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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File No. 0-28652
WASTE CONNECTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-3283464
(State or other jurisdiction (I.R.S. Employer Identification)
of incorporation or organization)
620 Coolidge Drive
Suite 350
Folsom, California 95630
(Address of principal executive offices) (Zip Code)
(916) 608-8200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of registrant as
of February 28, 2002: $830,449,033
Number of shares of Common Stock outstanding as of February 28, 2002: 27,443,806
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2002 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
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WASTE CONNECTIONS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
ITEM NO. PAGE
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PART I
1. BUSINESS 1
2. PROPERTIES 16
3. LEGAL PROCEEDINGS 16
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 17
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS 19
6. SELECTED FINANCIAL DATA 19
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 21
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK 29
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 30
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 30
PART III 57
PART IV
14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS
ON FORM 8-K 57
SIGNATURES 58
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS 59
EXHIBIT INDEX 60
PART I
Forward Looking Statements
Certain information contained in this Annual Report on Form 10-K,
including, without limitation, information appearing under Item 1, "Business,"
and Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," includes statements that are forward-looking in nature
These statements can be identified by the use of forward-looking terminology
such as "believes", "expects", "may", "will", "should" or "anticipates" or the
negative thereof or comparable terminology, or by discussions of strategy. Our
business and operations are subject to a variety of risks and uncertainties and,
consequently, actual results may materially differ from those projected by any
forward-looking statements in this Annual Report on Form 10-K. Factors that
could cause actual results to differ from those projected include, but are not
limited to, the following: (1) competition or unfavorable industry or economic
conditions could lead to a decrease in demand for our services and/or to a
decline in prices we realized for our services, (2) we depend in part on
acquisitions for growth; may be required to pay higher prices for acquisitions,
and we may experience difficulty in integrating and deriving synergies from
acquisitions, (3) we may not always have access to the additional capital that
we require to execute our growth strategy or our cost of capital may increase,
(4) governmental regulations may require increased capital expenditures or
otherwise affect our business, (5) businesses that we acquire may have
undiscovered liabilities, (6) we depend on large, long-term collection
contracts, and (7) key members of senior management may depart and may be
difficult or impossible to replace. These risks and uncertainties, as well as
others, are discussed in greater detail in our other filings with the Securities
and Exchange Commission. We make no commitment to revise or update any
forward-looking statements in order to reflect events or circumstances after the
date any such statement is made.
ITEM 1. BUSINESS
General
Waste Connections is a regional, integrated solid waste services company
that provides solid waste collection, transfer, disposal and recycling services
in secondary markets located primarily in the Western U.S. We currently own and
operate 74 collection operations, 26 transfer stations, 17 Subtitle D landfills
and 18 recycling facilities and operate, but do not own, an additional nine
transfer stations and nine Subtitle D landfills. As of December 31, 2001, we
served more than 800,000 commercial, industrial and residential customers in 18
states: California, Colorado, Iowa, Kansas, Kentucky, Minnesota, Mississippi,
Montana, Nebraska, New Mexico, Oklahoma, Oregon, South Dakota, Tennessee, Texas,
Utah, Washington, and Wyoming. Approximately 50% of our revenues are derived
from exclusive markets, the majority of which are from exclusive arrangements,
including franchise agreements, long-term municipal contracts and governmental
certificates.
Acquisitions have been and are expected to continue to be an important
component of our growth strategy. We have primarily targeted secondary markets
of the Western U.S. because we believe that: (1) there is less competition in
these markets from larger, better-capitalized solid waste services companies;
(2) these markets have strong projected economic and population growth rates;
(3) a large number of independent solid waste services companies suitable for
acquisition by us are located in these markets; and (4) there is greater
opportunity to enter into exclusive arrangements in these markets. In addition,
our senior management team has extensive experience in acquiring, integrating
and operating solid waste services businesses.
We have developed a two-pronged strategy tailored to the competitive and
regulatory factors that affect our markets. In the markets where waste
collection services are performed under exclusive arrangements, we generally
focus on controlling the solid waste stream by providing collection services
under such arrangements. In markets where we believe that competitive and
regulatory factors make owning landfills advantageous, we generally focus on
providing integrated services, from collection through disposal of solid waste
in landfills that we own or operate.
