share 27,675,639 32,325,624 32,871,652
============ ============ ============
See accompanying notes.
45
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
STOCKHOLDERS' EQUITY
------------------------------------------
COMMON STOCK ADDITIONAL
COMPREHENSIVE --------------------------- PAID-IN
INCOME SHARES AMOUNT CAPITAL
------------ ------------ ------------ ------------
Balances at December 31, 2000 26,480,046 $ 265 $ 296,439
Issuance of common stock warrants -- -- 105
Stock options granted below fair market value -- -- 200
Issuance of common stock 337,905 3 8,634
Amortization of deferred stock compensation -- -- --
Exercise of stock options and warrants 605,718 6 11,216
Amount reclassified into earnings, net of taxes -- -- --
Cumulative effect of accounting change -- -- --
Changes in fair value of interest rate swaps -- -- --
Net income $ 30,528 -- -- --
Other comprehensive income (loss) (8,144) -- -- --
Income tax effect of other comprehensive income 3,209 -- -- --
------------
Comprehensive income $ 25,593 -- -- --
============ ------------ ------------ ------------
Balances at December 31, 2001 27,423,669 274 316,594
Issuance of common stock warrants -- -- 577
Issuance of restricted stock -- -- 812
Stock options granted below fair market value -- -- 650
Amortization of deferred stock compensation -- -- --
Exercise of stock options and warrants 622,866 6 14,072
Amounts reclassified into earnings, net of taxes -- -- --
Changes in fair value of interest rate swaps -- -- --
Net income $ 55,466 -- -- --
Other comprehensive income (loss) 1,751 -- -- --
Income tax effect of other comprehensive income (812) -- -- --
------------
Comprehensive income $ 56,405 -- -- --
============ ------------ ------------ ------------
Balances at December 31, 2002 28,046,535 280 332,705
Issuance of common stock warrants to employees -- -- 17
Issuance of common stock warrants to consultants -- -- 173
Common stock donated to charitable trust 1,000 -- 34
Issuance of vested restricted stock 4,975 -- --
Cancellation of unvested restricted stock -- -- (125)
Amortization of deferred stock compensation -- -- --
Exercise of stock options and warrants 614,278 7 15,342
Amounts reclassified into earnings, net of taxes -- -- --
Changes in fair value of interest rate swaps -- -- --
Net income $ 65,596 -- -- --
Other comprehensive income (loss) 7,033 -- -- --
Income tax effect of other comprehensive income (2,634) -- -- --
------------
Comprehensive income $ 69,995 -- -- --
============ ------------ ------------ ------------
Balances at December 31, 2003 28,666,788 $ 287 $ 348,146
============ ============ ============
STOCKHOLDERS' EQUITY
---------------------------------------------------------
ACCUMULATED
OTHER
COMPREHENSIVE DEFERRED
INCOME STOCK RETAINED
(LOSS) COMPENSATION EARNINGS TOTAL
------------ ------------ ------------ ------------
Balances at December 31, 2000 $ -- $ -- $ 37,504 $ 334,208
Issuance of common stock warrants -- -- -- 105
Stock options granted below fair market value -- (200) -- --
Issuance of common stock -- -- -- 8,637
Amortization of deferred stock compensation -- 40 -- 40
Exercise of stock options and warrants -- -- -- 11,222
Amount reclassified into earnings, net of taxes 5,847 -- -- 5,847
Cumulative effect of accounting change (3,600) -- -- (3,600)
Changes in fair value of interest rate swaps (7,182) -- -- (7,182)
Net income -- -- 30,528 30,528
Other comprehensive income (loss) -- -- -- --
Income tax effect of other comprehensive income -- -- -- --
Comprehensive income -- -- -- --
------------ ------------ ------------ ------------
Balances at December 31, 2001 (4,935) (160) 68,032 379,805
Issuance of common stock warrants -- -- -- 577
Issuance of restricted stock -- (812) -- --
Stock options granted below fair market value -- (650) -- --
Amortization of deferred stock compensation -- 847 -- 847
Exercise of stock options and warrants -- -- -- 14,078
Amounts reclassified into earnings, net of taxes 4,002 -- -- 4,002
Changes in fair value of interest rate swaps (3,063) -- -- (3,063)
Net income -- -- 55,466 55,466
Other comprehensive income (loss) -- -- -- --
Income tax effect of other comprehensive income -- -- -- --
Comprehensive income -- -- -- --
------------ ------------ ------------ ------------
Balances at December 31, 2002 (3,996) (775) 123,498 451,712
Issuance of common stock warrants to employees -- -- -- 17
Issuance of common stock warrants to consultants -- -- -- 173
Common stock donated to charitable trust -- -- -- 34
Issuance of vested restricted stock -- -- -- --
Cancellation of unvested restricted stock -- 45 -- (80)
Amortization of deferred stock compensation -- 294 -- 294
Exercise of stock options and warrants -- -- -- 15,349
Amounts reclassified into earnings, net of taxes 4,200 -- -- 4,200
Changes in fair value of interest rate swaps 199 -- -- 199
Net income -- -- 65,596 65,596
Other comprehensive income (loss) -- -- -- --
Income tax effect of other comprehensive income -- -- -- --
Comprehensive income -- -- -- --
------------ ------------ ------------ ------------
Balances at December 31, 2003 $ 403 $ (436) $ 189,094 $ 537,494
============ ============ ============ ============
See accompanying notes.
46
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------------------
2001 2002 2003
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30,528 $ 55,466 $ 65,596
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss (gain) on disposal of assets 4,868 (1) 333
Depreciation 25,687 37,626 45,670
Amortization of intangibles 10,451 1,351 1,677
Loss on termination of interest rate swap 6,337 -- --
Deferred income taxes 12,442 10,132 27,931
Minority interests 7,338 9,367 10,549
Cumulative effect of change in accounting principle -- -- (448)
Amortization of debt issuance costs 1,592 2,195 2,403
Stock-based compensation 40 847 345
Interest income on restricted cash (654) (485) (302)
Closure and post-closure accretion 474 856 437
Tax benefit on the exercise of stock options 3,602 3,572 3,078
Loss on early extinguishment of debt 305 -- --
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable, net (1,978) (1,594) (2,909)
Prepaid expenses and other current assets (3,556) 380 (1,570)
Accounts payable (1,677) (2,730) 5,821
Deferred revenue 576 478 3,658
Accrued liabilities (8,937) 13,610 (4,911)
Other long-term liabilities (250) 418 (143)
------------ ------------ ------------
Net cash provided by operating activities 87,198 131,488 157,215
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of assets 3,049 2,234 1,534
Payments for acquisitions, net of cash acquired (52,853) (166,626) (84,855)
Capital expenditures for property and equipment (40,215) (56,776) (70,213)
Investment in unconsolidated entity -- -- (5,300)
Increase in restricted cash, net of interest income (989) (2,014) (2,093)
Decrease (increase) in other assets 168 291 (24)
------------ ------------ ------------
Net cash used in investing activities (90,840) (222,891) (160,951)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 263,521 381,000 108,940
Principal payments on notes payable and long-term debt (246,638) (290,962) (102,469)
Proceeds from option and warrant exercises 7,620 10,506 12,271
Termination of interest rate swap (6,337) -- --
Distributions to minority interest holders (3,370) (5,880) (9,702)
Debt issuance costs (6,336) (6,473) (4,095)
------------ ------------ ------------
Net cash provided by financing activities 8,460 88,191 4,945
------------ ------------ ------------
Net increase (decrease) in cash and equivalents 4,818 (3,212) 1,209
Cash and equivalents at beginning of year 2,461 7,279 4,067
------------ ------------ ------------
Cash and equivalents at end of year $ 7,279 $ 4,067 $ 5,276
============ ============ ============
See accompanying notes.
47
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------------------
2001 2002 2003
------------ ------------ ------------
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION AND NON-CASH TRANSACTIONS:
Cash paid for income taxes $ 13,607 $ 8,408 $ 12,877
============ ============ ============
Cash paid for interest $ 28,232 $ 28,973 $ 29,452
============ ============ ============
In connection with its acquisitions, the Company assumed
liabilities as follows:
Fair value of assets acquired $ 164,956 $ 262,565 $ 110,264
Cash paid for current year acquisitions (including
acquisition costs) (52,853) (158,355) (76,471)
Cash paid to settle prior year acquisition-related
liabilities -- (8,271) (8,384)
------------ ------------ ------------
Liabilities assumed and stock and notes payable
issued to sellers $ 112,103 $ 95,939 $ 25,409
============ ============ ============
See accompanying notes
48
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Waste Connections, Inc. ("WCI" or "the Company") was incorporated in
Delaware on September 9, 1997 and commenced its operations on October 1, 1997
through the purchase of certain solid waste operations in Washington. The
Company is an integrated, non-hazardous solid waste services company that
provides collection, transfer, disposal and recycling services to commercial,
industrial and residential customers in Alabama, Arizona, California, Colorado,
Georgia, Illinois, Iowa, Kansas, Kentucky, Minnesota, Mississippi, Montana,
Nebraska, New Mexico, Ohio, Oklahoma, Oregon, South Dakota, Tennessee, Texas,
Utah, Washington, and Wyoming.
Basis of Presentation
These consolidated financial statements include the accounts of WCI and
its wholly-owned and majority-owned subsidiaries. The consolidated entity is
referred to herein as the Company. All intercompany accounts and transactions
have been eliminated in consolidation.
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at purchase to be cash equivalents. As of December 31, 2002
and 2003, cash equivalents consisted of demand money market accounts.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risks consist primarily of accounts receivable. The
Company generally does not require collateral on its trade receivables. Credit
risk on accounts receivable is minimized as a result of the large and diverse
nature of the Company's customer base. The Company maintains allowances for
losses based on the expected collectibility of accounts receivable. Credit
losses have been within management's expectations.
Revenue Recognition and Accounts Receivable
Revenues are recognized as services are provided. Certain customers are
billed in advance and, accordingly, recognition of the related revenues is
deferred until the services are provided.
The Company's receivables are recorded when billed, advanced or accrued
and represent claims against third parties that will be settled in cash. The
carrying value of the Company's receivables, net of the allowance for doubtful
accounts, represents their estimated net realizable value. The Company estimates
its allowance for doubtful accounts based on historical collection trends, type
of customer such as municipal or non-municipal, the age of outstanding
receivables and existing economic conditions. If events or changes in
circumstances indicate that specific receivable balances may be impaired,
further consideration is given to the collectiblity of those balances and the
allowance is adjusted accordingly. Past-due receivable balances are written off
when the Company's internal collection efforts have been unsuccessful in
collecting the amount due.
Property and Equipment
Property and equipment are stated at cost. Improvements or betterments,
not considered to be maintenance and repair, which significantly extend the life
of an asset are capitalized. Expenditures for maintenance and repair costs are
charged to expense as incurred. The cost of assets retired or otherwise disposed
of and the related accumulated depreciation are eliminated from the accounts in
the year of disposal. Gains and losses resulting from disposals of property and
equipment are recognized in the period in which the property and equipment is
49
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
disposed. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets or the lease term, whichever is shorter.
The estimated useful lives are as follows:
Buildings 20 years
Machinery and equipment 3 - 15 years
Rolling stock 10 years
Containers 5 - 15 years
Landfill Accounting
On January 1, 2003, the Company adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations" ("SFAS No. 143"), which provides standards for
accounting for obligations associated with the retirement of long-lived assets.
The adoption of SFAS No. 143 impacted the calculation and accounting for
landfill retirement obligations, which the Company has historically referred to
as closure and post-closure obligations. The impact of SFAS No. 143 is discussed
in the closure and post-closure obligations section below.
