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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 0-23981
WASTE CONNECTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
94-3283464
(I.R.S. EMPLOYER IDENTIFICATION NO.)
35 IRON POINT CIRCLE, SUITE 200, FOLSOM, CA 95630
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(916) 608-8200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock:
As of July 15, 2004: 47,993,677 shares of common stock
================================================================================
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2003 and June 30, 2004
Condensed Consolidated Statements of Income for the three and six months
ended June 30, 2003 and 2004
Condensed Consolidated Statement of Stockholders' Equity and Comprehensive
Income for the six months ended June 30, 2004
Condensed Consolidated Statements of Cash Flows for the six months ended
June 30, 2003 and 2004
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Waste Connections, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(In thousands, except share and per share amounts)
December 31, June 30,
ASSETS 2003 2004
----------- -----------
Current assets:
Cash and equivalents $ 5,276 $ 5,569
Accounts receivable, less allowance for doubtful
accounts of $2,570 and $2,267 at December 31, 2003
and June 30, 2004, respectively 72,474 75,965
Prepaid expenses and other current assets 11,270 10,590
----------- -----------
Total current assets 89,020 92,124
Property and equipment, net 613,225 629,127
Goodwill, net 590,054 603,141
Intangible assets, net 64,784 69,008
Restricted cash 17,734 13,994
Other assets, net 21,135 21,037
----------- -----------
$ 1,395,952 $ 1,428,431
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 38,682 $ 40,499
Accrued liabilities 31,920 31,563
Deferred revenue 23,738 25,560
Current portion of long-term debt and notes payable 9,740 8,624
----------- -----------
Total current liabilities 104,080 106,246
Long-term debt and notes payable 601,891 467,425
Other long-term liabilities 8,400 8,003
Deferred income taxes 120,162 130,200
----------- -----------
Total liabilities 834,533 711,874
Commitments and contingencies
Minority interests 23,925 23,682
Stockholders' equity:
Commonstock: $0.01 par value; 50,000,000 and 100,000,000 shares authorized at
December 31, 2003 and June 30, 2004, respectively; 43,000,182 and
47,978,277 shares issued and outstanding at December 31, 2003 and June 30,
2004, respectively 430 480
Additional paid-in capital 348,003 467,024
Deferred stock compensation (436) (2,176)
Retained earnings 189,094 224,467
Accumulated other comprehensive income 403 3,080
----------- -----------
Total stockholders' equity 537,494 692,875
----------- -----------
$ 1,395,952 $ 1,428,431
=========== ===========
See accompanying notes
1
Waste Connections, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except share and per share amounts)
Three months ended Six months ended
June 30, June 30,
-------- --------
2003 2004 2003 2004
------------ ------------ ------------ ------------
Revenues $ 138,883 $ 160,561 $ 267,337 $ 309,820
Operating expenses:
Cost of operations 77,427 90,889 149,248 175,952
Selling, general and administrative 13,179 15,445 26,060 31,040
Depreciation and amortization 11,282 13,851 21,862 27,295
------------ ------------ ------------ ------------
Operating income 36,995 40,376 70,167 75,533
Interest expense (7,786) (5,174) (15,836) (11,998)
Other expense (205) (1,572) (167) (1,496)
------------ ------------ ------------ ------------
Income before income tax provision and
minority interests 29,004 33,630 54,164 62,039
Minority interests (2,593) (3,054) (4,875) (5,685)
------------ ------------ ------------ ------------
Income before income tax provision 26,411 30,576 49,289 56,354
Income tax provision (9,772) (11,405) (18,237) (20,981)
------------ ------------ ------------ ------------
Income before cumulative effect of change
in accounting principle 16,639 19,171 31,052 35,373
Cumulative effect of change in accounting
principle, net of tax expense of $166 -- -- 282 --
------------ ------------ ------------ ------------
Net income $ 16,639 $ 19,171 $ 31,334 $ 35,373
============ ============ ============ ============
Basic earnings per common share:
Income before cumulative effect of
change in accounting principle $ 0.39 $ 0.40 $ 0.73 $ 0.78
Cumulative effect of change in
accounting principle -- -- 0.01 --
------------ ------------ ------------ ------------
Net income per common share $ 0.39 $ 0.40 $ 0.74 $ 0.78
============ ============ ============ ============
Diluted earnings per common share:
Income before cumulative effect of
change in accounting principle $ 0.37 $ 0.39 $ 0.69 $ 0.75
Cumulative effect of change in
accounting principle -- -- 0.01 --
------------ ------------ ------------ ------------
Net income per common share $ 0.37 $ 0.39 $ 0.70 $ 0.75
============ ============ ============ ============
Shares used in the per share calculations:
Basic 42,397,502 47,425,227 42,260,726 45,233,354
============ ============ ============ ============
Diluted 49,199,573 49,443,469 49,093,940 49,692,267
============ ============ ============ ============
See accompanying notes.
2
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
Six Months Ended June 30, 2004
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
STOCKHOLDERS' EQUITY
------------------------------------------------------------------
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
COMPREHENSIVE ------------------------------ PAID-IN COMPREHENSIVE
INCOME SHARES AMOUNT CAPITAL INCOME
============ ------------ ------------ ------------ ------------
Balances at December 31, 2003 43,000,182 $ 430 $ 348,003 $ 403
Issuance of common stock
warrants to consultants -- -- 172 --
Conversion of 2006 Notes, net of
issuance costs of $1,729 4,876,968 49 121,870 --
Vesting of restricted stock 7,394 -- -- --
Cancellation of unvested
restricted stock -- -- (143) --
Issuance of unvested restricted
stock -- -- 2,242 --
Amortization of deferred stock
compensation -- -- -- --
Exercise of stock options
and warrants, including tax
benefit of $3,419 1,123,870 11 22,780 --
Repurchase of common stock (1,030,137) (10) (27,900) --
Net income $ 35,373 -- -- -- --
Changes in fair value of interest
rate swaps, net of $1,572 of tax
effect 2,677 -- -- -- 2,677
------------
Comprehensive income $ 38,050 -- -- -- --
============ ------------ ------------ ------------ ------------
Balances at June 30, 2004 47,978,277 $ 480 $ 467,024 $ 3,080
============ ============ ============ =============
STOCKHOLDERS' EQUITY
-----------------------------------------------
DEFERRED
STOCK RETAINED
COMPENSATION EARNINGS TOTAL
------------ ------------ ------------
Balances at December 31, 2003 $ (436) $ 189,094 $ 537,494
Issuance of common stock
warrants to consultants -- -- 172
Conversion of 2006 Notes, net of
issuance costs of $1,729 -- -- 121,919
Vesting of restricted stock -- -- --
Cancellation of unvested
restricted stock 49 -- (94)
Issuance of unvested restricted
stock (2,242) -- --
Amortization of deferred stock
compensation 453 -- 453
Exercise of stock options
and warrants, including tax
benefit of $3,419 -- -- 22,791
Repurchase of common stock -- -- (27,910)
Net income -- 35,373 35,373
Changes in fair value of interest
rate swaps, net of $1,572 of tax
effect -- -- 2,677
Comprehensive income -- -- --
------------ ------------ ------------
Balances at June 30, 2004 $ (2,176) $ 224,467 $ 692,875
============ ============= ============
3
Waste Connections, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Six months ended
June 30,
2003 2004
------------ ------------
Cash flows from operating activities:
Net income $ 31,334 $ 35,373
Adjustments to reconcile net income to net cash provided by operating
activities:
Loss (gain) on disposal of assets 219 (92)
Depreciation 21,198 26,054
Amortization of intangibles 664 1,241
Deferred income taxes 9,118 9,896
Minority interests 4,875 5,685
Cumulative effect of change in accounting principle (448) --
Amortization of debt issuance costs 1,182 1,388
Stock-based compensation 55 453
Interest income on restricted cash (189) (153)
Closure and post-closure accretion 214 205
Net change in operating assets and liabilities, net of
acquisitions 5,512 4,098
------------ ------------
Net cash provided by operating activities 73,734 84,148
------------ ------------
Cash flows from investing activities:
Payments for acquisitions, net of cash acquired (21,074) (12,373)
Capital expenditures for property and equipment (30,772) (33,895)
Proceeds from disposal of assets 526 752
Net change in other assets (1,719) 3,949
------------ ------------
Net cash used in investing activities (53,039) (41,567)
------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt 27,000 107,500
Principal payments on notes payable and long-term debt (48,153) (134,960)
Distributions to minority interest holders (4,606) (5,929)
Proceeds from option and warrant exercises 7,050 19,278
Payments for repurchase of common stock -- (27,910)
Debt issuance costs (53) (267)
------------ ------------
Net cash used in financing activities (18,762) (42,288)
------------ ------------
Net increase in cash and equivalents 1,933 293
Cash and equivalents at beginning of period 4,067 5,276
------------ ------------
Cash and equivalents at end of period $ 6,000 $ 5,569
============ ============
Non-cash financing activity:
Liabilities assumed and notes payable issued to sellers of
businesses acquired $ 1,294 $ 15,619
See accompanying notes.