Unless otherwise noted, all descriptions of our business in this Annual
Report on Form 10-K are as of December 31, 2001.
Industry Background
We estimate that the U.S. solid waste services industry generated revenues
of approximately $40 billion in 2001. The solid waste services industry has
undergone significant consolidation and integration since 1990. We believe that,
particularly in the Western U.S., the following factors have primarily caused
the consolidation and integration of the waste services industry:
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- Increased Impact of Regulations. Stringent industry regulations, such as
the Subtitle D regulations, have caused operating and capital costs to rise
and have accelerated consolidation and acquisition activities in the solid
waste collection and disposal industry. Many smaller industry participants
have found these costs difficult to bear and have decided to either close
their operations or sell them to larger operators. In addition, Subtitle D
requires more stringent engineering of solid waste landfills, and mandates
liner systems, leachate collection, treatment and monitoring systems and
gas collection and monitoring systems. These ongoing costs are combined
with increased financial reserve requirements for solid waste landfill
operators relating to closure and post-closure monitoring. As a result, the
number of solid waste landfills is declining while the average size is
increasing.
- Increased Integration of Collection and Disposal Operations. In certain
markets, competitive pressures are forcing operators to become more
efficient by establishing an integrated network of solid waste collection
operations and transfer stations, through which they secure solid waste
streams for disposal. Operators have adopted a variety of disposal
strategies, including owning landfills, establishing strategic
relationships to secure access to landfills and to capture significant
waste stream volumes to gain leverage in negotiating lower landfill fees,
and securing long-term, most-favored-pricing contracts with high capacity
landfills.
- Pursuit of Economies of Scale. Larger operators achieve economies of scale
by vertically integrating their operations or by spreading their facility,
asset and management infrastructure over larger volumes. Larger solid waste
collection and disposal companies have become more cost-effective and
competitive by controlling a larger waste stream and by gaining access to
significant financial resources to make acquisitions.
- Regulatory Framework in the Western U.S. In the Western U.S., waste
collection services are provided largely under three types of contractual
arrangements: certificates or permits, franchise agreements and municipal
contracts. Certificates or permits, such as governmental certificates
awarded to waste collection service providers in unincorporated areas and
electing municipalities of Washington by the Washington Utilities and
Transportation Commission (the "WUTC"), typically grant the certificate
holder the exclusive and perpetual right to provide specific residential,
commercial and industrial waste services in a territory at specified rates.
See "G certificates" below. Franchise agreements typically provide an
exclusive service period of five to ten years or longer and specify the
service territory, a broad range of services to be provided, and rates for
the services. They also often give the service provider a right of first
refusal to extend the term of the agreement. Municipal contracts typically
provide a shorter service period and a more limited scope of services than
franchise agreements and generally require competitive bidding at the end
of the contract term. Unless customers within the areas covered by certain
governmental certificates, franchise agreements and municipal contracts
elect not to receive any waste collection services, they are required to
pay collection fees to the company providing these services in their area.
These exclusive rights and contractual arrangements create barriers to
entry that can be overcome primarily through acquisitions of companies with
such exclusive rights or contractual arrangements.
Despite the ongoing consolidation, the solid waste services industry
remains regional in nature and fragmented. Based on published industry sources,
approximately 20% of the total revenues of the U.S. solid waste industry is
accounted for by more than 5,000 private, predominantly small, collection and
disposal businesses. We expect the current consolidation trends in the solid
waste industry to continue, because many independent landfill and collection
operators lack the capital resources, management skills and technical expertise
necessary to comply with stringent environmental and other governmental
regulations and to compete with larger, more efficient, integrated operators. In
addition, many independent operators may wish to sell their businesses to
achieve liquidity in their personal finances or as part of their estate
planning. We believe that the fragmented nature of the industry offers
significant consolidation and growth opportunities, especially in secondary
markets of the Western U.S., for companies with disciplined acquisition
programs, decentralized operating strategies and access to financial resources.