The Company utilizes the life cycle method of accounting for landfill
costs and the units of consumption method to amortize landfill construction
costs over the estimated remaining capacity of a landfill. Under this method the
Company includes future estimated construction costs using current dollars, as
well as costs incurred to date, in the amortization base. Additionally, the
Company includes deemed permitted expansion airspace, which has not been
permitted, in the calculation of the total remaining capacity of the landfill.
- Landfill development costs. Landfill development costs include the costs
of acquisition, construction associated with excavation, liners, site
berms, groundwater monitoring wells and leachate collection systems. The
Company estimates the total costs associated with developing each landfill
site to its final capacity. This includes certain projected landfill site
costs that are uncertain because they are dependent on future events and
thus actual costs could vary significantly from estimates. The total cost
to develop a site to its final capacity includes amounts previously
expended and capitalized, net of accumulated airspace amortization, and
projections of future purchase and development costs, landfill final
capping costs, liner construction costs, operating construction costs, and
capitalized interest costs. Total landfill costs include the development
costs associated with "deemed" permitted airspace. Deemed permitted
airspace is addressed below.
- Closure and post-closure obligations. The Company reserves for estimated
closure and post-closure maintenance obligations at the landfills it owns
and certain landfills that it operates, but does not own. Accrued closure
and post-closure costs represent an estimate of the current value of the
future obligation associated with closure and post-closure monitoring of
non-hazardous solid waste landfills currently owned and/or operated by the
Company. Closure and post-closure monitoring and maintenance costs
represent the costs related to cash expenditures yet to be incurred when a
landfill facility ceases to accept waste and closes. Accruals for closure
and post-closure monitoring and maintenance requirements in the U.S.
consider site inspection, groundwater monitoring, leachate management,
methane gas control and recovery, and operating and maintenance costs to
be incurred during the period after the facility closes. Certain of these
environmental costs, principally capping and methane gas control costs,
are also incurred during the operating life of the site in accordance with
the landfill operation requirements of Subtitle D and the air emissions
standards. Daily maintenance activities, which include many of these
costs, are expensed as incurred during the operating life of the landfill.
Daily maintenance activities include leachate disposal; surface water,
groundwater, and methane gas monitoring and maintenance; other pollution
control activities; mowing and fertilizing the landfill final cap; fence
and road maintenance; and third party inspection and reporting costs. Site
specific closure and post-closure engineering cost estimates are prepared
annually for landfills owned and/or operated by the Company for which it
is responsible for closure and post-closure.
Upon the adoption of SFAS No. 143, landfill closure and post-closure
liabilities are calculated by estimating the total obligation in current
dollars, inflating the obligation based upon the expected date of the
expenditure using an inflation rate of 3% and discounting the inflated
50
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
total to its present value using an 8.5% discount rate. The resulting
closure and post-closure obligation is recorded as a long-term liability
with a corresponding increase to landfill site costs as the landfill's
total airspace is consumed. Final capping costs are included in the
calculation of closure and post-closure liabilities. Final capping costs
are estimated using current dollars, inflated to the expected date of the
final capping expenditures, discounted to a net present value and recorded
on the balance sheet as a component of closure and post-closure
liabilities as landfill airspace is consumed. At December 31, 2002 and
2003, accruals for landfill closure and post-closure costs (including
costs assumed through acquisitions) were $13,749 and $5,479, respectively.
When using discounted cash flow techniques, reliable estimates of market
premiums may not be obtainable. In the waste industry, there is no market
for selling the responsibility for final capping, closure and post-closure
obligations independent of selling the landfill in its entirety.
Accordingly, the Company does not believe that it is possible to develop a
methodology to reliably estimate a market risk premium and has therefore
excluded any such market risk premium from its determination of expected
cash flows for landfill asset retirement obligations. The Company
estimates that its closure and post-closure payment commitments will begin
in 2006. Interest is accreted on the recorded liability using the
corresponding discount rate. Interest accretion was reduced as a result of
the decrease in the recorded closure and post-closure liabilities and has
been reclassified from interest expense to cost of operations, thus
causing a reduction in income from operations. However, there has been no
change in operating cash flow. In accordance with SFAS No. 143, the
closure and post-closure liability is recorded as an addition to site
costs and amortized to depletion expense on a units-of-consumption basis
as landfill airspace is consumed. The impact of changes determined to be
changes in estimates, based on an annual update, is accounted for on a
prospective basis. Depletion expense resulting from the closure and
post-closure obligations recorded as a component of landfill site costs
will generally be less during the early portion of a landfill's operating
life and increase thereafter. The closure and post-closure liabilities
reflect owned landfills and landfills operated under life-of-site
operating agreements with estimated remaining lives, based on remaining
permitted capacity, probable expansion capacity and projected annual
disposal volumes, that range from approximately 3 to 263 years, with an
average remaining life of approximately 63 years. The costs for closure
and post-closure obligations at landfills the Company owns or operates are
generally estimated based on interpretations of current requirements and
proposed or anticipated regulatory changes. The estimates for landfill
closure and post-closure costs, including final capping costs, also
consider when the costs would actually be paid and factor in inflation and
discount rates. The possibility of changing legal and regulatory
requirements and the forward-looking nature of these types of costs make
any estimation or assumption less certain.
Adopting SFAS No. 143 required a cumulative adjustment to reflect the
change in accounting for landfill obligations retroactively to the date of
the inception of the landfill. Inception of the asset retirement
obligation is the date operations commenced or the date the asset was
acquired. Upon adopting SFAS No. 143 on January 1, 2003, the Company
recorded a cumulative effect of the change in accounting principle of $448
($282, net of tax), a decrease in its closure and post-closure liability
of $9,142 and a decrease in net landfill assets of $8,667. Discounting the
obligation with a higher discount rate and recording the liability as
airspace is consumed resulted in a decrease to the closure and
post-closure liabilities recorded by the Company before it adopted SFAS
No. 143.
The closure and post-closure liability at January 1, 2002, on a pro forma
basis as if SFAS No. 143 had been applied during all periods presented,
would have been $2,894. The following is a reconciliation of the Company's
closure and post-closure liability balance from December 31, 2002 to
December 31, 2003:
Closure and post-closure liability at December 31, 2002 $ 13,749
Decrease in closure and post-closure liability from adopting
SFAS No. 143 (9,142)
Liabilities incurred 435
Accretion expense 437
--------
Closure and post-closure liability at December 31, 2003 $ 5,479
========
51
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Pro forma financial information to reflect the reported results of
operations for the two years ended December 31, 2001 and 2002, as if SFAS
No. 143 were adopted on January 1, 2001, is as follows:
Year Ended December 31,
--------------------------
2001 2002
---------- ----------
Net income as reported $ 30,528 $ 55,466
Pro forma impact of applying SFAS No. 143, net of tax (28) 318
---------- ----------
Pro forma net income $ 30,500 $ 55,784
========== ==========
Basic earnings per share as reported $ 1.13 $ 2.00
Pro forma impact of applying SFAS No. 143, net of tax -- .01
---------- ----------
Pro forma basic earnings per share $ 1.13 $ 2.01
========== ==========
Diluted earnings per share as reported $ 1.10 $ 1.90
Pro forma impact of applying SFAS No. 143, net of tax -- .01
---------- ----------
Pro forma diluted earnings per share $ 1.10 $ 1.91
========== ==========
At December 31, 2003, $12,253 of the Company's restricted cash balance was for
purposes of settling future closure and post-closure liabilities.
- Disposal capacity. The Company's internal and third-party engineers
perform surveys at least annually to estimate the disposal capacity at its
landfills. This is done by using surveys and other methods to calculate,
based on the terms of the permit, height restrictions and other factors,
how much airspace is left to fill and how much waste can be disposed of at
a landfill before it has reached its final capacity. The Company's
landfill depletion rates are based on the remaining disposal capacity,
considering both permitted and deemed permitted airspace, at its
landfills. Deemed permitted airspace consists of additional disposal
capacity being pursued through means of an expansion. Deemed permitted
airspace that meets certain internal criteria is included in the estimate
of total landfill airspace. The Company's internal criteria to determine
when deemed permitted airspace may be included as disposal capacity is as
follows:
(1) The land where the expansion is being sought is contiguous to the
current disposal site, and is either owned by the Company or the
property is under option, purchase, operating or other agreement;
(2) Total development costs, final capping costs, and
closure/post-closure costs have been determined;
(3) Internal personnel have performed a financial analysis of the
proposed expansion site and have determined that it has a positive
financial and operational impact;
(4) Internal or external personnel are actively working to obtain the
necessary approvals to obtain the landfill expansion permit;
(5) Obtaining the expansion is considered probable. For a pursued
expansion to be considered probable, there must be no significant
known technical, legal, community, business, or political
restrictions or similar issues existing that could impair the success
of the expansion; and
(6) The land where the expansion is being sought has the proper zoning or
proper zoning can readily be obtained.
It is possible that the Company's estimates or assumptions will ultimately
turn out to be significantly different from actual results. In some cases
the Company may be unsuccessful in obtaining an expansion permit or the
Company may determine that an expansion permit that the Company previously
thought was probable has become unlikely. To the extent that such
estimates, or the assumptions used to make those estimates, prove to be
significantly different than actual results, or the belief that the
Company will receive an expansion permit changes adversely in a
significant manner, the costs of the landfill, including the costs
incurred in the pursuit of the expansion, may be subject to impairment
testing, as described below, and lower profitability may be experienced
52
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
due to higher amortization rates, higher capping, closure and post-closure
rates, and higher expenses or asset impairments related to the removal of
previously included expansion airspace.
The Company periodically evaluates its landfill sites for potential
impairment indicators. The Company's judgments regarding the existence of
impairment indicators are based on regulatory factors, market conditions and
operational performance of its landfills. Future events could cause the Company
to conclude that impairment indicators exist and that its landfill carrying
costs are impaired.
Allocation of Acquisition Purchase Price
A summary of the Company's acquisition purchase price allocation policies
is as follows:
- Acquisition purchase price is allocated to identified intangible assets
and tangible assets acquired and liabilities assumed based on their
estimated fair values at the dates of acquisition, with any residual
amounts allocated to goodwill.
- The Company deems the total remaining airspace of an acquired landfill to
be a tangible asset. Therefore, for acquired landfills, it initially
allocates the purchase price to identified intangible and tangible assets
acquired, excluding landfill airspace, and liabilities assumed based on
their estimated fair values at the date of acquisition. Any residual
amount is allocated to landfill airspace.
- The Company often consummates single acquisitions that include a
combination of collection operations and landfills. For each separately
identified collection operation and landfill acquired in a single
acquisition, the Company performs an initial allocation of total purchase
price to the identified collection operations and landfills based on their
relative fair values. Following this initial allocation of total purchase
price to the identified collection operations and landfills, the Company
further allocates the identified intangible assets and tangible assets
acquired and liabilities assumed for each collection operation and
landfill based on their estimated fair values at the dates of acquisition,
with any residual amounts allocated to either goodwill or landfill site
costs, as discussed above.
- The Company accrues the payment of contingent purchase price if the events
surrounding the contingency are deemed assured beyond a reasonable doubt.
Contingent purchase price related to landfills is allocated to landfill
site costs and contingent purchase price for acquisitions other than
landfills is allocated to goodwill.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the estimated
fair value of the net tangible and intangible assets of the acquired entities.
Goodwill and intangible assets deemed to have indefinite lives are no longer
amortized but are subject to annual impairment tests in accordance with SFAS No.
142. Other intangible assets, including those meeting new recognition criteria
under SFAS No. 142, continue to be amortized over their estimated useful lives.
The Company fully adopted the new rules on accounting for goodwill and
other intangible assets beginning on January 1, 2002. The Company tests goodwill
for impairment using the two-step process prescribed in SFAS No. 142. The first
step is a screen for potential impairment, while the second step measures the
amount of the impairment, if any. At least annually, the Company performs
impairment tests of goodwill and indefinite-lived intangible assets based on the
carrying values. As a result of performing the tests for potential impairment,
the Company determined that no impairment existed as of December 31, 2003 and
therefore, it was not necessary to write down any of its goodwill or
indefinite-lived intangible assets.