4
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share, per share and per ton amounts)
1. BASIS OF PRESENTATION AND SUMMARY
The accompanying condensed consolidated financial statements relate to Waste
Connections, Inc. and its subsidiaries (the "Company") as of June 30, 2004 and
for the three and six month periods ended June 30, 2003 and 2004. The
consolidated financial statements of the Company include the accounts of Waste
Connections, Inc. and its wholly-owned and majority-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. Operating
results for the three and six month periods ended June 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2004.
The Company's consolidated balance sheet as of June 30, 2004, the consolidated
statements of income for the three and six months ended June 30, 2003 and 2004,
and the consolidated statements of cash flows for the six months ended June 30,
2003 and 2004 are unaudited. In the opinion of management, such financial
statements include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the Company's financial
position, results of operations, and cash flows for the periods presented. The
consolidated financial statements presented herein should be read in conjunction
with the Company's 2003 annual report on Form 10-K.
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. 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.
2. ADOPTION OF NEW ACCOUNTING STANDARDS
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 Company fully adopted FIN 46 on
March 31, 2004 and this adoption did not have a material impact on the Company's
financial statements.
5
3. STOCK SPLIT
On May 26, 2004, the Company announced that its Board of Directors had declared
a three-for-two stock split of its common stock, in the form of a 50% stock
dividend to stockholders of record on June 10, 2004. Shares resulting from the
split were distributed on June 24, 2004 (payment date). Shares, share price, per
share amounts, common stock at par value and capital in excess of par value have
been restated to reflect the effect of the stock split for all periods presented
in this Form 10-Q. As a result of the stock split, fractional shares equal to
837 whole shares were repurchased at a price of $23.
4. 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.
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 using a
Black-Scholes option pricing model. 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 and diluted earnings per share for the three and six months ended June 30,
2003 and 2004:
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2003 2004 2003 2004
--------- --------- --------- ---------
Net income, as reported $ 16,639 $ 19,171 $ 31,334 $ 35,373
Add: stock-based employee compensation
expense included in reported net
income, net of related tax effects -- 159 35 285
Deduct: total stock-based employee
compensation expense determined
under fair value method for all awards,
net of related tax effects (1,816) (2,024) (3,467) (4,254)
-----------------------------------------------------
Pro forma net income $ 14,823 $ 17,306 $ 27,902 $ 31,404
=====================================================
Earnings per share:
Basic - as reported $ 0.39 $ 0.40 $ 0.74 $ 0.78
Basic - pro forma $ 0.35 $ 0.36 $ 0.66 $ 0.69
Diluted - as reported $ 0.37 $ 0.39 $ 0.70 $ 0.75
Diluted - pro forma $ 0.33 $ 0.36 $ 0.63 $ 0.67
5. LANDFILL ACCOUNTING
At June 30, 2004, the Company owned 21 landfills, and operated, but did not own,
five landfills under life-of-site operating contracts and eight landfills under
operating contracts with finite terms. The Company also owns two Subtitle D
landfill sites that are permitted for operation, but not constructed as of June
30, 2004. The contract for one landfill operating under a limited term, from
which the Company generated approximately $0.7 million of annualized revenues,
expired on June 30, 2004. The Company's landfills have site costs with a net
book value of $388,856 at June 30, 2004. With the exception of two owned
landfills that only accept construction and demolition waste, all landfills that
the Company owns or operates are Subtitle D landfills. For the Company's eight
landfills
6
operated under contracts with finite terms, the owner of the property, generally
a municipality, usually owns the permit and is generally responsible for closure
and post-closure obligations. The Company is responsible for all closure and
post-closure liabilities for four of the five operating landfills that it
operates under life-of-site operating contracts.
Many of the Company's existing landfills have the potential for expanded
disposal capacity beyond the amount currently permitted. The Company's internal
and third-party engineers perform surveys at least annually to estimate the
disposal capacity at its landfills. The Company's landfill depletion rates are
based on the remaining disposal capacity, considering both permitted and deemed
permitted airspace, at its owned landfills and landfills operated 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 the
estimate of total landfill airspace. The Company's internal criteria 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 the Company either owns it or the property
is under option, purchase, operating or other agreements;
(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) The Company considers it probable that the expansion will be achieved.
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.
The Company is currently seeking to expand permitted capacity at seven of its
owned landfills and four landfills that it operates under life-of-site operating
contracts, and considers the achievement of these expansions to be probable.
Although the Company cannot be certain that all future expansions will be
permitted as designed, the average remaining life, when considering remaining
permitted capacity, probable expansion capacity and projected annual disposal
volume, of the Company's owned landfills and landfills operated under
life-of-site operating contracts is 58 years, with lives ranging from 3 to 263
years.
The Company uses the units-of-production method to calculate the depletion rate
at the landfills it owns and the landfills it operates under life-of-site
operating contracts. This methodology divides the costs associated with
acquiring, permitting and developing the entire landfill by the total remaining
disposal capacity of that landfill. The resulting per unit depletion rate is
applied to each ton of waste disposed at the landfill and is recorded as expense
for that period. During the six months ended June 30, 2003 and 2004, the Company
expensed approximately $6,123 and $7,440, respectively, or an average of $2.30
and $2.35 per ton consumed, respectively, related to landfill depletion.