Strategy
Our objective is to build a leading integrated solid waste services company
in secondary markets located primarily in the Western U.S. We have developed a
two-pronged strategy tailored to the competitive and regulatory factors that
affect our markets.
First, in markets where waste collection services are provided under
exclusive arrangements, or where waste disposal is municipally funded or
available from multiple municipal sources, we believe that controlling the waste
stream by providing collection services under exclusive arrangements is often
more important to our growth and profitability than owning or operating
landfills. In addition, regulations in some Western U.S. markets dictate the
disposal facility to be used. The large size of many western states increases
the cost of interstate and long haul disposal, heightening the effects of
regulations that direct waste disposal, which may make it more difficult for a
landfill to obtain the disposal volume necessary to operate profitably. In
markets with these characteristics, we believe that landfill ownership or
vertical integration is not critical to our success.
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Second, in markets where we believe that owning landfills is a strategic
element to a collection operation because of competitive and regulatory factors,
we generally focus on providing integrated services, from collection through
disposal of solid waste in landfills that we own or operate.
GROWTH STRATEGY
- Internal Growth. To generate continued internal growth, we will focus on
increasing market penetration in our current and adjacent markets,
soliciting new commercial, industrial, and residential customers in markets
where such customers may elect whether or not to receive waste collection
services, marketing upgraded or additional services (such as compaction or
automated collection) to existing customers and, where appropriate, raising
prices. Where possible, we intend to leverage our franchise-based platforms
to expand our customer base beyond our exclusive market territories. As
customers are added in existing markets, our revenue per routed truck
increases, which generally increases our collection efficiencies and
profitability. In markets in which we have exclusive contracts, franchises
and certificates, we expect internal volume growth generally to track
population and business growth.
- Transfer stations are also an important part of our internal growth
strategy. They extend our direct-haul reach and link disparate collection
operations with disposal capacity that we own, operate or contract. We
currently own and/or operate 35 transfer stations. By operating transfer
stations, we also engage in direct communications with municipalities and
private operators that deliver waste to our transfer stations. This
positions us to gain additional business in our markets if a municipality
privatizes any solid waste operations it owns or rebids existing contracts,
and it increases our opportunities to acquire other private collection
operations that use the transfer stations.
- Exclusive Arrangements. We derive a significant portion of our revenues
from arrangements, including franchise agreements, municipal contracts and
governmental certificates, under which we are the exclusive service
provider in a specified market. We intend to devote significant resources
to securing additional franchise agreements and municipal contracts through
competitive bidding and additional governmental certificates by acquiring
other companies. In bidding for franchises and municipal contracts and
evaluating acquisition candidates holding governmental certificates, our
management team draws on its experience in the waste industry and its
knowledge of local service areas in existing and target markets. Our
district managers maintain relationships with local governmental officials
within their service areas, and sales representatives may be assigned to
cover specific municipalities. These personnel focus on maintaining,
renewing and renegotiating existing franchise agreements and municipal
contracts and on securing additional agreements and contracts.
- Expansion Through Acquisitions. We intend to expand the scope of our
operations by continuing to acquire solid waste operations in new markets
and in existing or adjacent markets that are combined with or "tucked in"
to existing operations. We focus our acquisition efforts on markets which
we believe provide significant growth opportunities for a well-capitalized
market entrant and where we can create economic and operational barriers to
entry by new competitors. We believe that our experienced management,
decentralized operating strategy, financial strength, size and public
company status make us an attractive buyer to certain solid waste
collection and disposal acquisition candidates. We have developed an
acquisition discipline based on a set of financial, geographic and
management criteria to evaluate opportunities. Once closed an acquisition
is closed, we seek to integrate it and to minimize disruption to the
ongoing operations of both Waste Connections and the acquired business.
We intend to expand into new geographic regions through acquisitions. We
use an initial acquisition in a new market as an operating base. Then we
seek to strengthen the acquired operation's presence in that market by
providing additional services, adding new customers and making "tuck-in"
acquisitions. We next seek to broaden our regional presence by adding
additional operations in markets adjacent to the new location.