Net income for the year ended December 31, 2001, adjusted for the
nonamortization provisions of SFAS No. 142, was $37,390. Basic and diluted
shares outstanding were 27,069,685 and 27,675,639, respectively, for the year
ended December 31, 2001. Adjusted basic and diluted earnings per share were
$1.38 and $1.35, respectively, for the year ended December 31, 2001.
The Company acquired indefinite-lived intangible assets, long-term
franchise agreements, contracts and non-competition agreements in connection
with certain of its acquisitions. The amounts assigned to indefinite-lived
53
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
intangible assets consist of the value of certain perpetual rights to provide
solid waste collection and transportation services in specified territories. The
estimated fair value of the acquired indefinite-lived intangible assets,
long-term franchise agreements and contracts was determined by management based
on the discounted net cash flows associated with the rights, agreements and
contracts. The estimated fair value of the non-competition agreements reflects
management's estimates based on the amount of revenue protected under such
agreements. The amounts assigned to the franchise agreements, contracts, and
non-competition agreements are being amortized on a straight-line basis over the
expected term of the related agreements (ranging from 5 to 56 years). In
accordance with the provisions of SFAS No. 142, indefinite-lived intangible
assets resulting from acquisitions completed subsequent to June 30, 2001 are not
amortized; however, they are required to be classified separately from goodwill.
Restricted Cash
Restricted cash held by trustees is included in other non-current assets
and consists principally of funds held in trust for the construction of various
facilities, and funds deposited in connection with landfill closure and
post-closure obligations. Proceeds from these financing arrangements are
directly deposited into trust funds, and the Company does not have the ability
to utilize the funds in regular operating activities. Accordingly, these amounts
are reported as an investing activity when the cash is released from the trust
funds and as a financing activity when the industrial revenue bonds are repaid
out of the Company's cash balances.
Asset Impairments
Long-lived assets consist primarily of property, plant and equipment,
goodwill and other intangible assets. Property, plant, equipment and other
intangible assets are carried on the Company's financial statements based on
their cost less accumulated depreciation or amortization. The recoverability of
these assets is tested whenever events or changes in circumstances indicate that
their carrying amount may not be recoverable.
Typical indicators that an asset may be impaired include:
- A significant decrease in the market price of an asset or asset group;
- A significant adverse change in the extent or manner in which an asset or
asset group is being used or in its physical condition;
- A significant adverse change in legal factors or in the business climate
that could affect the value of an asset or asset group, including an
adverse action or assessment by a regulator;
- An accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of a long-lived asset;
- Current period operating or cash flow losses combined with a history of
operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of a long-lived
asset or asset group; or
- A current expectation that, more likely than not, a long-lived asset or
asset group will be sold or otherwise disposed of significantly before the
end of its previously estimated useful life.
If any of these or other indicators occur, a test of recoverability is
performed by comparing the carrying value of the asset or asset group to its
undiscounted expected future cash flows. If the carrying values are in excess of
undiscounted expected future cash flows, impairment is measured by comparing the
fair value of the asset to its carrying value. Fair value is determined by an
internally developed discounted projected cash flow analysis of the asset. Cash
flow projections are sometimes based on a group of assets, rather than a single
asset. If cash flows cannot be separately and independently identified for a
single asset, the Company will determine whether an impairment has occurred for
the group of assets for which the projected cash flows can be identified. If the
fair value of an asset is determined to be less than the carrying amount of the
asset or asset group, an impairment in the amount of the difference is recorded
in the period that the impairment indicator occurs. Several impairment
indicators are beyond the Company's control, and whether or not they will occur
cannot be predicted with any certainty. Estimating future cash flows requires
significant judgment and projections may vary from cash flows eventually
realized. There are other considerations for impairments of landfills and
goodwill, as described below.
54
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Landfills - There are certain indicators listed above that require
significant judgment and understanding of the waste industry when applied to
landfill development or expansion projects. For example, a regulator may
initially deny a landfill expansion permit application though the expansion
permit is ultimately granted. In addition, management may periodically divert
waste from one landfill to another to conserve remaining permitted landfill
airspace. Therefore, certain events could occur in the ordinary course of
business and not necessarily be considered indicators of impairment due to the
unique nature of the waste industry.
Goodwill - The Company assesses whether goodwill is impaired on an annual
basis. If the Company determined the existence of goodwill impairment, the
Company would measure that impairment based on the amount by which the book
value of goodwill exceeds its implied fair value. The implied fair value of
goodwill is determined by deducting the fair value of a reporting unit's
identifiable assets and liabilities from the fair value of the reporting unit as
a whole, as if that reporting unit had just been acquired and the purchase price
were being initially allocated. Additional impairment assessments may be
performed on an interim basis if the Company encounters events or changes in
circumstances, such as those listed above, that would indicate that, more likely
than not, the book value of goodwill has been impaired.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, trade
receivables, restricted funds held in trust, trade payables, debt instruments
and interest rate swaps. As of December 31, 2002 and 2003, the carrying values
of cash, trade receivables, restricted funds held in trust, and trade payables
are considered to be representative of their respective fair values. The
carrying values of the Company's debt instruments, excluding the 2006
Convertible Subordinated Notes and 2022 Floating Rate Convertible Subordinated
Notes, approximate their fair values as of December 31, 2002 and 2003, based on
current incremental borrowing rates for similar types of borrowing arrangements.
The Company's 2006 Convertible Subordinated Notes have a carrying value of
$150,000 and had a fair value of approximately $186,915 at December 31, 2002 and
$160,770 at December 31, 2003, based on the publicly quoted trading price of
these notes. The Company's 2022 Floating Rate Convertible Subordinated Notes
have a carrying value of $175,000 and had a fair value of approximately $181,475
at December 31, 2002 and $178,798 at December 31, 2003, based on the publicly
quoted trading price of these notes. The Company's interest rate swaps are
recorded at their estimated fair values based on estimated cash flows calculated
using interest rate yield curves as of December 31, 2002 and 2003.
Derivative Financial Instruments
SFAS No. 133, "Accounting for Derivatives and Hedging Activities", as
amended, became effective January 1, 2001. SFAS No. 133 establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133 requires the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset against
the change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income (Note 11) until the
hedged item is recognized in earnings. The ineffective portion of a derivative's
change in fair value is immediately recognized in earnings.
The Company's objective for utilizing derivative instruments is to reduce
its exposure to fluctuations in cash flows due to changes in the variable
interest rates of certain borrowings issued under its credit facility and other
variable rate debt. The Company's strategy to achieve that objective involves
entering into interest rate swaps that are specifically designated to certain
variable rate instruments and accounted for as cash flow hedges.
At December 31, 2003, the Company's derivative instruments consist of two
forward-starting interest rate swap agreements, entered into in May 2003. Each
interest rate swap agreement has a notional amount of $87,500 and effectively
fixes the interest rate on the notional amount at interest rates ranging from
2.67% to 2.68%, plus applicable margin. The effective date of the swap
agreements is February 2004 and each swap agreement expires in February 2007.
These interest rate swap agreements are effective as cash flow hedges for a
portion of the Company's variable rate debt, and the Company applies hedge
55
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
accounting to account for these instruments. The notional amounts and all other
significant terms of the swap agreements are matched to the provisions and terms
of the variable rate debt being hedged.
Income Taxes
The Company uses the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and income tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse. The
Company assumes the deductibility of certain costs in its income tax filings and
estimates the future recovery of deferred tax assets.
The Company has accrued income tax reserves for contingencies identified
in the preparation of previously filed tax returns. The Company establishes the
reserves based upon management's assessment of exposure associated with
permanent differences, tax credits and interest expense. The tax reserves are
analyzed periodically (but not less frequently than annually) and adjustments
are made as events occur to warrant adjustments to the reserve. For example, if
the statutory period for assessing tax on a given tax return or period lapses,
the reserve associated with that period will be reduced.
Stock-Based Compensation
As permitted under the provisions of SFAS No. 123, the Company has elected
to account for stock-based compensation using the intrinsic value method
prescribed by APB 25. Under the intrinsic value method, compensation cost is the
excess, if any, of the quoted market price or fair value of the stock at the
grant date or other measurement date over the amount an employee must pay to
acquire the stock.
The weighted average grant date fair values per share for options granted
during 2001, 2002 and 2003 are as follows:
2001 2002 2003
------ ------ ------
Exercise prices equal to market price of stock $10.32 $ 9.40 $ 7.76
Exercise prices less than market price of stock 15.73 16.17 --
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended December 31, 2001, 2002 and 2003: risk-free
interest rate of 4.5%, 3.5% and 2.4%, respectively; dividend yield of zero;
volatility factor of the expected market price of the Company's common stock of
45%, 40% and 25%, respectively; and a weighted-average expected life of the
option of 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of the Company's employee stock options.
56
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The following
table summarizes the Company's pro forma net income and pro forma basic net
income per share for the years ended December 31, 2001, 2002 and 2003:
Year Ended December 31,
----------------------------------------
2001 2002 2003
---------- ---------- ----------
Net income, as reported $ 30,528 $ 55,466 $ 65,596
Add: stock-based employee compensation expense
included in reported net income, net of related
tax effects 24 533 196
Deduct: total stock-based employee compensation
expense determined under fair value method for
all awards, net of related tax effects (3,135) (5,771) (7,105)
---------- ---------- ----------
Pro forma net income $ 27,417 $ 50,228 $ 58,687
========== ========== ==========
Earnings per share:
Basic - as reported $ 1.13 $ 2.00 $ 2.32
Basic - pro forma 1.01 1.81 2.07
Diluted - as reported 1.10 1.90 2.18
Diluted - pro forma 0.99 1.75 1.98
Per Share Information
Basic net income per share is computed using the weighted average number
of common shares outstanding. Diluted net income per share is computed using the
weighted average number of common and potential common shares outstanding.
Potential common shares are excluded from the computation if their effect is
anti-dilutive.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 2001, 2002 and 2003 was $1,160, $1,403 and $1,842,
respectively.
Insurance Liabilities
During 2002, the Company increased its scope of high-deductible insurance,
adding automobile liability, general liability and workers' compensation claims.
Previously, the Company's high-deductible insurance program covered only
automobile collision and employee group health claims. The Company's insurance
accruals are based on claims filed and estimates of claims incurred but not
reported and are developed by the Company's management with assistance from its
third-party actuary and its third-party claims administrator. The insurance
accruals are influenced by the Company's past claims experience factors, which
have a limited history, and by published industry development factors. At
December 31, 2002 and 2003, the Company's total accrual for self-insured
liabilities was $4,038 and $8,611, respectively.
Segment Information
The Company identifies its operating segments based on management
responsibility and geographic location. The Company considers each of its four
operating regions that report stand-alone financial information and have segment
57
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
managers that report to the Company's chief operating decision maker to be an
operating segment. The Company has assessed and determined that it has met all
of the aggregation criteria required under SFAS No. 131 to aggregate multiple
operating segments into one reportable segment. Therefore, all operating
segments have been aggregated together and are reported as a single segment
consisting of the collection, transfer, recycling and disposal of non-hazardous
solid waste primarily in the Western and Southern United States.
Reclassifications
Certain amounts reported in the Company's prior years' financial
statements have been reclassified to conform with the 2003 presentation.
New Accounting Pronouncements
SFAS No. 143
In June 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"), which
outlines standards for accounting for obligations associated with the retirement
of long-lived assets. The Company fully adopted the new rules under SFAS No. 143
beginning on January 1, 2003, which impacted the accounting for landfill
retirement obligations, historically referred to as closure and post-closure
obligations. Refer to the section on landfill accounting within this footnote
for further detail.