The Company reserves for closure and post-closure maintenance obligations at the
landfills it owns and certain landfills it operates under life-of-site operating
contracts. Final capping costs are included in the calculation of closure and
post-closure liabilities. The Company calculates the net present value of its
closure and post-closure commitments recorded in 2004 assuming a 2.5% inflation
rate and a 7.5% discount rate. The resulting closure and post-closure obligation
is recorded on the balance sheet as an addition to site costs and amortized to
depletion expense as the landfill's airspace is consumed. During the six months
ended June 30, 2003 and 2004, the Company expensed approximately $287 and $205,
respectively, or an average of $0.08 and $0.06 per ton consumed, respectively,
related to closure and post-closure accretion expense.
7
The following is a reconciliation of the Company's closure and post-closure
liability balance from December 31, 2003 to June 30, 2004:
Closure and post-closure liability at December 31, 2003 $ 5,479
Changes resulting from adjustments to the timing or amount
of undiscounted cash flows (880)
Liabilities incurred 213
Accretion expense 205
--------
Closure and post-closure liability at June 30, 2004 $ 5,017
========
At June 30, 2004, $12,167 of the Company's restricted cash balance was for
purposes of settling future closure and post-closure liabilities.
6. ACQUISITIONS
During the six months ended June 30, 2004, the Company acquired seven
non-hazardous solid waste collection and disposal businesses. Aggregate
consideration for the acquisitions consisted of $10,384 in cash (net of cash
acquired), $4,346 in notes payable to sellers, common stock warrants valued at
$172, and the assumption of debt totaling $11,179.
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 June 30, 2004, the Company had eight 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.
A summary of the preliminary purchase price allocations for the acquisitions
consummated in the six months ended June 30, 2004 is as follows:
Acquired assets:
Accounts receivable $ 1,109
Prepaid expenses and other current assets 60
Property and equipment 9,387
Goodwill 13,087
Long-term franchise agreements and contracts 5,087
Other intangibles 259
Non-competition agreements 118
Assumed liabilities:
Accounts payable (1,421)
Accrued liabilities (1,540)
Deferred taxes (143)
Debt and other liabilities assumed (15,619)
---------
Total cash consideration, net $ 10,384
=========
8
During the six months ended June 30, 2004, the Company paid $2,161 of
acquisition-related liabilities accrued at December 31, 2003.
The seven acquisitions acquired in the six months ended June 30, 2004 were not
significant to the Company's results of operations.
Goodwill and long-term franchise agreements, contracts, and other intangibles
acquired in the six months ended June 30, 2004 totaling $12,121 and $5,094,
respectively, are expected to be deductible for tax purposes.
7. INTANGIBLE ASSETS
Intangible assets, exclusive of goodwill, consist of the following as of June
30, 2004:
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-------------- -------------- --------------
Amortizable intangible assets:
Long-term franchise agreements
and contracts $ 51,732 $ (2,845) $ 48,887
Non-competition agreements 4,104 (2,837) 1,267
Other, net 2,675 (1,023) 1,652
---------- ---------- ----------
58,511 (6,705) 51,806
Nonamortized intangible assets:
Indefinite-lived intangible assets 17,202 -- 17,202
---------- ---------- ----------
Intangible assets, exclusive of goodwill $ 75,713 $ (6,705) $ 69,008
========== ========== ==========
The weighted-average amortization periods for long-term franchise agreements,
non-competition agreements and other intangibles acquired during the six months
ended June 30, 2004 are 21.4 years, 5 years and 10 years, respectively.
Estimated future amortization expense of amortizable intangible assets for the
next five years is as follows:
For the year ended December 31, 2004 $ 2,409
For the year ended December 31, 2005 2,318
For the year ended December 31, 2006 2,119
For the year ended December 31, 2007 1,923
For the year ended December 31, 2008 1,726
8. LONG-TERM DEBT
The Company has entered into interest rate swap agreements to hedge risk
associated with fluctuations in interest rates. The interest rate swap
agreements have a notional amount of $250,000, expire in 2007, and effectively
fix the interest rate on the notional amount at an average interest rate of
2.55%, plus applicable margin. 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.
In March 2004, the Company refinanced the senior secured 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 credit facility to
$600,000.
9
In April 2004, the Company redeemed its $150,000 aggregate principal amount 5.5%
Convertible Subordinated Notes due 2006. Holders of the notes chose to convert a
total of $123,648 principal amount of the notes into 4,876,968 shares of Waste
Connections common stock at a price of approximately $25.35 per share, or
approximately 39.443 shares per $1 principal amount of notes, plus cash in lieu
of fractional shares. The Company redeemed the balance of $26,352 principal
amount of the notes with proceeds from its credit facility at a redemption price
of $1.022 per $1 principal amount of the notes. All holders of the notes also
received accrued interest of $0.0275 per $1 principal amount of notes. As a
result of the redemption, the Company recognized $1,478 of pre-tax expense
($1,125 net of taxes) in April 2004.
On July 15, 2004, the Company completed an exchange offer with respect to its
$175,000 aggregate principal amount Floating Rate Convertible Subordinated Notes
due 2022 (the "2022 Notes"). As of that date, holders of $172,022 principal
amount of old 2022 Notes had tendered their notes in exchange for an equal
principal amount of the Company's new 2022 Notes. The Company offered to
exchange $1 in principal amount of new 2022 Notes for each $1 in principal
amount of its old 2022 Notes accepted for exchange. Through the exchange offer,
the Company updated certain features of the old 2022 Notes with terms that are
now prevalent in the convertible note market, including net share settle and
dividend protection provisions. The initial conversion price of the new 2022
Notes is $32.26 per share, which is equal to approximately 30.9981 shares per $1
in principal amount of new 2022 New Notes, and reflects the Company's
three-for-two split of its common stock in June 2004. Holders of $2,978
principal amount of old 2002 Notes had not tendered their notes in exchange for
new 2022 Notes as of that date, and, as a result, their notes will remain
subject to the provisions of the Indenture governing the old 2022 Notes, except
in the case of any such holders complying with the guaranteed delivery
procedures outlined in the exchange offer.
9. DILUTED EARNINGS PER SHARE CALCULATION
The following table sets forth the numerator and denominator used in the
computation of diluted earnings per common share:
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
2003 2004 2003 2004
----------- ----------- ----------- -----------
Numerator:
Net income for basic earnings per share $ 16,639 $ 19,171 $ 31,334 $ 35,373
Interest expense on convertible
subordinated notes due 2006, net of tax
effects 1,476 231 2,951 1,707
-----------------------------------------------------
Net income for diluted earnings per share $ 18,115 $ 19,402 $ 34,285 $ 37,080
=====================================================
Denominator:
Basic shares outstanding 42,397,502 47,425,227 42,260,726 45,233,354
Dilutive effect of convertible
subordinated notes due 2006 5,917,163 910,333 5,917,163 3,413,748
Dilutive effect of options and warrants 880,865 1,086,709 909,767 1,027,839
Dilutive effect of restricted stock 4,043 21,200 6,284 17,326
-----------------------------------------------------
Diluted shares outstanding 49,199,573 49,443,469 49,093,940 49,692,267
=====================================================
As of June 30, 2004, all outstanding stock options and warrants were included in
the computation of diluted income per share, as they were all dilutive.