We believe that many new market "tuck-in" acquisition opportunities exist
within our current and targeted market areas. For example, we have
identified more than 510 independent entities that provide collection and
disposal services in the states where we currently operate. We believe that
throughout the Western U.S., many independent entities are suitable for
acquisition by Waste Connections and provide opportunities to increase our
market share and route density.
OPERATING STRATEGY
- Decentralized Operations. We manage our operations on a decentralized
basis. This places decision-making authority close to the customer,
enabling us to identify customers' needs quickly and to address those needs
in a cost-effective manner. We believe that
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decentralization provides a low-overhead, highly efficient operational
structure that allows us to expand into geographically contiguous markets
and operate in relatively small communities that larger competitors may not
find attractive. We believe that this structure gives us a strategic
competitive advantage, given the relatively rural nature of much of the
Western U.S., and makes us an attractive buyer to many potential
acquisition candidates.
- We currently deliver our services from approximately 92 operating locations
which are grouped into three regions, Pacific Northwest, Western and
Central, and one division, Eastern. We reorganized our business into three
regions in May 2000, balancing them on the basis of their respective
geographic characteristics, interstate waste flow, revenue base, employee
base, regulatory structure and acquisition opportunities. Each region has a
Regional Vice President, reporting directly to the corporate management,
who is responsible for operations in that region and who supervises a
regional controller and regional business development staff. We entered the
areas comprising our Eastern division in September 2001. Currently, all
operations within this division report directly to our corporate office.
- Our regions and division serve a total of 23 market areas, divided into 92
districts. Our district managers have autonomous service and
decision-making authority for their districts and are responsible for
maintaining service quality, promoting safety in the operations,
implementing marketing programs, and overseeing day-to-day operations,
including contract administration. District managers also help identify
acquisition candidates and are responsible for integrating them into our
operations and obtaining the permits and other governmental approvals
required for us to operate the acquired businesses.
- Operating Enhancements. We develop company-wide operating standards, which
are tailored for each of our markets based on industry standards and local
conditions. Using these standards, we track collection and disposal routing
efficiency and equipment utilization. We also implement cost controls and
employee training and safety procedures, and establish a sales and
marketing plan for each market. We have installed a wide area network,
implemented advanced management information systems and financial controls,
and consolidated accounting, insurance and employee benefit functions,
customer service, productivity reporting and dispatching systems. While
regional management operates with a high degree of autonomy, our senior
officers monitor regional and district operations and require adherence to
our accounting, purchasing, marketing and internal control policies,
particularly with respect to financial matters. Our executive officers
regularly review the performance of district managers and operations. We
believe that by establishing operating standards, closely monitoring
performance and streamlining certain administrative functions, we can
improve the profitability of existing operations.
To improve an acquired business' operational productivity, administrative
efficiency and profitability, we apply the same operating standards,
information systems and financial controls to the acquired business that
our existing operations employ. Moreover, if we can internalize the waste
stream of acquired operations, we can further increase operating
efficiencies and improve capital utilization. Where not restricted by
exclusive agreements, contracts, permits or certificates, we also solicit
new commercial, industrial and residential customers in areas within and
surrounding the markets served by acquired collection operations, to
further improve operating efficiencies and increase the volume of solid
waste collected by the acquired operations.
SERVICES
COMMERCIAL, INDUSTRIAL AND RESIDENTIAL WASTE SERVICES
We serve more than 800,000 commercial, industrial and residential
customers. Our services are generally provided under one of the following: a)
governmental certificates, b) exclusive franchise agreements, c) exclusive
municipal contracts, d) commercial and industrial service agreements, e)
residential subscriptions and f) residential contracts.
Governmental certificates, exclusive franchise agreements and exclusive
municipal contracts grant us rights to provide services within specified areas
at established rates. Governmental certificates are generally perpetual in
duration. We currently have in excess of 500 municipal contracts and franchise
agreements which vary in both size and duration. Generally franchise agreements
with counties tend to be larger and of longer duration than municipal contracts.