FIN 45
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). It clarifies that a guarantor
is required to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee, including its
ongoing obligation to stand ready to perform over the term of the guarantee in
the event that the specified triggering events or conditions occur. The
objective of the initial measurement of the liability is the fair value of the
guarantee at its inception. The initial recognition and initial measurement
provisions of FIN 45 are effective on a prospective basis to guarantees issued
after December 31, 2002, and the Company will record the fair value of future
material guarantees, if any. The Company did not have any material guarantees at
December 31, 2003.
FIN 46
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46") which
was subsequently amended in December 2003. FIN 46 requires that unconsolidated
variable interest entities be consolidated by their primary beneficiaries. A
primary beneficiary is the party that absorbs a majority of the entity's
expected losses or residual benefits. FIN 46 applies to variable interest
entities created after January 31, 2003 and to existing variable interest
entities beginning after June 15, 2003. The adoption of FIN 46 did not have a
material impact on the Company's financial statements.
SFAS No. 150
In May 2003, the Financial Accounting Standards Board issued SFAS No. 150,
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 establishes standards for
how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). SFAS No. 150 was effective for financial
instruments entered into or modified after May 31, 2003, and otherwise was
effective at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS No. 150 did not have a material impact on the
Company's financial statements.
The minority interest holders of a majority-owned subsidiary of Waste
Connections have a currently exercisable option (the put option) to require
Waste Connections to complete the acquisition of this majority-owned subsidiary
58
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
by purchasing their minority ownership interests for fair market value. The put
option calculates the fair market value of the subsidiary based on its current
operating income before depreciation and amortization, as defined in the put
option agreement. The put option does not have a stated termination date. At
December 31, 2003, the minority interest holders' pro rata share of the
subsidiary's fair market value is estimated to be worth between $65,000 and
$80,000. Because the put is exercisable at fair market value, no amounts have
been accrued relative to the put option.
2. USE OF ESTIMATES AND ASSUMPTIONS
In preparing the Company's financial statements, several estimates and
assumptions are made that affect the accounting for and recognition of assets,
liabilities, revenues and expenses. These estimates and assumptions must be made
because certain of the information that is used in the preparation of the
Company's financial statements is dependent on future events, cannot be
calculated with a high degree of precision from data available or is simply not
capable of being readily calculated based on generally accepted methodologies.
In some cases, these estimates are particularly difficult to determine and the
Company must exercise significant judgment. The most difficult, subjective and
complex estimates and the assumptions that deal with the greatest amount of
uncertainty are related to the Company's accounting for landfills and asset
impairments and are discussed in Note 1. One additional area that involves
estimation is when the Company estimates the amount of potential exposure it may
have with respect to litigation, claims and assessments in accordance with SFAS
No. 5, Accounting for Contingencies. Actual results for all estimates could
differ materially from the estimates and assumptions that the Company uses in
the preparation of its financial statements.
3. ACQUISITIONS
2002 and 2003 Acquisitions
During 2002, the Company acquired 17 non-hazardous solid waste businesses
that were accounted for as purchases. Aggregate consideration for the
acquisitions consisted of $166,626 in cash (net of cash acquired), $2,217 in
notes payable to sellers, common stock warrants valued at $577 and the
assumption of debt and long-term liabilities totaling $73,464.
During 2003, the Company acquired 16 non-hazardous solid waste businesses
that were accounted for as purchases. Aggregate consideration for the
acquisitions consisted of $76,471 in cash (net of cash acquired), common stock
warrants valued at $173 and the assumption of debt totaling $23,033.
The results of operations of the acquired businesses have been included in
the Company's consolidated financial statements from their respective
acquisition dates.
The purchase prices have been allocated to the identified intangible
assets and tangible assets acquired and liabilities assumed based on their
estimated fair values at the dates of acquisition, with any residual amounts
allocated to goodwill. The purchase price allocations are considered preliminary
until the Company is no longer waiting for information that it has arranged to
obtain and that is known to be available or obtainable. Although the time
required to obtain the necessary information will vary with circumstances
specific to an individual acquisition, the "allocation period" for finalizing
purchase price allocations generally does not exceed one year from the
consummation of a business combination.
As of December 31, 2003, the Company had five acquisitions for which
purchase price allocations were preliminary, mainly as a result of pending
working capital valuations. The Company believes the potential changes to its
preliminary purchase price allocations will not have a material impact on its
financial condition, results of operations or cash flows.
59
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
A summary of the purchase price allocations for acquisitions consummated
in 2002 and preliminary purchase price allocations for the acquisitions
consummated in 2003 is as follows:
2002 2003
Acquisitions Acquisitions
------------ ------------
Acquired assets:
Accounts receivable $ 10,521 $ 6,076
Prepaid expenses and other current assets 1,032 918
Property and equipment 95,285 20,768
Goodwill 137,218 41,078
Indefinite-lived intangible assets 6,529 325
Long-term franchise agreements and other 11,216 32,272
Non-competition agreements 764 364
Deferred tax asset -- 4,436
Other assets -- 4,026
Assumed liabilities:
Deferred revenue (5,182) (1,064)
Accounts payable and accrued liabilities (17,048) (7,398)
Debt and long-term liabilities assumed (73,464) (23,033)
Deferred income taxes (5,722) (2,124)
------------ ------------
$ 161,149 $ 76,644
============ ============
During the year ended December 31, 2002, the Company paid $8,271 of
acquisition-related liabilities accrued at December 31, 2001. During the year
ended December 31, 2003, the Company paid $8,384 of acquisition-related
liabilities accrued at December 31, 2002.
Goodwill acquired in 2002 and 2003 totaling $103,644 and $38,615,
respectively, is expected to be deductible for tax purposes.
In connection with an acquisition consummated in 2002, the Company is
required to pay $2,000 of contingent consideration in cash to the former
shareholders which is triggered by the Company obtaining an expansion permit for
a landfill acquired. The Company has included in these financial statements the
$2,000 contingent cash payment because it considers it beyond a reasonable doubt
that the expansion permit for the landfill acquired in 2002 will be obtained.
Additionally, at December 31, 2003, the Company accrued an $850 liability to
former owners of a company acquired in 2003 that was payable in cash based upon
the acquired company meeting or exceeding certain revenue targets during the 90
day period following the close of the acquisition. The acquired company met the
required revenue targets and the $850 was paid in full in January 2004.
The following pro forma results of operations assume that the Company's
significant acquisitions occurring in 2002 and 2003, accounted for using the
purchase method of accounting, were acquired as of January 1, 2002 (unaudited):
Year Ended December 31,
---------------------------
2002 2003
------------ ------------
Total revenue $ 577,248 $ 588,335
Net income 56,266 66,520
Basic income per share 2.03 2.35
Diluted income per share 1.92 2.20
60
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The unaudited pro forma results do not purport to be indicative of the
results of operations which actually would have resulted had the acquisitions
occurred on January 1, 2002, nor are they necessarily indicative of future
operating results.
4. INTANGIBLE ASSETS
Intangible assets, exclusive of goodwill, consisted of the following at
December 31, 2003:
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
------------ ------------ ------------
Amortizable intangible assets:
Long-term franchise agreements
and contracts $ 46,810 $ (1,994) $ 44,816
Non-competition agreements 3,986 (2,551) 1,435
Other, net 2,415 (917) 1,498
------------ ------------ ------------
53,211 (5,462) 47,749
Nonamortized intangible assets:
Indefinite-lived intangible assets 17,035 -- 17,035
------------ ------------ ------------
Intangible assets, exclusive of goodwill $ 70,246 $ (5,462) $ 64,784
============ ============ ============
The weighted-average amortization periods of long-term franchise
agreements and non-competition agreements acquired during the year ended
December 31, 2003 are 37.5 and 5 years, respectively.
Intangible assets, exclusive of goodwill, consisted of the following at
December 31, 2002:
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
------------ ------------ ------------
Amortizable intangible assets:
Long-term franchise agreements
and contracts $ 14,552 $ (1,064) $ 13,488
Non-competition agreements 3,622 (1,983) 1,639
Other, net 2,400 (740) 1,660
------------ ------------ ------------
20,574 (3,787) 16,787
Nonamortized intangible assets:
Indefinite-lived intangible assets 16,711 -- 16,711
------------ ------------ ------------
Intangible assets, exclusive of goodwill $ 37,285 $ (3,787) $ 33,498
============ ============ ============
The weighted-average amortization periods of long-term franchise
agreements and non-competition agreements acquired during the year ended
December 31, 2002 are 38.4 and 5 years, respectively.
The amounts assigned to indefinite-lived intangible assets consist of the
value of certain perpetual rights to provide solid waste collection and
transportation services in specified territories. These indefinite-lived
intangible assets were subject to amortization prior to the Company's adoption
of SFAS No. 142.
61
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Estimated future amortization expense for the next five years of
amortizable intangible assets is as follows:
For the year ended December 31, 2004 $ 2,154
For the year ended December 31, 2005 2,037
For the year ended December 31, 2006 1,853
For the year ended December 31, 2007 1,615
For the year ended December 31, 2008 1,504
Total goodwill amortization expense for the year ended December 31, 2001
was $9,581. Total amortization expense for intangible assets was $870, $1,351
and $1,677 for the years ended December 31, 2001, 2002 and 2003, respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
-----------------------------
2002 2003
------------ ------------
Landfill site costs $ 412,226 $ 429,838
Rolling stock 102,756 126,748
Land, buildings and improvements 64,299 72,463
Containers 57,365 66,711
Machinery and equipment 50,926 69,668
------------ ------------
687,572 765,428
Less accumulated depreciation and depletion (109,532) (152,203)
------------ ------------
$ 578,040 $ 613,225
============ ============
The Company's landfill depletion expense for the years ended December 31,
2001, 2002 and 2003 was $8,008, $12,123, and $13,618, respectively.
6. OTHER ASSETS
Other assets consist of the following:
December 31,
-----------------------------
2002 2003
------------ ------------
Restricted cash $ 11,314 $ 17,734
Deferred financing costs 12,270 13,961
Investment in unconsolidated entity -- 5,300
Other 1,578 1,874
------------ ------------
$ 25,162 $ 38,869
============ ============
Restricted cash is included as part of other assets and generally consists
of amounts on deposit with various banks that support the Company's financial
assurance obligations for its landfill facilities' closure and post-closure
costs and amounts outstanding under various municipal debt obligations.
62
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31,
-----------------------------
2002 2003
------------ ------------
Income taxes $ 11,996 $ 4,784
Payroll and payroll-related 7,137 5,783
Interest payable 4,201 4,422
Insurance claims 4,038 8,611
Acquisition-related 11,017 3,232
Interest rate swaps 3,996 --
Other 3,520 5,088
------------ ------------
$ 45,905 $ 31,920
============ ============
8. LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
-----------------------------
2002 2003
------------ ------------
Revolver under Credit Facility $ 216,000 $ 53,000
Term Loan under Credit Facility -- 175,000
2006 Convertible Subordinated Notes 150,000 150,000
2022 Floating Rate Convertible Subordinated
Notes 175,000 175,000
2001 Wasco Bonds 13,600 13,600
California Tax-Exempt Bonds 8,945 28,970
Notes payable to sellers in connection with
acquisitions, unsecured, bearing
interest at 5.0% to 9.0%, principal and
interest payments due periodically with
due dates ranging from 2004 to 2012 5,357 5,356
Notes payable to third parties, secured by
substantially all assets of certain
subsidiaries of the Company, bearing
interest at 3.0% to 11.0%, principal and
interest payments due periodically with
due dates ranging from 2004 to 2010 13,225 10,705
------------ ------------
582,127 611,631
Less - current portion (3,646) (9,740)
------------ ------------
$ 578,481 $ 601,891
============ ============
Credit Facility
In 2000, the Company entered into a revolving credit facility with a
syndicate of banks for which Fleet Boston Financial Corporation acted as agent.