10
10. COMPREHENSIVE INCOME
Comprehensive income includes changes in the fair value of interest rate swaps
that qualify for hedge accounting. The difference between net income and
comprehensive income for the three and six months ended June 30, 2003 and 2004
is as follows:
Three months ended Six months ended
June 30, June 30,
----------------------------------------------
2003 2004 2003 2004
----------------------------------------------
Net income $ 16,639 $ 19,171 $ 31,334 $ 35,373
Unrealized gain on interest rate swaps, net
of tax expense of $119 and $2,660 for the three
months ended June 30, 2003 and 2004, respectively,
and $703 and $1,572 for the six months ended June
30, 2003 and 2004, respectively 203 4,529 1,112 2,677
----------------------------------------------
Comprehensive income $ 16,842 $ 23,700 $ 32,446 $ 38,050
==============================================
The components of other comprehensive income and related tax effects for the
three and six months ended June 30, 2003 and 2004 are as follows:
Three months ended June 30, 2003
------------------------------------------
Gross Tax effect Net of tax
------------------------------------------
Amounts reclassified into earnings $ 1,603 $ 593 $ 1,010
Changes in fair value of interest rate swaps (1,281) (474) (807)
------------------------------------------
$ 322 $ 119 $ 203
==========================================
Three months ended June 30, 2004
------------------------------------------
Gross Tax effect Net of tax
------------------------------------------
Amounts reclassified into earnings $ 889 $ 329 $ 560
Changes in fair value of interest rate swaps 6,300 2,331 3,969
------------------------------------------
$ 7,189 $ 2,660 $ 4,529
==========================================
Six months ended June 30, 2003
------------------------------------------
Gross Tax effect Net of tax
------------------------------------------
Amounts reclassified into earnings $ 3,108 $ 1,150 $ 1,958
Changes in fair value of interest rate swaps (1,293) (447) (846)
------------------------------------------
$ 1,815 $ 703 $ 1,112
==========================================
Six months ended June 30, 2004
------------------------------------------
Gross Tax effect Net of tax
------------------------------------------
Amounts reclassified into earnings $ 1,366 $ 506 $ 860
Changes in fair value of interest rate swaps 2,883 1,066 1,817
------------------------------------------
$ 4,249 $ 1,572 $ 2,677
==========================================
11. SHARE REPURCHASE PROGRAM
On May 3, 2004, the Company announced that its Board of Directors had authorized
a common stock repurchase program for the repurchase of up to $200 million of
common stock over a two-year period. Under the program, stock repurchases may be
made in the open market or in privately negotiated transactions from time to
time at management's discretion. The timing and amounts of any repurchases will
depend on many factors, including the Company's capital structure, the market
price of the common stock and overall market conditions. As of June 30, 2004,
the Company had repurchased 1,029,300 shares of its common stock under this
program at a cost of $27,887.
11
12. COMMITMENTS AND CONTINGENCIES
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 Court of Appeal heard oral arguments over our appeal on June
16, 2004. 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 June 30, 2004, the Company had
$4,209 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 $4,209 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 as a result of its high deductible
programs. 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 in Valley County,
Nebraska. 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, 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 because the negligence of Father Rooney was
equal to or greater than any negligence on the part of the Company's driver, and
the Company intends to defend this case vigorously. This case is in the early
stages of discovery and the Company has not accrued any potential loss as of
June 30, 2004; 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.
Additionally, the Company is party to various legal proceedings in the ordinary
course of business and as a result of the extensive governmental regulation of
the solid waste industry. The Company's management does not believe that these
proceedings, either individually or in the aggregate, are likely to have a
material adverse effect on its business, financial condition, operating results
or cash flows.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain information contained in this Quarterly Report on Form 10-Q, including,
without limitation, information appearing under this Part I, Item 2, 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 differ materially from those projected by any
forward-looking statements in this Quarterly Report on Form 10-Q. Factors that
could cause actual results to differ from those projected include, but are not
limited to, the following: (1) difficulties in making acquisitions, acquiring
exclusive contracts and generating internal growth may cause our growth to be
slower than expected; (2) our growth and future financial performance depend
significantly on our ability to integrate acquired businesses into our
organization and operations; (3) our acquisitions may not be successful,
resulting in changes in strategy, operating losses or a loss on sale of the
business acquired; (4) we compete for acquisition candidates with other
purchasers, some of which have greater financial resources than we do, and these
other purchasers may be able to offer more favorable acquisition terms, thus
limiting our ability to grow through acquisition; (5) timing of acquisitions may
cause fluctuations in our quarterly results, which may cause our stock price to
decline; (6) rapid growth may strain our management, operational, financial and
other resources; (7) we may be unable to compete effectively with governmental
service providers and larger and better capitalized companies, which may result
in reduced revenues and lower profits; and (8) we may lose contracts through
competitive bidding, early termination or governmental action, which would cause
our revenues to decline. These risks and uncertainties, as well as others, are
discussed in greater detail in our other filings with the Securities and
Exchange Commission, including our most recent Annual Report on Form 10-K. There
may be additional risks of which we are not presently aware or that we currently
believe are immaterial which could have an adverse impact on our business. We
make no commitment to revise or update any forward-looking statements in order
to reflect events or circumstances after the date any such statement is made.
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included elsewhere herein.
OVERVIEW
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. As of June 30, 2004,
we served more than one million commercial, industrial and residential customers
from a network of 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 104 collection
operations and operated or owned 33 transfer stations, operated or owned 33
Subtitle D landfills, owned two construction and demolition landfills and
operated or owned 26 recycling facilities. We also owned two Subtitle D landfill
sites that are permitted for operation, but not constructed as of June 30, 2004.
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 our financial condition or operating performance. There were
no significant changes to our critical accounting estimates and assumptions in
the six months ended June 30, 2004. Refer to our Annual Report on Form 10-K for
a complete description of our critical accounting estimates and assumptions.
13
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 six months ended June 30, 2004
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.
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 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 includes 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 workers' compensation exposure,
comprehensive maintenance and health and safety programs, and increasing the use
of transfer stations to further enhance internalization rates. Our
high-deductible insurance covers automobile liability, general liability,
workers' compensation claims, 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, customer lists, 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.
At June 30, 2004, we had 285.6 million tons of permitted remaining airspace
capacity and 83.3 million tons of deemed probable expansion airspace capacity at
our 26 owned and operated landfills and landfills operated under
14
life-of-site operating contracts. We do not measure remaining airspace capacity
at the eight landfills we operate under contracts with finite terms. Based on
remaining permitted capacity as of June 30, 2004, and projected annual disposal
volumes, the average remaining landfill life for our owned landfills and
landfills operated under life-of-site operating contracts is approximately 45
years. The operating contracts for which the contracted term is not the life of
the landfill have expiration dates from 2004 to 2013.