Some of these contracts have already expired and Waste Connections is continuing
to provide service while new agreements are being negotiated. We do not expect
that any contracts in negotiation or likely to terminate within 2002 would have
a material adverse affect on our revenues or cash flows.
We provide commercial and industrial services, other than those we perform
under governmental certificates, franchise agreements or municipal contracts,
under agreements ranging from one to five years. We determine fees under these
agreements by such factors as collection frequency, level of service, route
density, the type, volume and weight of the waste collected, type of equipment
and
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containers furnished, the distance to the disposal or processing facility, the
cost of disposal or processing and prices charged in our markets for similar
service. Collection of larger volumes associated with commercial and industrial
waste streams generally helps improve our operating efficiencies, and
consolidation of these volumes allows us to negotiate more favorable disposal
prices. Our commercial and industrial customers use portable containers for
storage, enabling us to service many customers with fewer collection vehicles.
Commercial and industrial collection vehicles normally require one operator. We
provide one to eight cubic yard containers to commercial customers, 10 to 50
cubic yard containers to industrial customers, and 30 to 96 gallon carts to
residential customers. For an additional fee, we install stationary compactors
that compact waste prior to collection on the premises of a substantial number
of large volume customers.
We provide residential waste services under contracts with homeowners'
associations, apartment owners or mobile home park operators, or on a
subscription basis with individual households. We set base residential fees on a
contract basis primarily on route density, the frequency and level of service,
the distance to the disposal or processing facility, weight and type of waste
collected, type of equipment and containers furnished, the cost of disposal or
processing and prices charged in that market for similar services. Collection
fees are paid either by the municipalities from tax revenues or directly by the
residents receiving the services.
TRANSFER STATION SERVICES
We have an active program to acquire, develop, own and operate transfer
stations in markets proximate to our operations. Currently, we own and operate
transfer stations in California, Colorado, Kansas, Mississippi, Nebraska,
Oklahoma, Oregon, Tennessee and Washington. In addition, we operate, but do not
own, transfer stations in California, Nebraska, Oregon and Washington. These
transfer stations receive, compact, and transfer solid waste to be transported
by larger vehicles to landfills. We believe that the transfer stations benefit
us by:
- concentrating the waste stream from a wider area, which increases the
volume of disposal at landfills that we operate and gives us greater
leverage in negotiating for more favorable disposal rates at other
landfills;
- improving utilization of collection personnel and equipment; and
- building relationships with municipalities and private operators that
deliver waste, which can lead to additional growth opportunities.
LANDFILLS
We seek to identify solid waste landfill acquisition candidates to achieve
vertical integration in markets where the economic and regulatory environment
makes such acquisitions attractive. We believe that in some markets, acquiring
landfills provides opportunities to vertically integrate our collection,
transfer and disposal operations while improving operating margins. We evaluate
landfill candidates by determining, among other things, the amount of waste that
could be diverted to the landfill in question, whether access to the landfill is
economically feasible from our existing market areas either directly or through
transfer stations, the expected life of the landfill, the potential for
expanding the landfill, and current disposal costs compared to the cost of
acquiring the landfill. Where the acquisition of a landfill is not attractive,
we pursue long term disposal contracts with facilities, which are typically
municipally controlled.
Currently, we own and operate landfills in Colorado, Kansas, Minnesota,
Mississippi, Nebraska, New Mexico, Oklahoma, Oregon, Tennessee and Washington.
In addition, we operate, but do not own, landfills in California, Colorado,
Nebraska, New Mexico and Tennessee. All landfills that we own or operate are
Subtitle D landfills.
We monitor the available permitted in-place disposal capacity of our
landfills on an ongoing basis and evaluate whether to seek to expand this
capacity. In making this evaluation, we consider various factors, including the
volume of waste projected to be disposed of at the landfill, the size of the
unpermitted acreage included in the landfill, the likelihood that we will be
able to obtain the necessary approvals and permits required for the expansion
and the costs that would be involved in developing the additional capacity. We
also regularly consider whether it is advisable, in light of changing market
conditions and/or regulatory requirements, to seek to expand or change the
permitted waste streams or to seek other permit modifications.