Under the credit facility, the Company could borrow up to $435,000. In October
2003, the Company amended its Credit Facility to increase the maximum borrowings
to $575,000. This new credit facility consists of a $400,000 senior secured
revolving credit facility with a syndicate of banks for which Fleet National
Bank acts as agent, and a $175,000 senior secured term loan. As of December 31,
2002, the Company had an aggregate of $216,000 outstanding under the credit
63
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
facility, exclusive of outstanding stand-by letters of credit of $23,638. As of
December 31, 2003, $228,000 was outstanding under the credit facility as
follows: $175,000 was outstanding under the senior secured term loan and $53,000
was outstanding under the senior secured revolving credit facility, exclusive of
outstanding stand-by letters of credit of $45,905. The senior secured revolving
credit facility requires monthly interest payments and matures in October 2008.
The senior secured term loan requires annual principal payments equal to 1% of
the notional balance at the end of years one through six with all remaining
outstanding amounts due October 2010. Under the new credit facility, there is no
maximum amount of stand-by letters of credit that can be issued; however, the
issuance of stand-by letters of credit reduces the amount of total borrowings
available. The new credit facility requires the Company to pay a commitment fee
ranging from 0.25% to 0.50% of the unused portion of the new credit facility.
The Company is able to increase the maximum borrowings under the new credit
facility to $675,000, although no existing lender will have any obligation to
increase its commitment, provided that no event of default, defined in the new
credit facility, has occurred. The borrowings under the new credit facility bear
interest at a rate per annum equal to, at the Company's discretion, either the
Fleet National Bank Base Rate plus applicable margin (5.0% and 4.5% as of
December 31, 2002 and 2003, respectively), or the LIBOR rate plus applicable
margin (approximately 3.7% and 3.2% as of December 31, 2002 and 2003,
respectively). The applicable margin under the revolving credit facility varies
depending on the Company's leverage ratio. The applicable margin on the term
loan is 50 basis points in the case of loans based on the Base Rate and 200
basis points in the case of loans based on the LIBOR rate. Virtually all of the
Company's assets, including its interest in the equity securities of its
subsidiaries, secure its obligations under the new credit facility. The new
credit facility places certain business, financial and operating limitations on
the Company relating to, among other things, the incurrence of additional
indebtedness, investments, acquisitions, asset sales, mergers, dividends,
distributions and repurchases and redemption of capital stock. The new credit
facility does permit redemption of the 2006 Notes. The new credit facility also
requires that specified financial ratios and balances be maintained. As of
December 31, 2002 and 2003, the Company was in compliance with all applicable
covenants in its then outstanding credit facility.
5.5% Convertible Subordinated Notes Due 2006
In April 2001, the Company issued 5.5% Convertible Subordinated Notes due
April 2006 (the "2006 Convertible Subordinated Notes") with an aggregate
principal amount of $150,000 in a Rule 144A offering. The 2006 Convertible
Subordinated Notes are unsecured, rank junior to existing and future Senior
Indebtedness, as defined in the indenture governing the notes, and are
convertible at any time at the option of the holder into common stock at a
conversion price of $38.03 per share. The notes are callable by the Company
beginning April 2004 at an early call premium of 102.2%. The proceeds from the
sale of the 2006 Convertible Subordinated Notes were used to repay a portion of
the outstanding indebtedness and related costs under the Credit Facility.
Floating Rate Convertible Subordinated Notes due 2022
In April 2002, Waste Connections issued Floating Rate Convertible
Subordinated Notes due 2022 (the "2022 Floating Rate Convertible Subordinated
Notes") with an aggregate principal amount of $175,000 in a Rule 144A offering.
The 2022 Floating Rate Convertible Subordinated Notes are unsecured and rank
pari passu with the Company's 2006 Convertible Subordinated Notes and junior to
all other existing and future senior indebtedness, as defined in the indenture
governing the 2022 Floating Rate Convertible Subordinated Notes. The 2022
Floating Rate Convertible Subordinated Notes bear interest at the 3-month LIBOR
rate plus 50 basis points, payable quarterly.
The holders may surrender notes for conversion into common stock at a
conversion price of $48.39 per share on or after August 1, 2002, but prior to
the maturity date, only if any of the following conditions are satisfied: (a)
the closing sale price per share of the Company's common stock for at least 20
trading days in the period of 30 consecutive trading days ending on the last
trading day of the calendar quarter preceding the calendar quarter in which the
conversion occurs is more than 110% of the conversion price per share on that
thirtieth trading day; (b) during such period, if any, that the credit ratings
assigned to the 2022 Floating Rate Convertible Subordinated Notes by Moody's
Investors Service, Inc. and Standard & Poor's Rating Group (the "Rating
Agencies") are reduced below B3 or B-, respectively; (c) if neither Rating
Agency is rating the 2022 Floating Rate Convertible Subordinated Notes; (d)
during the five business day period after any nine consecutive trading day
period in which the trading price of the 2022 Floating Rate Convertible
Subordinated Notes (per $1 principal amount) for each day of such period is less
than 95% of the product of the closing sale price of the Company's common stock
multiplied by the number of shares issuable upon conversion of $1 principal
64
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
amount of the 2022 Floating Rate Convertible Subordinated Notes; (e) upon the
occurrence of specified corporate transactions; or (f) if the 2022 Floating Rate
Convertible Subordinated Notes have been called for redemption and the
redemption has not yet occurred.
The Company may redeem all or a portion of the 2022 Floating Rate
Convertible Subordinated Notes for cash at any time on or after May 7, 2006.
Holders of the 2022 Floating Rate Convertible Subordinated Notes may require the
Company to purchase their notes in cash at a price of par plus accrued interest,
if any, upon a change in control of the Company, as defined in the indenture, or
on any of the following dates: May 1, 2009, May 1, 2012 and May 1, 2017.
The net proceeds from the sale of the 2022 Floating Rate Convertible
Subordinated Notes were used to repay a portion of the outstanding indebtedness
under the Company's credit facility.
Wasco Bond
In December 1999, the Company completed a $13,600 tax-exempt bond
financing for its Wasco subsidiary (the "Wasco Bond"). These funds were used for
the acquisition, construction, furnishing, equipping and improving of a landfill
located in Wasco County, Oregon (the "Landfill Project"). In March 2001, the
Company refinanced the Wasco Bond by completing $13,600 of tax-exempt revenue
bond financing through the issuance of three bonds (the "2001 Wasco Bonds"). The
Company incurred debt extinguishment costs of $144, net of tax, related to this
refinancing. The 2001 Wasco Bonds consist of $1,040 of 6.5% term bonds due March
1, 2004, $4,085 of 7.0% term bonds due March 1, 2012 and $8,475 of 7.25% term
bonds due March 1, 2021. On an annual basis, the Company is required to remit
sinking fund payments to a restricted cash account held by a trustee. The
sinking fund requirement in 2002 and 2003 were $325 and $345, respectively. The
total future sinking fund requirements are as follows: $370 in 2004, $395 in
2005, $425 in 2006, $455 in 2007, $485 in 2008 and $10,800 thereafter. Until
used to repay outstanding principal on the bonds, these sinking fund payments
are classified as restricted cash and included in other assets in the
accompanying consolidated balance sheet.
California Tax-Exempt Bonds
In June 1998, the Company completed a $1,800 tax-exempt bond financing for
its Madera subsidiary (the "Madera Bond"). These funds were used for specified
capital expenditures and improvements, including installation of a landfill gas
recovery system. The bonds mature on May 1, 2016 and bear interest at variable
rates based on market conditions for California tax-exempt bonds (approximately
1.8% and 1.3% at December 31, 2002 and 2003, respectively). The bonds are backed
by a letter of credit issued by Fleet Boston Financial Corporation under the
Credit Facility for $1,829.
In July 1998 and May 1999, Cold Canyon Landfill, Inc. and South County
Sanitary Service, Inc., wholly-owned subsidiaries of the Company acquired in
2002, received a total of $9,490 from the issuance of tax-exempt bond financing
(the "Cold Canyon and South County Bonds") through the California Pollution
Control Financing Authority. These funds were used for specified capital
expenditures and improvements. The outstanding balance of the Cold Canyon and
South County Bonds was $7,145 at December 31, 2003 with scheduled principal
maturities of $1,300 in May 2006 and $5,845 in July 2008. The Cold Canyon and
South County Bonds bear interest at variable rates based on market conditions
for California tax-exempt bonds (approximately 1.8% and 1.3% at December 31,
2002 and 2003, respectively) and are backed by a letter of credit issued by
Fleet Boston Financial Corporation under the Credit Facility for $7,246.
In June 1999, GreenWaste of Tehama, a wholly-owned subsidiary of the
Company acquired in 2003, received a total of $3,435 from the issuance of
tax-exempt bond financing (the "Tehama Bonds") through California Pollution
Control Financing Authority. These funds were used to finance improvements to
and expansion of certain solid waste disposal facilities. The outstanding
balance of the Tehama bonds was $2,060 at December 31, 2003. The bond bears
interest at variable rates based on market conditions for California tax-exempt
bonds (approximately 1.3% at December 31, 2003). On an annual basis, the Company
is required to remit sinking fund payments to a restricted cash account held by
a trustee. There was not a sinking fund requirement in 2003. The total future
sinking fund requirements are as follows: $430 in 2004, $455 in 2005, $475 in
2006, $60 in 2007, $60 in 2008 and $580 thereafter. Until used to repay
outstanding principal on the bonds, these sinking fund payments are classified
as restricted cash and included in other assets in the accompanying consolidated
balance sheet.
65
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
In August 1997 and October 2001, GreenTeam of San Jose, a wholly-owned
subsidiary of the Company acquired in 2003, received a total of $18,040 from the
issuance of tax-exempt bond financing (the "San Jose Bonds") through California
Pollution Control Financing Authority. These funds are used for specified
capital expenditures and improvements. The outstanding balance of the San Jose
bonds was $17,965 at December 31, 2003. The bonds bear interest at variable
rates based on market conditions for California tax-exempt bonds (approximately
1.3% at December 31, 2003). On an annual basis, the Company is required to remit
sinking fund payments to a restricted cash account held by a trustee. There was
not a sinking fund requirement in 2003. The total future sinking fund
requirements are as follows: $1,960 in 2004, $2,080 in 2005, $2,180 in 2006,
$2,305 in 2007, $2,420 in 2008 and $7,020 thereafter. Until used to repay
outstanding principal on the bonds, these sinking fund payments are classified
as restricted cash and included in other assets in the accompanying consolidated
balance sheet.
The Company has a total of $28,970 of tax-exempt bonds at December 31,
2003 that mature through 2016 that are remarketed weekly by a remarketing agent
to effectively maintain a variable yield. If the remarketing agent is unable to
remarket the bonds, then the remarketing agent can put the bonds to the Company.
The Company has obtained stand-by letters of credit, issued under its senior
secured revolving credit facility, to guarantee repayment of the bonds in this
event. The Company classified these borrowings as long-term at December 31, 2003
because the borrowings are supported by stand-by letters of credit issued under
the Company's senior secured revolving credit facility which is long-term.
Interest Rate Swaps
In December 2000, the Company restructured two existing interest rate swap
agreements, extending their maturity through December 2003 and removing the
embedded option features of the agreements. As of December 31, 2000, the Fleet
Boston swap had a notional amount of $125,000 at a fixed rate of 6.17% plus
applicable margin and the Union Bank of California swap had a notional amount of
$125,000 at a fixed rate of 7.01% plus applicable margin. In March 2001,
$110,000 of the notional amount under the Union Bank of California swap was
terminated because the Company used the proceeds from its Convertible
Subordinated Notes offering to repay $110,000 of the LIBOR note, the cash flows
of which this swap was designated to hedge. The Company made a cash payment of
$6,337 to terminate the swap in 2001.