The disposal tonnage that we received in the six months ended June 30, 2003 and
2004 at all of our landfills owned or operated during the respective period is
shown below (tons in thousands):
June 30, 2003 June 30, 2004
----------------------- -----------------------
Number of Total Number of Total
Sites Tons Sites Tons
--------- --------- --------- ---------
Owned landfills or landfills operated
under life-of-site contracts 23 2,660 26 3,169
Operated landfills under limited term
operating agreements 7 366 9 494
--------- --------- --------- ---------
30 3,026 35 3,663
--------- --------- --------- ---------
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
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
June 30, 2004, we had $0.1 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 June 30, 2004, we had $4.2 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 $4.2
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 periodically evaluate acquired assets for potential impairment indicators. If
any impairment indicators are present, 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. 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. As of June 30, 2004, there have been no adjustments to the
carrying amounts of intangibles, including goodwill, resulting from these
evaluations. As of June 30, 2004, goodwill and other intangible assets
represented 47.1% of total assets and 97.0% of stockholders' equity.
NEW ACCOUNTING PRONOUNCEMENTS
For a description of the new accounting standards that affect us, see Note 2 to
our Condensed Consolidated Financial Statements included under Part I, Item 1 of
this Form 10-Q.
15
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2004
The following table sets forth items in our consolidated statements of income as
a percentage of revenues for the periods indicated.
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
2003 2004 2003 2004
-------- -------- -------- --------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of operations 55.8 56.6 55.8 56.8
Selling, general and
administrative expenses 9.5 9.6 9.8 10.0
Depreciation and
amortization expense 8.1 8.7 8.2 8.8
-------- -------- -------- --------
Operating income 26.6 25.1 26.2 24.4
Interest expense, net (5.6) (3.2) (5.9) (3.9)
Other expense (0.1) (1.0) (0.1) (0.5)
Minority interests (1.9) (1.9) (1.8) (1.8)
Income tax expense (7.0) (7.1) (6.8) (6.8)
Cumulative effect of change in
accounting principle -- -- 0.1 --
-------- -------- -------- --------
Net income 12.0% 11.9% 11.7% 11.4%
======== ======== ======== ========
REVENUES. Total revenues increased $21.7 million, or 15.6%, to $160.6 million
for the three months ended June 30, 2004, from $138.9 million for the three
months ended June 30, 2003. Acquisitions closed subsequent to June 30, 2003
increased revenues approximately $15.1 million. Increases in recyclable
commodity prices increased revenues by $1.2 million, and increased prices
charged to our customers and volume changes in our existing business resulted in
a net revenue increase of approximately $5.4 million. The volume increase was
partially offset by exiting the roll-off business at our Georgia operations.
Revenues for the six months ended June 30, 2004 increased $42.5 million, or
15.9%, to $309.8 million from $267.3 million for the six months ended June 30,
2003. Acquisitions closed subsequent to June 30, 2003, and the full-period
inclusion of revenues from acquisitions closed during the six months ended June
30, 2003, increased revenues approximately $30.7 million. Increases in
recyclable commodity prices increased revenues by $2.1 million, and increased
prices charged to our customers and volume changes in our existing business
resulted in a net revenue increase of $9.7 million. The volume increase was
partially offset by exiting the roll-off business at our Georgia operations and
the loss of certain municipal contracts that expired subsequent to June 30,
2003, and were not renewed.
COST OF OPERATIONS. Total cost of operations increased $13.5 million, or 17.4%,
to $90.9 million for the three months ended June 30, 2004, from $77.4 million
for the three months ended June 30, 2003. Cost of operations for the six months
ended June 30, 2004, increased $26.8 million, or 17.9%, to $176.0 million from
$149.2 million for the six months ended June 30, 2003. The increases were
primarily attributable to operating costs associated with acquisitions closed
subsequent to June 30, 2003, increases in medical expenses for our self-insured
employee health plans, higher fuel costs and increased expenses associated with
higher collection volumes.
Cost of operations as a percentage of revenues increased 0.8 percentage points
to 56.6% for the three months ended June 30, 2004, from 55.8% for the three
months ended June 30, 2003. Cost of operations as a percentage of revenues for
the six months ended June 30, 2004, increased 1.0 percentage point to 56.8% from
55.8% for the six months ended June 30, 2003. The increases as a percentage of
revenues were primarily attributable to companies acquired subsequent to June
30, 2003, having operating margins below our company average associated with a
higher mix of collection volumes, higher labor and other operating costs,
increased fuel costs, increased medical
16
expenses resulting from a higher volume of claims and an increase in the number
of claims reaching our per claim deductible limits for our self-insured employee
health plans.
SG&A. SG&A expenses increased $2.2 million, or 17.2%, to $15.4 million for the
three months ended June 30, 2004, from $13.2 million for the three months ended
June 30, 2003. SG&A expenses for the six months ended June 30, 2004 increased
$4.9 million, or 19.1%, to $31.0 million from $26.1 million for the six months
ended June 30, 2003. Our SG&A expenses for the three and six months ended June
30, 2004, increased from the prior year periods as a result of additional
personnel from acquisitions closed subsequent to June 30, 2003, increased
accounting expenses related to new corporate governance requirements, increased
management information system expenses, increased employee bonus and stock
compensation expense recognized in the three months ended June 30, 2004, and
increased payroll tax expenses resulting from an increase in exercises of stock
options during the first six months of 2004, partially offset by a decline in
bad debt expense due to improved customer collections.
SG&A expenses as a percentage of revenues for the three months ended June 30,
2004, increased 0.1 percentage points to 9.6% from 9.5% for the three months
ended June 30, 2003. SG&A as a percentage of revenues for the six months ended
June 30, 2004, increased 0.2 percentage points to 10.0% from 9.8% for the six
months ended June 30, 2003. The increases were primarily due to increased
employee bonus and stock compensation expense and increased payroll tax expenses
resulting from increases in exercises of stock options, partially offset by a
decline in bad debt expense due to improved customer collections.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased
$2.6 million, or 22.8%, to $13.9 million for the three months ended June 30,
2004, from $11.3 million for the three months ended June 30, 2003. Depreciation
and amortization expense for the six months ended June 30, 2004, increased $5.4
million, or 24.9%, to $27.3 million from $21.9 million for the six months ended
June 30, 2003. The increases were primarily attributable to depreciation and
depletion associated with acquisitions closed subsequent to June 30, 2003,
increased depreciation expense resulting from new equipment acquired to support
our base operations, increased amortization expense associated with intangible
assets acquired in acquisitions closed subsequent to June 30, 2003, and
increased depletion expense resulting from higher volumes at our landfill
operations.