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RECYCLING SERVICES
We offer municipal, commercial, industrial and residential customers
recycling services for a variety of recyclable materials, including cardboard,
office paper, plastic containers, glass bottles and ferrous and aluminum metals.
We own and operate 18 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
certain benchmark resale prices for recycled commodities. To the extent 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. We believe that recycling
will continue to be an important component of local and state solid waste
management plans due to the public's increasing environmental awareness and
expanding regulations that mandate or encourage recycling.
G CERTIFICATES
A substantial portion of our Washington collection business is performed
under governmental certificates (referred to as "G certificates") awarded by the
WUTC. G certificates apply only to unincorporated areas of Washington and
municipalities that have elected to have their solid waste collection overseen
by the WUTC. G certificates generally grant the holder the exclusive and
perpetual right to provide certain solid waste collection and transportation
services in a specified territory. The WUTC has repeatedly determined that, in
enacting the statute authorizing G certificates, the Washington Legislature
intended to favor grants of exclusive, rather than overlapping, service rights
for conventional solid waste services. Accordingly, most G certificates
currently grant exclusive solid waste collection and transportation rights for
conventional solid waste services in their specified territories.
SALES AND MARKETING
In many of our existing markets, we provide waste collection, transfer and
disposal services to municipalities and governmental authorities under exclusive
franchise agreements, municipal contracts and G certificates; service providers
do not contract directly with individual customers. In addition, because we have
grown to date primarily through acquisitions, we have generally assumed existing
franchise agreements, municipal contracts and G certificates from the acquired
companies, rather than obtaining new contracts. For these reasons, our sales and
marketing efforts to date have been narrowly focused. We have added sales and
marketing personnel as necessary to solicit new customers in markets where we
are not the exclusive provider of solid waste services, expand our presence into
areas adjacent to or contiguous with our existing markets, and market additional
services to existing customers.
COMPETITION
The solid waste services industry is highly competitive and fragmented and
requires substantial labor and capital resources. The industry presently
includes three large national waste companies: Allied Waste Industries, Inc.,
Republic Services, Inc., and Waste Management, Inc. Casella Waste Systems, Inc.,
and Waste Industries, Inc. are other public companies with a regional focus and
annual revenues in excess of $100 million. Certain of the markets in which we
compete or will likely compete are served by one or more large, national solid
waste companies, as well as by numerous privately held regional and local solid
waste companies of varying sizes and resources, some of which have accumulated
substantial goodwill in their markets. We also compete with operators of
alternative disposal facilities, including incinerators, and with counties,
municipalities, and solid waste districts that maintain their own waste
collection and disposal operations. Public sector operations may have financial
advantages over Waste Connections, because of their access to user fees and
similar charges, tax revenues and tax-exempt financing.
We compete for collection, transfer and disposal volume based primarily on
the price and quality of our services. From time to time, competitors may reduce
the price of their services in an effort to expand their market shares or
service areas or to win competitively bid municipal contracts. These practices
may cause us to reduce the price of our services or, if we elect not to do so,
to lose business. We provide a substantial portion of our residential,
commercial and industrial collection services under exclusive franchise and
municipal contracts and certificates, some of which are subject to periodic
competitive bidding. We provide the balance of our services under subscription
agreements with individual households and one to five year service contracts
with commercial and industrial customers.
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The solid waste collection and disposal industry is currently undergoing
significant consolidation, and we encounter competition in our efforts to
acquire landfills, transfer and collection operations. Intense competition
exists not only for collection, transfer and disposal volume, but also for
acquisition candidates. We generally compete for acquisition candidates with
publicly owned regional and large national waste management companies.
Competition in the disposal industry may also be affected by the increasing
national emphasis on recycling and other waste reduction programs, which may
reduce the volume of waste deposited in landfills. Accordingly, it may become
uneconomical for us to make further acquisitions or we may be unable to locate
or acquire suitable acquisition candidates at price levels and on terms and
conditions that we consider appropriate, particularly in markets we do not
already serve.