At December 31, 2003, the Company's derivative instruments consisted of
two forward-starting interest rate swap agreements, entered into in May 2003.
Each interest rate swap agreement has a notional amount of $87,500 and
effectively fixes the interest rate on the notional amount at interest rates
ranging from 2.67% to 2.68%, plus applicable margin. The effective date of the
swap agreements is February 2004 and each swap agreement expires in February
2007. These interest rate swap agreements are effective as cash flow hedges for
a portion of the Company's variable rate debt and the Company applies hedge
accounting pursuant to SFAS No. 133 to account for these instruments. The
notional amounts and all other significant terms of the swap agreements are
closely matched to the provisions and terms of the variable rate debt being
hedged.
As of December 31, 2003, aggregate contractual future principal payments
by calendar year on long-term debt are due as follows:
2004 $ 9,740
2005 7,395
2006 157,871
2007 6,240
2008 66,720
Thereafter 363,665
-----------
$ 611,631
===========
66
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Leases
The Company leases its facilities and certain equipment under
non-cancelable operating leases for periods ranging from one to ten years. The
Company's total rent expense under operating leases during the years ended
December 31, 2001, 2002 and 2003 was $2,699, $4,493, and $4,687, respectively.
As of December 31, 2003, future minimum lease payments under these leases,
by calendar year, are as follows:
2004 $ 3,980
2005 3,468
2006 2,804
2007 2,391
2008 2,222
Thereafter 12,191
-----------
$ 27,056
===========
Financial Surety Bonds
The Company uses financial surety bonds for a variety of corporate
guarantees. The two largest uses of financial surety bonds are for municipal
contract performance guarantees and landfill closure and post-closure financial
assurance required under certain environmental regulations. Environmental
regulations require demonstrated financial assurance to meet closure and
post-closure requirements for landfills. In addition to surety bonds, these
requirements may also be met through alternative financial assurance
instruments, including insurance, letters of credit and restricted cash
deposits.
At December 31, 2002 and 2003, the Company had provided customers and
various regulatory authorities with surety bonds in the aggregate amount of
approximately $36,300 and $54,495, respectively, to secure its landfill closure
and post-closure requirements and $27,800 and $37,795, respectively, to secure
performance under collection contracts and landfill operating agreements.
In August 2003, the Company paid $5,300 to acquire a 9.9% interest in a
company that, among other activities, issues financial surety bonds to secure
landfill closure and post-closure obligations for companies operating in the
solid waste industry. The Company accounts for this investment under the cost
method of accounting. At December 31, 2003, this investee company had written
$17,815 of the Company's financial surety bonds for landfill closure and
post-closure obligations. The Company's reimbursement obligations under these
bonds are secured by a pledge of its stock in the investee company.
Unconditional Purchase Obligation
The Company has an unconditional obligation to purchase diesel fuel under
a 24 month agreement expiring on December 31, 2005. The total minimum amount of
diesel fuel to be purchased under the agreement is $20,526.
CONTINGENCIES
Environmental Risks
The Company is subject to liability for any environmental damage that its
solid waste facilities may cause to neighboring landowners or residents,
particularly as a result of the contamination of soil, groundwater or surface
water, and especially drinking water, including damage resulting from conditions
67
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
existing prior to the acquisition of such facilities by the Company. The Company
may also be subject to liability for any off-site environmental contamination
caused by pollutants or hazardous substances whose transportation, treatment or
disposal was arranged by the Company or its predecessors. Any substantial
liability for environmental damage incurred by the Company could have a material
adverse effect on the Company's financial condition, results of operations or
cash flows. As of December 31, 2003, the Company is not aware of any significant
environmental liabilities.
Legal Proceedings
The Company owns undeveloped property in Harper County, Kansas where it is
seeking permits to construct and operate a municipal solid waste landfill. In
2002, the Company received a special use permit from Harper County for zoning
the landfill and in 2003 it received a draft permit from the Kansas Department
of Health and Environment to construct and operate the landfill. In July 2003,
the District Court of Harper County invalidated the previously issued zoning
permit. The Company has appealed the District Court's decision to invalidate the
zoning permit. The Kansas Department of Health and Environment has notified the
Company that it will not issue a final permit to construct and operate the
landfill until the zoning matter is resolved. At December 31, 2003, the Company
had $3,900 of capitalized expenditures related to this landfill development
project. Based on the advice of counsel, the Company believes that it will
prevail in this matter and does not believe that an impairment of the
capitalized expenditures exists. If the Company does not prevail on appeal,
however, it will be required to expense in a future period the $3,900 of
capitalized expenditures, less the recoverable value of the undeveloped property
and other amounts recovered, which would likely have a material adverse effect
on its reported income for that period.
The Company is primarily self-insured for automobile liability, general
liability and workers' compensation claims. The Company is a party to various
claims and suits pending for alleged damages to persons and property and alleged
liabilities occurring during the normal operations of the solid waste management
business. On October 31, 2003, the Company's subsidiary, Waste Connections of
Nebraska, Inc., was named as a defendant in the case of KAREN COLLERAN,
CONSERVATOR OF THE ESTATE OF ROBERT ROONEY V. WASTE CONNECTIONS OF NEBRASKA,
INC. The plaintiff seeks recovery for damages allegedly suffered by Father
Robert Rooney when the bicycle he was riding collided with one of the Company's
garbage trucks. The complaint alleges that Father Rooney suffered serious bodily
injury, including traumatic brain injury. The plaintiff seeks recovery of past
medical expenses of approximately $430 and an unspecified amount for future
medical expenses, and home healthcare, past pain and suffering, future pain and
suffering, lost income, loss of earning capacity, and permanent injury and
disability. The Company's primary defense is that the plaintiff is not entitled
to any damages under Nebraska law, where the accident occurred, because the
negligence of Father Rooney was equal to or greater than any negligence on the
part of the driver, and the Company intends to defend this case vigorously. This
case is in the preliminary stages of discovery and the Company has not accrued
any potential loss as of December 31, 2003; however, an adverse outcome in this
case coupled with a significant award to the plaintiff could have a material
adverse effect on the Company's reported income in the period incurred.
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, the Company is subject to
various judicial and administrative proceedings involving federal, state or
local agencies. In these proceedings, an agency may seek to impose fines on the
Company or to revoke or deny renewal of an operating permit held by the Company.
From time to time the Company may also be subject to actions brought by
citizens' groups or adjacent landowners or residents in connection with the
permitting and licensing of landfills and transfer stations, or alleging
environmental damage or violations of the permits and licenses pursuant to which
the Company operates.
In addition, the Company is a party to various claims and suits pending
for alleged damages to persons and property, alleged violations of certain laws
and alleged liabilities arising out of matters occurring during the normal
operation of the waste management business. However, as of December 31, 2003
there is no current proceeding or litigation involving the Company that the
Company believes will have a material adverse impact on its business, financial
condition, results of operations or cash flows.
68
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Guarantees
The Company has guaranteed the tax-exempt bonds for its Wasco subsidiary.
If this subsidiary fails to meet its obligations associated with tax-exempt
bonds as they come due, the Company will be required to perform under the
related guarantee agreement. No additional liability has been recorded for these
guarantees because the underlying obligations are reflected in the Company's
consolidated balance sheets. See Note 8 for information on the Wasco tax-exempt
bond balances and maturities.
10. STOCKHOLDERS' EQUITY
Common Stock
Of the 21,333,212 shares of common stock authorized but unissued as of
December 31, 2003, the following shares were reserved for issuance:
Stock option plans 6,537,795
2006 Convertible Subordinated Notes 3,944,775
2022 Floating Rate Convertible Subordinated Notes 3,616,445
Consultant Incentive Plan 500,000
Stock purchase warrants 120,333
Restricted stock plan 90,025
----------
14,809,373
==========
Restricted Stock
During 2002, the Company's Board of Directors adopted the 2002 Restricted
Stock Plan (the "Restricted Stock Plan") in which selected employees, other than
officers and directors, may participate. Restricted stock awards under the
Restricted Stock Plan may or may not require a cash payment from a participant
to whom an award is made. The awards become free of the stated restrictions over
periods determined at the date of the grant, subject to continuing employment,
the achievement of particular performance goals and/or the satisfaction of
certain vesting provisions applicable to each award of shares. The Board of
Directors currently administers the Restricted Stock Plan. The Board of
Directors authorizes the grant of any stock awards and determines the employees
to whom shares are awarded, number of shares to be awarded, award period and
other terms and conditions of the awards. Shares of restricted stock may be
forfeited and revert to the Company if a plan participant resigns from Waste
Connections and its subsidiaries, is terminated for cause or violates the terms
of any noncompetition or nonsolicitation agreements to which that plan
participant is bound (if such plan participant has been terminated without
cause). A total of 95,000 shares were reserved for issuance under the Restricted
Stock Plan. During the years ended December 31, 2002 and 2003, the Company
issued 23,003 and 1,300 shares of restricted stock, with grant-date fair values
of $35.28 and $36.63 per share, respectively, to selected employees. The total
fair value of the issued restricted stock was $812 and $48 for the years ended
December 31, 2002 and 2003, respectively, and is being amortized to expense over
the three-year restriction period. During 2003, a portion of the restricted
stock granted in 2002 became free of restrictions, resulting in the issuance of
4,975 shares of common stock.
Stock Options
In 1997, the Company's Board of Directors adopted a stock option plan in
which all officers, employees, directors and consultants may participate (the
"1997 Option Plan"). Options granted under the 1997 Option Plan may either be
incentive stock options or nonqualified stock options, generally have a term of
10 years from the date of grant, and will vest over periods determined at the
date of grant. The exercise prices of the options are determined by the
Company's Board of Directors and will be at least 100% or 110% of the fair
market value of the Company's common stock on the date of grant as provided for
in the Option Plan.
69
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The 1997 Option Plan provides for the reservation of common stock for
issuance thereunder equal to 3,500,000 shares. The amount of common stock
reserved for issuance under the 1997 Option Plan is decreased for options
exercised and increased for previously granted options that have been forfeited
or cancelled. As of December 31, 2003, options for 64,006 shares of common stock
were available for future grants under the 1997 Option Plan.
In 2002, the Company's Board of Directors authorized two additional
equity-based compensation plans: the 2002 Stock Option Plan and 2002 Senior
Management Equity Incentive Plan. A total of 2,500,000 shares of the Company's
common stock were reserved for future issuance under the 2002 Stock Option Plan.
Participation in the 2002 Stock Option Plan is limited to consultants and
employees, other than officers and directors. Options granted under the 2002
Stock Option Plan are nonqualified stock options and have a term of no longer
than ten years from the date they are granted. Options generally become
exercisable in installments pursuant to a vesting schedule set forth in each
option agreement. The Board of Directors authorizes the granting of options and
determines the employees and consultants to whom options are to be granted, the
number of shares subject to each option, the exercise price, option term,
vesting schedule and other terms and conditions of the options. A total of
3,000,000 shares of the Company's common stock were reserved for future issuance
under the 2002 Senior Management Equity Incentive Plan. The Company's
stockholders approved the 2002 Senior Management Equity Incentive Plan on May
16, 2002. Participation in the 2002 Senior Management Equity Incentive Plan is
limited to officers and directors of the Company. Options granted under the 2002
Senior Management Equity Incentive Plan may be either incentive stock options or
non-qualified stock options. As of December 31, 2003, options for 965,061 and
1,885,000 shares of common stock were available for future grants under the 2002
Stock Option Plan and 2002 Senior Management Equity Incentive Plan,
respectively.
As of December 31, 2001, 2002, and 2003, a total of 521,396, 690,577, and
940,367 options to purchase common stock were exercisable under all stock option
plans, respectively.