Depreciation and amortization expense as a percentage of revenues increased 0.6
percentage points to 8.7% for the three months ended June 30, 2004, from 8.1%
for the three months ended June 30, 2003. Depreciation and amortization expense
as a percentage of revenues for the six months ended June 30, 2004, increased
0.6 percentage points to 8.8% from 8.2% for the six months ended June 30, 2003.
The increases in depreciation and amortization as a percentage of revenues were
the result of depreciation expense associated with new equipment acquired
subsequent to June 30, 2003, which replaced older equipment with lower
depreciation costs, increased amortization expense associated with intangible
assets acquired in acquisitions closed subsequent to June 30, 2003.
OPERATING INCOME. Operating income increased $3.4 million, or 9.1%, to $40.4
million for the three months ended June 30, 2004, from $37.0 million for the
three months ended June 30, 2003. Operating income for the six months ended June
30, 2004 increased $5.3 million, or 7.6%, to $75.5 million from $70.2 million
for the six months ended June 30, 2003. The increases were primarily
attributable to the growth in revenues, partially offset by increased operating
costs, recurring SG&A expenses to support the revenue growth, increases in
employee bonus and stock compensation expense and increased depreciation and
amortization expenses.
Operating income as a percentage of revenues decreased 1.5 percentage points to
25.1% for the three months ended June 30, 2004, from 26.6% for the three months
ended June 30, 2003. Operating income as a percentage of revenues for the six
months ended June 30, 2004, decreased 1.8 percentage points to 24.4% from 26.2%
for the six months ended June 30, 2003. The decreases were due to the
aforementioned percentage of revenue increases in cost of operations, SG&A
expenses, and depreciation and amortization expenses.
INTEREST EXPENSE. Interest expense decreased $2.6 million, or 33.5%, to $5.2
million for the three months ended June 30, 2004, from $7.8 million for the
three months ended June 30, 2003. Interest expense for the six months ended June
30, 2004, decreased $3.8 million, or 24.2%, to $12.0 million from $15.8 million
for the six months ended June 30, 2003. The decreases were attributable to
declines in our total outstanding debt balances and a decrease in the effective
interest rate of our aggregate debt balance, due primarily to the expiration of
two interest rate swap agreements in late 2003 that required fixed interest
payments in excess of our variable rate borrowing cost.
17
The decrease in our total outstanding debt balance was primarily due to the
redemption of our $150 million aggregate principal amount, 5.5% Convertible
Subordinated Notes due 2006, which resulted in $123.6 million of the outstanding
note principal being converted into our common stock, partially offset by
additional borrowings to fund acquisitions and repurchases of our common stock.
OTHER EXPENSE. Other expense increased to $1.6 million for the three months
ended June 30, 2004, from $0.2 million for the three months ended June 30, 2003.
Other expense increased to $1.5 million for the six months ended June 30, 2004,
from $0.2 million for the six months ended June 30, 2003. Other expense in the
three and six months ended June 30, 2004, includes $1.5 million of costs
associated with the redemption of our $150 million 5.5% Convertible Subordinated
Notes due 2006. These redemption costs included early redemption premium
payments and the write-off of a portion of the unamortized debt issuance costs.
The remaining components of other expense in 2003 and 2004 were net losses
incurred on the disposal of certain assets.
MINORITY INTERESTS. Minority interests increased $0.5 million, or 17.8%, to $3.1
million for the three months ended June 30, 2004, from $2.6 million for the
three months ended June 30, 2003. Minority interest increased $0.8 million, or
16.6%, to $5.7 million for the six months ended June 30, 2004, from $4.9 million
for the six months ended June 30, 2003. The increases in minority interests were
due to increased earnings by our majority-owned subsidiaries.
PROVISION FOR INCOME TAXES. Income taxes increased $1.6 million, or 16.7%, to
$11.4 million for the three months ended June 30, 2004, from $9.8 million for
the three months ended June 30, 2003. Income taxes increased $2.8 million, or
15.0%, to $21.0 million for the six months ended June 30, 2004, from $18.2
million for the six months ended June 30, 2003. These increases were due to
increased pre-tax earnings and an increase in our effective tax rate. Our
effective tax rates for the three and six months ended June 30, 2004 were 37.3%
and 37.2%, respectively, an increase from 37.0% in the prior year periods. The
increase in our effective tax rate was due to the recognition of non-tax
deductible expenses in 2004, partially offset by the reversal of certain tax
contingencies that expired in the current year periods.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Cumulative effect of change
in accounting principle for the six months ended June 30, 2003, consisted of a
$0.3 million gain, net of tax effects, resulting from our adoption of SFAS No.
143 on January 1, 2003. Our adoption of SFAS No. 143 required us to record a
cumulative change in accounting for landfill closure and post-closure
obligations retroactively to the date of the acquisition of each landfill.
NET INCOME. Net income increased $2.6 million, or 15.2%, to $19.2 million for
the three months ended June 30, 2004, from $16.6 million for the three months
ended June 30, 2003. Net income increased $4.1 million, or 12.9% to $35.4
million for the six months ended June 30, 2004, from $31.3 million for the six
months ended June 30, 2004. The increases were primarily attributable to
increased operating income and decreased interest expense, partially offset by
increased minority interest expense, other expense and income tax expense.
LIQUIDITY AND CAPITAL RESOURCES
Our business is capital intensive. Our capital requirements include fleet and
containers, facilities, and 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 June 30, 2004, we had a working capital deficit of $14.1 million,
including cash and equivalents of $5.6 million. 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 expenditure
requirements to reduce our indebtedness under our credit facility and to
minimize our cash balances.
In October 2003, we entered into a new credit facility to increase the maximum
borrowings available to us to $575 million. This new credit facility consisted
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, we refinanced the senior secured term loan
portion of our 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
18
remained consistent. In addition, we increased the amount outstanding under the
senior secured term loan from $175 million to $200 million, resulting in an
increase in the size of the facility to $600 million. The senior secured
revolving credit facility matures in October 2008. The senior secured term loan
requires annual principal payments equal to 1% of the initial term loan amount
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. 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, 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. At June 30, 2004, the
applicable margin on the term loan was 25 basis points in the case of loans
based on the Base Rate and 175 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
restrictions on us relating to, among other things, additional indebtedness,
investments, acquisitions, asset sales, mergers, dividends, distributions, and
repurchases and redemption of capital stock. The new credit facility also
requires that we maintain specified financial ratios and balances. As of June
30, 2004, we were in compliance with all applicable covenants in our 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 $16.0 million increase in outstanding
borrowings under our credit facility in 2004 was primarily due to our cash
redemption of a portion of our $150 million aggregate principal amount, 5.5%
Convertible Subordinated Notes due 2006 and our repurchase of outstanding common
stock, 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.
As of June 30, 2004, we had the following contractual obligations (in
thousands):
Principal Payments Due by Period
--------------------------------
Less Than
Recorded Obligations Total 1 Year 2 to 3 Years 4 to 5 Years Over 5 Years
-------------------- ------------ ------------ ------------ ------------ ------------
Long-term debt (1) $ 476,050 $ 8,624 $ 15,622 $ 65,838 $ 385,966
--------------------------------------------------------------------------------
Total contractual cash
obligations $ 476,050 $ 8,624 $ 15,622 $ 65,838 $ 385,966
================================================================================
(1) Long-term debt payments include $44 million in principal payments due 2008
related to our senior secured revolving credit facility and $198 million in
principal payments due 2010 related to our senior secured term loan, both
under our credit facility. As of June 30, 2004, our credit facility allowed
us to borrow up to $600 million.
Amount of Commitment Expiration Per Period
------------------------------------------
Less Than
Unrecorded Obligations Total 1 Year 2 to 3 Years 4 to 5 Years Over 5 Years
---------------------- ------------ ------------ ------------ ------------ ------------
Operating leases (2) $ 27,102 $ 3,994 $ 6,289 $ 4,628 $ 12,191
Unconditional purchase
obligations(2) 15,735 10,235 5,500 -- --
--------------------------------------------------------------------------------
Total commercial
commitments $ 42,837 $ 14,229 $ 11,789 $ 4,628 $ 12,191
================================================================================
(2) We are party to operating lease agreements and unconditional purchase
obligations. 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 three or
six months ended June 30, 2004, nor are they expected to have a material
impact on our future financial position, results of operations or
liquidity.
19
We are party to stand-by letters of credit and financial surety bonds. 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 six months ended June 30, 2004, nor are they
expected to have a material impact on our future financial position, results of
operations or liquidity.
The minority interest holders of one of our majority-owned subsidiaries have a
currently exercisable option (the "put option") to require us 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 June 30, 2004, the minority
interest holders' pro rata share of the subsidiary's fair market value is
estimated to be worth between $69 million and $83 million. Because the put
option is required at fair market value, no amounts have been accrued relative
to the put option.
For the six months ended June 30, 2004, net cash provided by operating
activities was $84.1 million. Of this amount, $4.1 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 six months ended June 30,
2004, consist of non-cash expenses including $27.3 million of depreciation and
amortization, $5.7 million of minority interest expense, $1.4 million of debt
issuance cost amortization, and the deferral of $9.9 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 six months ended June 30, 2004, net cash used in investing activities
was $41.6 million. Of this amount, $12.4 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, 2003. Cash used
for capital expenditures was $33.9 million, which was primarily for investments
in fixed assets, consisting of trucks, containers, other equipment and landfill
development. Cash provided by investing activities included $3.9 million of net
draws of restricted cash.
For the six months ended June 30, 2004, net cash used in financing activities
was $42.3 million, which included $19.3 million of proceeds from stock option
and warrant exercises, less $27.5 million of net payments under our various debt
arrangements, $27.9 million to repurchase shares of our common stock, $5.9
million of cash distributions to minority interest holders and $0.3 million of
debt issuance costs, primarily related to our amended credit facility.
We made approximately $33.9 million in capital expenditures for property and
equipment during the six months ended June 30, 2004. We expect to make capital
expenditures of approximately $70.0 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 us. 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 as a result.
SEASONALITY
Based on historic trends, 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
20
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.
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 fixed 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 was February 2004 and each swap agreement expires in February
2007.
In March 2004, we entered into two additional three-year interest rate swap
agreements. Each interest rate swap agreement has a notional amount of $37.5
million and effectively fixed the interest rate on the notional amount at an
interest rate of 2.25%, plus applicable margin.
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 June 30,
2003 and 2004, of $249.4 million and $202.4 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 percentage point increase in interest rates on our
variable-rate debt as of June 30, 2003 and 2004, would decrease our annual
pre-tax income by approximately $2.5 million and $2.0 million, respectively. 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 facilities 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 June 30, 2004 would not materially affect our cash flows or
pre-tax income.
21
ITEM 4. CONTROLS AND PROCEDURES
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 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as of June 30, 2004. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective, in all material
respects, to ensure that information required to be disclosed in the reports we
file or submit under the Exchange Act is recorded, processed, summarized and
reported as and when required.
During the quarter ended June 30, 2004, there were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date they were evaluated in connection with the
preparation of this quarterly report on Form 10-Q.
22
PART II - OTHER INFORMATION
ITEM 1. 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
Court of Appeal heard oral arguments over our appeal on June 16, 2004. 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 June 30, 2004, we had $4.2 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 $4.2
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 as a result of our high deductible programs. 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 in Valley County, Nebraska. 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 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 early stages of discovery, and we have not accrued any
potential loss as of June 30, 2004; 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.
23
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
On May 3, 2004, we announced that our Board of Directors had authorized a common
stock repurchase program for the repurchase of up to $200 million of our common
stock over a two-year period. Under the program, we may repurchase stock in the
open market or in privately negotiated transactions from time to time at
management's discretion. The timing and amounts of any repurchases will depend
on many factors, including our capital structure, the market price of our common
stock and overall market conditions. The table below reflects repurchases we
have made as of June 30, 2004:
(In thousands, except share and per share amounts; amounts below reflect our
three-for-two split of our common stock in June 2004):
Total Number Maximum
of Shares Approximate Dollar
Total Number Average Purchased as Value of Shares that
of Shares Price Paid Part of Publicly May Yet Be Purchased
Period Purchased Per Share Announced Program Under the Program
------------------------------------------------------------------------------------------------------------------------
4/1/04 - 4/30/04 283,350 (1) $ 27.17 -- N/A
5/1/04 - 5/31/04 682,950 (2) 26.95 637,950 $ 182,806
6/1/04 - 6/30/04 63,000 27.99 63,000 181,042
--------------------------------------------------------------------------------------------------
Total 1,029,300 $ 27.07 700,950 $ 181,042
(1) These shares were purchased in open market transactions other than through
a publicly announced program. This program was approved by our Board of
Directors on February 25, 2004 and authorized us to repurchase up to
approximately $45 million of our common stock from time to time.
(2) Under the program described in footnote 1 above, 45,000 shares of common
stock were purchased in open market transactions on May 3, 2004.
24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(Amounts below reflect our three-for-two split of our common stock in June
2004.)
Our annual meeting of stockholders was held on May 26, 2004.
Ron J. Mittelstaedt was elected as a Class III director by the votes indicated
below:
Total Votes For: 39,840,939
Total Votes Withheld: 1,634,452
The term for Mr. Mittelstaedt will run until the date of our annual meeting of
stockholders in 2007 and until a successor has been duly elected and qualified.
Continuing in office as Class I directors, whose term runs until the annual
meeting of stockholders in 2005 and until their successors have been duly
elected and qualified, were Eugene V. Dupreau and Robert H. Davis. Continuing in
office as Class II directors, whose term runs until the annual meeting of
stockholders in 2006 and until their successors have been duly elected and
qualified, were Michael W. Harlan and William J. Razzouk.
The following proposal was adopted at the annual meeting by the votes indicated
below:
To approve the amendment of our Amended and Restated Certificate of
Incorporation to (a) increase the authorized number of shares of common stock
from 50,000,000 to 100,000,000 shares and (b) delete references to the Series A
Preferred Stock which converted to common stock upon the completion of our
initial public offering.