A summary of the Company's stock option activity and related information
for the years ended December 31, 2001, 2002 and 2003 is presented below:
Weighted
Number of Average
Shares (Options) Exercise Price
------------ ------------
Outstanding as of December 31, 2000 1,464,251 $ 13.65
Granted 1,050,050 25.26
Forfeited (55,597) 20.58
Exercised (556,835) 13.33
------------
Outstanding as of December 31, 2001 1,901,869 20.00
Granted 1,530,589 25.91
Forfeited (112,161) 26.09
Exercised (616,670) 17.12
------------
Outstanding as of December 31, 2002 2,703,627 23.79
Granted 1,643,750 32.70
Forfeited (113,066) 28.80
Exercised (610,583) 20.10
------------
Outstanding as of December 31, 2003 3,623,728 28.29
============
70
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The following table summarizes information about stock options outstanding
as of December 31, 2003:
Options
Options Outstanding Exercisable
------------------------------------------------- --------
Weighted
Average
Weighted Remaining Weighted
Average Contractual Average
Exercise Life Exercise
Exercise Price Shares Price (In Years) Shares Price
-------------------------------------------------------------------------------
$ 3.50 to 5.00 2,500 $ 3.80 6.4 500 $ 5.00
$10.25 to 12.00 118,666 11.00 5.3 118,666 11.00
$16.81 to 25.06 1,411,217 24.11 7.6 578,343 23.90
$25.31 to 37.75 2,091,345 32.13 9.0 242,858 31.11
---------- ----------
3,623,728 28.29 8.3 940,367 24.12
========== ==========
Stock Purchase Warrants
In 2002, the Company's Board of Directors authorized the 2002 Consultant
Incentive Plan (the "Consultant Incentive Plan"), under which warrants to
purchase the Company's common stock may be issued to certain consultants to the
Company. Warrants awarded under the Consultant Incentive Plan are subject to a
vesting schedule set forth in each warrant agreement. Historically, warrants
issued have been fully vested and exercisable at the date of grant. The Board of
Directors authorizes the issuance of warrants and determines the consultants to
whom warrants are to be issued, the number of shares subject to each warrant,
the purchase price, exercise date and period, warrant term and other terms and
conditions of the warrants. The Board reserved 500,000 shares of the Company's
common stock for future issuance under the Consultant Incentive Plan. The
Company issued 400 and 41,600 warrants under the Consultant Incentive Plan
during the years ended December 31, 2002 and 2003, respectively.
The following table summarizes information about warrants outstanding as of
December 31, 2002 and 2003:
Issue Warrants Exercise Fair Value Outstanding at December 31,
Date Issued Price of Warrants 2002 2003
--------------- -------- -------------- ----------- -------- --------
Warrants issued in connection
with an acquisition February 1998 200,000 $ 4.00 $ 954 73,333 73,333
Warrants issued to third-party
acquisition consultants Throughout 2001 11,499 28.28 to 33.45 104 11,429 --
Warrants issued to third-party
acquisition consultants Throughout 2002 64,610 26.75 to 37.00 577 64,610 52,400
Warrants issued to employees Throughout 2003 600 33.66 to 35.00 17 -- 600
Warrants issued to third-party
acquisition consultants Throughout 2003 41,000 28.45 to 35.77 173 -- 41,000
-------- --------
149,372 167,333
======== ========
The warrants are exercisable when granted and expire between 2003 and 2008.
Warrants issued to employees and third-party acquisition consultants are
valued using the Black-Scholes pricing model with assumed stock price volatility
and risk-free interest rates similar to those used for stock options, and with
71
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
an expected life of 2 years. Warrants issued to third-party acquisition
consultants are recorded as an element of the related cost of acquisitions.
Warrants issued to employees are charged to expense.
11. COMPREHENSIVE INCOME
Comprehensive income, as defined, includes all changes in equity (net
assets) during a period from non-stockholder sources. The components of other
comprehensive income (loss) and related tax effects for the years ended December
31, 2001, 2002 and 2003 are as follows:
Year Ended December 31, 2001
----------------------------------------
Gross Tax effect Net of tax
---------- ---------- ----------
Cumulative effect of accounting change $ (5,940) $ 2,340 $ (3,600)
Amounts reclassified into earnings 9,648 (3,801) 5,847
Changes in fair value of interest rate swaps (11,852) 4,670 (7,182)
---------- ---------- ----------
$ (8,144) $ 3,209 $ (4,935)
========== ========== ==========
Year Ended December 31, 2002
----------------------------------------
Gross Tax effect Net of tax
---------- ---------- ----------
Amounts reclassified into earnings $ 6,404 $ (2,402) $ 4,002
Changes in fair value of interest rate swaps (4,653) 1,590 (3,063)
---------- ---------- ----------
$ 1,751 $ (812) $ 939
========== ========== ==========
Year Ended December 31, 2003
----------------------------------------
Gross Tax effect Net of tax
---------- ---------- ----------
Amounts reclassified into earnings $ 6,667 $ (2,467) $ 4,200
Changes in fair value of interest rate swaps 366 (167) 199
---------- ---------- ----------
$ 7,033 $ (2,634) $ 4,399
========== ========== ==========
In March 2001, the Company determined that the debt, the specific cash
flows of which an interest rate swap was designated to hedge, would be repaid
prior to its due date as a result of the convertible subordinated debt offering
(Note 8); therefore, it was probable that the future variable interest payments
under the related debt (the hedged transactions) would not occur and
accordingly, unrealized losses of $6,337 in other comprehensive income related
to the swap were reclassified into earnings. The interest rate swap was
terminated for a cash payment equal to its then fair value of $(6,337).
The estimated net amount of the existing unrealized gains as of December
31, 2003 (based on the interest rate yield curve at that date) included in
accumulated other comprehensive income expected to be reclassified into pre-tax
earnings within the next 12 months is $0. The timing of actual amounts
reclassified into earnings is dependent on future movements in interest rates.
72
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
12. INCOME TAXES
The provision for income taxes before the cumulative effect of the change
in accounting principle for the years ended December 31, 2001, 2002 and 2003
consists of the following:
Year Ended December 31,
----------------------------------------
2001 2002 2003
---------- ---------- ----------
Current:
Federal $ 6,792 $ 21,151 $ 8,334
State 578 1,830 1,112
Deferred:
Federal 12,388 9,293 26,844
State 54 839 1,109
---------- ---------- ----------
$ 19,812 $ 33,113 $ 37,399
========== ========== ==========
Significant components of deferred income tax assets and liabilities are as
follows as of December 31, 2002 and 2003:
2002 2003
---------- ----------
Deferred income tax assets:
Accounts receivable reserves $ 951 $ 963
Accrued expenses 934 1,305
State taxes 102 --
Net operating losses from acquired subsidiaries -- 4,436
Other 837 1,294
---------- ----------
Total deferred income tax assets: 2,824 7,998
---------- ----------
Deferred income tax liabilities:
Net asset basis difference in
non-taxable acquisitions (59,454) (61,332)
Amortization (9,393) (24,462)
Depreciation (26,336) (37,000)
Other liabilities (33) (1,706)
Prepaid expenses (2,151) (3,660)
---------- ----------
Total deferred income tax liabilities (97,367) (128,160)
---------- ----------
Net deferred income tax liability $ (94,543) $ (120,162)
========== ==========
During the years ended December 31, 2002 and 2003, the Company reduced its
taxes payable by $3,572 and $3,078, respectively, as a result of the exercise of
non-qualified stock options and the disqualifying disposition of incentive stock
options. These amounts were recorded in additional paid-in capital.
73
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The differences between the Company's provision for income taxes as
presented in the accompanying statements of operations and benefit for income
taxes computed at the federal statutory rate consist of the items shown in the
following table as a percentage of pre-tax income:
Year Ended December 31,
----------------------------------------
2001 2002 2003
---------- ---------- ----------
Income tax provision at the statutory rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 2.0 2.2 1.1
Goodwill amortization 1.5 -- --
Other 0.9 0.2 0.2
---------- ---------- ----------
39.4% 37.4% 36.3%
========== ========== ==========
At December 31, 2003, the Company had approximately $12,000 of federal and
state net operating loss ("NOL") carryforwards. The federal and state NOL
carryforwards have expiration dates through the year 2022. While we expect to
realize the deferred tax assets, changes in estimates of future taxable income
or in tax laws may alter this expectation.
13. NET INCOME PER SHARE INFORMATION
The following table sets forth the calculation of the numerator and
denominator used in the computation of basic and diluted net income per share
for the years ended December 31, 2001, 2002 and 2003:
Year Ended December 31,
--------------------------------------------
2001 2002 2003
------------ ------------ ------------
Numerator:
Net income for basic earnings per share $ 30,528 $ 55,466 $ 65,596
Interest expense on 2006 Convertible
Subordinated Notes, net of tax effects -- 5,852 5,902
------------ ------------ ------------
Net income for diluted earnings per share $ 30,528 $ 61,318 $ 71,498
------------ ------------ ------------
Denominator:
Basic shares outstanding 27,069,685 27,750,642 28,327,296
Dilutive effect of 2006 Convertible
Subordinated Notes -- 3,944,775 3,944,775
Dilutive effect of stock options and warrants 605,954 628,954 595,888
Dilutive effect of restricted stock -- 1,253 3,693
------------ ------------ ------------
Diluted shares outstanding 27,675,639 32,325,624 32,871,652
============ ============ ============
The Company's 2006 Convertible Subordinated Notes are convertible at any
time at the option of the holders into a total of 3,944,775 shares of common
stock. These shares have not been included in the computation of diluted net
income per share for the year ended December 31, 2001 because to have done so
would have been antidilutive. The Company's 2022 Floating Rate Convertible
Subordinated Notes are convertible into 3,616,445 shares of common stock in
accordance with the provisions listed in Note 8 to these financial statements.
These shares have not been included in the computation of diluted net income per
share for the year ended December 31, 2002 and 2003 because none of the
provisions that would result in conversion of the notes into common stock
occurred during 2002 and 2003.
74
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Additionally, as of December 31, 2002 and 2003, the following stock options
and warrants were not included in the computation of diluted net income per
share because to do so would have been antidilutive:
December 31, 2002 December 31, 2003
---------------------------- ----------------------------
Number of Exercise Number of Exercise
Shares Price Range Shares Price Range
--------- ---------------- --------- ----------------
Outstanding options 122,250 $33.06 to $37.75 45,250 $34.87 to $37.75
Outstanding warrants 24,650 $33.30 to $37.00 2,700 $35.00 to $37.00
--------- ---------
146,900 47,950
========= =========
14. EMPLOYEE BENEFIT PLANS
WCI has a voluntary savings and investment plan (the "WCI 401(k) Plan").
The WCI 401(k) Plan is available to all eligible, non-union employees of WCI.
Under the WCI 401(k) Plan, WCI's contributions were 40% of the first 5% of the
employee's contributions at December 31, 2002 and were 50% of the first 5% of
the employee's contributions at December 31, 2003. The Murrey Companies have a
voluntary savings and investment plan (the "Murrey 401(k) Plan"). The Murrey
401(k) Plan is available to all eligible, non-union employees of the Murrey
Companies. Under the Murrey 401(k) Plan, the Murrey Companies' contributions are
at the discretion of management. During the years ended December 31, 2001, 2002
and 2003, the total 401(k) plan expense for the WCI and Murrey 401(k) plans was
approximately $1,132, $1,477, and $1,942, respectively.