Total Votes For: 39,084,540
Total Votes Against: 2,373,661
Total Votes Abstained: 17,190
The following proposal was adopted at the annual meeting by the votes indicated
below:
To approve the 2004 Equity Incentive Plan.
Total Votes For: 24,081,675
Total Votes Against: 13,864,513
Total Votes Abstained: 52,461
Total Broker No-Vote: 3,476,742
The following proposal was adopted at the annual meeting by the votes indicated
below:
To ratify the appointment of Ernst & Young LLP as our independent auditors for
Waste Connections for the year 2004.
Total Votes For: 40,916,919
Total Votes Against: 547,117
Total Votes Abstained: 11,355
25
ITEM 5. OTHER INFORMATION
(a) In accordance with Rule 416(b) promulgated under the Securities Act of
1933, as amended (the "Securities Act"), the number of shares of our
common stock registered for sale under the Securities Act by the
following Registration Statements on Form S-8 has been deemed to be
increased to include the shares of common stock issued in connection
with our three-for-two stock split in the form of a 50% stock dividend
effected on June 24, 2004 (the "Stock Split"), to the extent issued
with respect to shares designated by such registration statements but
unsold as of the date of the Stock Split: Registration Statement on
Form S-8 (Reg. No. 333-102413) filed with the SEC on January 8, 2003;
Registration Statement on Form S-8 (Reg. No. 333-90810) filed with the
SEC on June 19, 2002; Registration Statement on Form S-8 (Reg. No.
333-83172) filed with the SEC on February 21, 2002; Registration
Statement on Form S-8 (Reg. No. 333-42096) filed with the SEC on July
24, 2000; Registration Statement on Form S-8 (Reg. No. 333-72113)
filed with the SEC on February 10, 1999; and Registration Statement on
Form S-8 (Reg. No. 333-63407) filed with the SEC on September 15,
1998.
(b) On July 20, 2004, our Board of Directors approved amendments to our
Amended and Restated Bylaws that, among other things, affect the
advance notice procedures by which stockholders may recommend nominees
for our board of directors, as described in the Proxy Statement for
our annual stockholders meeting held on May 26, 2004. As a result of
such amendments, in order to be considered for inclusion in our proxy
materials for future annual meetings of stockholders, notice of a
stockholder's nomination of a person for election to the Board must be
received by the Secretary of Waste Connections at our principal
executive offices no later than the close of business (California
time) on the one hundred twentieth (120th) day prior to the date which
is the same month and day as the date of our proxy statement released
to stockholders in connection with the previous year's annual meeting.
To be considered timely, stockholder proposals submitted after this
deadline must be delivered to or mailed and received at our principal
executive offices no later than the close of business (California
time) on the ninetieth (90th) day prior to the meeting of
stockholders. The amendments to our Amended and Restated Bylaws did
not otherwise materially change the procedures governing stockholder
nominations of candidates for our Board of Directors described therein
and in our most recent Proxy Statement.
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
-------------- -----------------------
3.1 (r) Amended and Restated Certificate of Incorporation of
the Registrant, in effect as of the date hereof
3.2 Amended and Restated Bylaws 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
4.10 (r) Form of Note for the Registrant's new Floating Rate
Convertible Subordinated Notes Due 2022
4.11 (r) (+) Form of Indenture between the Registrant, as Issuer,
and U.S. Bank National Association, as Trustee
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 (e) Second Amended Employment Agreement between the
Registrant and Darrell Chambliss, dated as of June 1,
2000
10.7 (e) Second Amended Employment Agreement between the
Registrant and Michael Foos, dated as of June 1, 2000
10.8 (a) Employment Agreement between the Registrant and Steven
Bouck, dated as of February 1, 1998
10.9 (a) Employment Agreement between the Registrant and Eugene
V. Dupreau, dated as of February 23, 1998
10.10 (a) Form of Indemnification Agreement entered into by the
Registrant and each of its directors and officers
27
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
-------------- -----------------------
10.11 (b) (+) Loan Agreement, dated as of June 1, 1998, between
Madera Disposal Systems, Inc. and the California
Pollution Control Financing Authority
10.12 (b) Employment Agreement between the Registrant and David
M. Hall, dated as of July 8, 1998
10.13 (g) Employment Agreement between the Registrant and James
M. Little, dated as of September 13, 1999
10.14 (g) Employment Agreement between the Registrant and Jerri
L. Hunt, dated as of October 25, 1999
10.15 (j) Employment Agreement between the Registrant and Kenneth
O. Rose, dated as of May 1, 2002
10.16 (j) Employment Agreement between the Registrant and Robert
D. Evans, dated as of May 10, 2002
10.17 (k) 2002 Senior Management Equity Incentive Plan
10.18 (k) 2002 Stock Option Plan
10.19 (l) 2002 Restricted Stock Plan
10.20 (m) Consultant Incentive Plan
10.21 (n) Employment Agreement between the Registrant and David
G. Eddie, dated as of May 15, 2001
10.22 (n) Employment Agreement between the Registrant and
Worthing F. Jackman, dated as of April 11, 2003
10.23 (o) Amended and Restated Revolving Credit and Term Loan
Agreement dated as of October 22, 2003
10.24 (p) Refinancing Facility Amendment to Amended and Restated
Revolving Credit and Term Loan Agreement dated as of
March 2, 2004
10.25 (q) Second Amended and Restated Employment Agreement
between the Registrant and Ronald J. Mittelstaedt,
dated March 1, 2004
10.26 Amendment No. 2 to Amended and Restated Revolving
Credit and Term Loan Agreement, dated May 4, 2004
10.27 Nonqualified Deferred Compensation Plan, dated July 1,
2004
10.28 2004 Equity Incentive Plan, as amended and restated
July 20, 2004
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
(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, filed on July 24, 2000.
28
(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.
(p) Incorporated by reference to the exhibit filed with the
Registrant's Form 10-K filed on March 12, 2004.
(q) Incorporated by reference to the exhibit filed with the
Registrant's Form 10-Q filed on April 22, 2004.
(r) Incorporated by reference to the exhibit filed with the
Registrant's Form T-3 filed on June 16, 2004.
(+) Filed without exhibits and schedules (to be provided
supplementally on request of the Commission).
(b) Reports on Form 8-K:
On April 15, 2004, we filed a report on Form 8-K announcing the completion
of the redemption of our $150 million aggregate principal amount, 5.5%
Convertible Subordinated Notes due 2006.
On April 22, 2004, we filed a report on Form 8-K announcing the results of
our earnings for the first quarter of 2004.
On April 22, 2004, we filed a report on Form 8-K providing estimates for
certain components of our results of operations for the second quarter of
2004.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WASTE CONNECTIONS, INC.
BY: /s/ Ronald J. Mittelstaedt
-------------------------------------
Date: July 22, 2004 Ronald J. Mittelstaedt,
President and Chief Executive Officer
BY: /s/ Steven F. Bouck
-------------------------------------
Date: July 22, 2004 Steven F. Bouck,
Executive Vice President and Chief
Financial Officer
30