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the unaudited consolidated quarterly results
of operations as reported for 2002 and 2003:
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Revenues:
2002 as reported $105,742 $128,091 $133,487 $131,341
Gross profit:
2002 (reflecting SFAS No. 143
reclassification as more fully
described in Note 1) 46,427 55,917 58,020 56,111
Net income:
2002 as reported 12,171 14,342 15,193 13,760
Basic income per common share:
2002 as reported 0.44 0.52 0.55 0.49
Diluted income per common share:
2002 as reported 0.43 0.49 0.51 0.47
75
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
Revenues:
2003 as reported 128,454 138,883 146,178 149,994
Gross profit:
2003 as reported 56,633 61,456 63,771 64,808
Income before cumulative effect of
change in accounting principle:
2003 as reported 14,413 16,639 16,972 17,290
Cumulative effect of change in
accounting principle, net of tax:
2003 as reported 282 -- -- --
Net income:
2003 as reported 14,695 16,639 16,972 17,290
Basic income per common share before
effect of change in accounting
principle:
2003 as reported 0.51 0.59 0.60 0.61
Net income per common share:
2003 as reported 0.52 0.59 0.60 0.61
Diluted income per common share
Before effect of change in accounting
principle:
2003 as reported 0.49 0.55 0.56 0.57
Net income per common share:
2003 as reported 0.50 0.55 0.56 0.57
16. SUBSEQUENT EVENTS
On March 2, 2004, the Company refinanced the term loan portion of its
credit facility in order to reduce the effective borrowing cost. The applicable
margin on the senior secured term loan was reduced by 25 basis points; all other
terms remained consistent. In addition, the Company increased the amount
outstanding under the senior secured term loan from $175,000 to $200,000,
resulting in an increase in the size of the facility to $600,000.
On March 3, 2004, the Company announced that on April 15, 2004, it intends
to redeem in full the Company's 5.5% Convertible Subordinated Notes due 2006.
Holders may convert their notes into shares of Waste Connections' common stock
at a price of $38.03 per share or they may have their notes redeemed at a total
redemption price of $1.0495 per $1 principal amount of notes, consisting of a
redemption price of $1.022 plus accrued interest of $0.0275.
76
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except as set forth above in Part I under "Executive Officers" and in the
paragraph below, the information required by Item 10 has been omitted from this
report, and is incorporated by reference to the caption "Election of Directors"
in our definitive Proxy Statement for the 2004 Annual Meeting of Stockholders,
which we will file with the Commission pursuant to Regulation 14A within 120
days after the end of our 2003 fiscal year.
We have adopted a Code of Conduct and Ethics that applies to our officers
(including our principal executive officer, principal financial officer,
principal accounting officer, controller, and all other officers), directors and
employees. We have also adopted Corporate Governance Guidelines to promote the
effective functioning of our Board of Directors and its Committees, to promote
the interests of stockholders and to ensure a common set of expectations
concerning how the Board, its Committees and Management should perform their
respective functions. Our Code of Conduct and Ethics and our Corporate
Governance Guidelines are available on our website at
http://wasteconnections.com as are the charters of our Board's Audit, Nominating
and Corporate Governance and Compensation Committees. Information on the website
is not part of this report. If we grant any waiver from our Code of Conduct and
Ethics with respect to the conduct of executive officers or directors, we will
publicly disclose such waiver to our stockholders as required by applicable law.
Stockholders may also obtain copies of the Corporate Governance documents
discussed above by contacting the Secretary of Waste Connections at the address
or phone number listed on the cover page of this Annual Report.
ITEMS 11, 12, 13 and 14.
The information required by Items 11 through 14 of Part III has been
omitted from this report, and is incorporated by reference to the captions
"Executive Compensation," "Principal Stockholders," "Certain Relationships and
Related Transactions" and "Principal Accounting Fees and Services" in our
definitive Proxy Statement for the 2004 Annual Meeting of Stockholders.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) See Index to Financial Statements on page 40. The following Financial
Statement Schedule is filed herewith on page 77 and made a part of this Report:
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
(b) Reports on Form 8-K
On October 23, 2003, we filed a report on Form 8-K reporting our third
quarter earnings in the form of a press release.
On October 23, 2003, we filed a report on Form 8-K reporting the closing of
an agreement for $575 million in senior secured credit facilities comprised of a
$400 million senior secured five-year revolving credit facility and a $175
million senior secured seven-year term loan.
(c) See Exhibit Index immediately following signature pages.
77
SIGNATURES
Pursuant to the requirements of Sections 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 Connections, Inc.
By: /s/ Ronald J. Mittelstaedt
-----------------------------------------------
Ronald J. Mittelstaedt
President, Chief Executive Officer and Chairman
Date: March 12, 2004
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Ronald J. Mittelstaedt and Steven F.
Bouck, jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities to sign any amendments to this
Annual Report on Form 10-K, and to file the same with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities 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 dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Ronald J. Mittelstaedt President, Chief Executive Officer and Chairman March 12, 2004
--------------------------- (principal executive officer)
Ronald J. Mittelstaedt
/s/ Steven F. Bouck Executive Vice President and Chief Financial Officer March 12, 2004
--------------------------- (principal financial officer)
Steven F. Bouck
/s/ David G. Eddie Vice President - Corporate Controller March 12, 2004
--------------------------- (principal accounting officer)
David G. Eddie
/s/ Eugene V. Dupreau Director and Regional Vice President - Western Region March 12, 2004
---------------------------
Eugene V. Dupreau
/s/ Michael W. Harlan Director March 12, 2004
---------------------------
Michael W. Harlan
/s/ William J. Razzouk Director March 12, 2004
---------------------------
William J. Razzouk
/s/ Robert H. Davis Director March 12, 2004
---------------------------
Robert H. Davis
78
WASTE CONNECTIONS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 2001, 2002 and 2003
(in thousands)
Additions
-------------------- Deductions
Balance at Charged to Charged (Write-offs, Balance
Beginning Costs and to Other Net of at End
Description of Year Expenses Accounts Collections) of Year
----------- -------- -------- -------- -------- --------
Deducted from asset accounts:
Allowance for doubtful accounts:
Year ended December 31, 2001 $ 1,899 $ 1,922 $ -- $ (1,654) $ 2,167
Year ended December 31, 2002 2,167 2,809 -- (2,467) 2,509
Year ended December 31, 2003 2,509 2,792 -- (2,731) 2,570
79
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
3.1 (a) Amended and Restated Certificate of Incorporation of the
Registrant, in effect as of the date hereof
3.2 (a) Amended and Restated By-Laws of the Registrant, in effect as of
the date hereof
4.1 (a) Form of Common Stock Certificate
4.2 (h) Form of Note for the Registrant's 5.5% Convertible Subordinated
Notes due April 15, 2006
4.3 (h) (+) Indenture between the Registrant, as Issuer, and State Street
Bank and Trust Company, as Trustee, dated as of April 4, 2001
4.4 (h) (+) Purchase Agreement between the Registrant and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, dated March 30, 2001
4.5 (h) (+) Registration Rights Agreement between the Registrant and
Merrill Lynch, Pierce, Fenner & Smith Incorporated, dated as of
April 4, 2001
4.6 (i) Form of Note for the Registrant's Floating Rate Convertible
Subordinated Notes Due 2022
4.7 (i) (+) Indenture between the Registrant, as Issuer, and State Street
Bank and Trust Company of California, N.A., as Trustee, dated
as of April 30, 2002
4.8 (i) (+) Purchase Agreement between the Registrant and Deutsche Bank
Securities Inc., dated April 26, 2002
4.9 (i) (+) Registration Rights Agreement between the Registrant and
Deutsche Bank Securities Inc., dated as of April 30, 2002
10.1 (d) Second Amended and Restated 1997 Stock Option Plan
10.2 (a) Form of Option Agreement
10.3 (a) Form of Warrant Agreement
10.4 (a) Form of Stock Purchase Agreement dated as of September 30, 1997
10.5 (c) Form of Third Amended and Restated Investors' Rights Agreement,
dated as of December 31, 1998
10.6 (f) First Amended and Restated Employment Agreement between the
Registrant and Ronald J. Mittelstaedt, dated as of June 1, 2000
10.7 (e) Second Amended Employment Agreement between the Registrant and
Darrell Chambliss, dated as of June 1, 2000
10.8 (e) Second Amended Employment Agreement between the Registrant and
Michael Foos, dated as of June 1, 2000
10.9 (a) Employment Agreement between the Registrant and Steven Bouck,
dated as of February 1, 1998
10.10 (a) Employment Agreement between the Registrant and Eugene V.
Dupreau, dated as of February 23, 1998
10.11 (a) Form of Indemnification Agreement entered into by the
Registrant and each of its directors and officers
10.12 (b) (+) Loan Agreement, dated as of June 1, 1998, between Madera
Disposal Systems, Inc. and the California Pollution Control
Financing Authority
80
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
10.13 (b) Employment Agreement between the Registrant and David M. Hall,
dated as of July 8, 1998
10.14 (g) Employment Agreement between the Registrant and James M.
Little, dated as of September 13, 1999
10.15 (g) Employment Agreement between the Registrant and Jerri L. Hunt,
dated as of October 25, 1999
10.16 (j) Employment Agreement between the Registrant and Kenneth O.
Rose, dated as of May 1, 2002
10.17 (j) Employment Agreement between the Registrant and Robert D.
Evans, dated as of May 10, 2002
10.18 (k) 2002 Senior Management Equity Incentive Plan
10.19 (k) 2002 Stock Option Plan
10.20 (l) 2002 Restricted Stock Plan
10.21 (m) Consultant Incentive Plan
10.22 (n) Employment Agreement between the Registrant and David G. Eddie,
dated as of May 15, 2001
10.23 (n) Employment Agreement between the Registrant and Worthing F.
Jackman, dated as of April 11, 2003
10.24 (o) Amended and Restated Revolving Credit and Term Loan Agreement
dated as of October 22, 2003
10.25 Refinancing Facility Amendment to Amended and Restated
Revolving Credit and Term Loan Agreement dated as of March 2,
2004
12.1 Statement regarding computation of ratio of earnings to fixed
charges
21.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, Independent Auditors
24 Power of Attorney. Reference is made to the signature page of
this Form 10-K.
31.1 Certification of President and Chief Executive Officer
31.2 Certification of Chief Financial Officer
32 Certificate of Chief Executive Officer and Chief Financial
Officer
99.1 Proxy Statement for the Registrant's 2004 Annual Stockholders
Meeting scheduled to be held May 29, 2004. (To be filed with
the Commission prior to 120 days after December 31, 2003, and
incorporated by reference herein to the extent indicated in
Part III to this Form 10-K.)
81
(a) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1, Registration No. 333-48029.
(b) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-4, Registration No. 333-59199.
(c) Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-4, Registration No. 333-65615.
(d) Incorporated by reference to the exhibit filed with the Registrant's Form
S-8, Registration No. 333-42096.
(e) Incorporated by reference to the exhibit filed with the Registrant's Form
10-Q filed on November 14, 2000.
(f) Incorporated by reference to the exhibit filed with the Registrant's Form
10-Q filed on August 7, 2000.
(g) Incorporated by reference to the exhibit filed with the Registrant's Form
10-K filed on March 13, 2000.
(h) Incorporated by reference to the exhibit filed with the Registrant's Form
S-3 filed on June 5, 2001.
(i) Incorporated by reference to the exhibit filed with the Registrant's Form
S-3 filed on July 29, 2002.
(j) Incorporated by reference to the exhibit filed with the Registrant's Form
10-Q filed on August 13, 2002.
(k) Incorporated by reference to the exhibit filed with the Registrant's Form
S-8 filed on February 21, 2002.
(l) Incorporated by reference to the exhibit filed with the Registrant's Form
S-8 filed on June 19, 2002.
(m) Incorporated by reference to the exhibit filed with the Registrant's Form
S-8 filed on January 8, 2003.
(n) Incorporated by reference to the exhibit filed with the Registrant's Form
10-Q filed on August 13, 2003.
(o) Incorporated by reference to the exhibit filed with the Registrant's Form
8-K filed on October 23, 2003.
(+) Filed without exhibits and schedules (to be provided supplementally on
request of the Commission).
82