REGULATION
INTRODUCTION
Our landfill operations and non-landfill operations, including waste
transportation, transfer stations, vehicle maintenance shops and fueling
facilities, are all subject to extensive and evolving federal, state and local
environmental laws and regulations, the enforcement of which has become
increasingly stringent in recent years. The environmental regulations that
affect us are administered by the EPA and other federal, state and local
environmental, zoning, health and safety agencies. The WUTC regulates the
portion of our collection business in Washington performed under G certificates,
which generally grant us perpetual and exclusive collection rights in certain
areas. We are currently in substantial compliance with applicable federal, state
and local environmental laws, permits, orders and regulations. We do not
currently anticipate any material environmental costs necessary to bring our
operations into compliance (although there can be no assurance in this regard).
We anticipate that regulation, legislation and regulatory enforcement actions
related to the solid waste services industry will continue to increase. We
attempt to anticipate future regulatory requirements and to plan in advance as
necessary to comply with them.
The principal federal, state and local statutes and regulations that apply
to our operations are described below. All of the federal statutes described
below contain provisions that authorize, under certain circumstances, lawsuits
by private citizens to enforce the provisions of the statutes. In addition to a
penalty award by the United States, some of those statutes authorize an award of
attorneys' fees to parties that successfully bring such an action. Enforcement
actions under these statutes may include both civil and criminal penalties, as
well as injunctive relief in some instances.
THE RESOURCE CONSERVATION AND RECOVERY ACT OF 1976 ("RCRA")
RCRA regulates the generation, treatment, storage, handling, transportation
and disposal of solid waste and requires states to develop programs to ensure
the safe disposal of solid waste. RCRA divides solid waste into two groups,
hazardous and nonhazardous. Wastes are generally classified as hazardous if they
either (i) are specifically included on a list of hazardous wastes, or (ii)
exhibit certain characteristics defined as hazardous. Household wastes are
specifically designated as nonhazardous. Wastes classified as hazardous under
RCRA are subject to much stricter regulation than wastes classified as
nonhazardous, and businesses that deal with hazardous waste are subject to
regulatory obligations in addition to those imposed on handlers of nonhazardous
waste. From the date of inception through December 31, 2001, we did not, to our
knowledge, transport hazardous wastes under circumstances that would subject us
to hazardous waste regulations under RCRA. Some of our ancillary operations
(e.g., vehicle maintenance operations) may generate hazardous wastes. We manage
these wastes in substantial compliance with applicable laws.
In October 1991, the EPA adopted the Subtitle D Regulations governing solid
waste landfills. The Subtitle D Regulations, which generally became effective in
October 1993, include location restrictions, facility design standards,
operating criteria, closure and post-closure requirements, financial assurance
requirements, groundwater monitoring requirements, groundwater remediation
standards and corrective action requirements. In addition, the Subtitle D
Regulations require that new landfill sites meet more stringent liner design
criteria (typically, composite soil and synthetic liners or two or more
synthetic liners) intended to keep leachate out of groundwater and have
extensive collection systems to carry away leachate for treatment prior to
disposal. Groundwater monitoring wells must also be installed at virtually all
landfills to monitor groundwater quality and, indirectly, the effectiveness of
the leachate collection system. The Subtitle D Regulations also require, where
certain regulatory thresholds are exceeded, that facility owners or operators
control emissions of methane gas generated at landfills in a manner intended to
protect human health and the environment. Each state is required to revise its
landfill regulations to meet these requirements or such requirements will be
automatically imposed by the EPA on landfill owners and operators in that state.
Each state is also required to adopt and implement a permit program or other
appropriate system to ensure that landfills in the state comply with the
Subtitle D Regulations. Various states in which we operate or in which we may
operate in the future have adopted regulations or programs as stringent as, or
more stringent than, the Subtitle D Regulations.
7
RCRA also regulates underground storage of petroleum and other regulated
materials. RCRA requires registration, compliance with technical standards for
tanks, release detection and reporting, and corrective action, among other
things. Certain of Waste Connections' facilities and operations are subject to
these requirements.
THE FEDERAL WATER POLLUTION CONTROL ACT OF 1972, AS AMENDED (THE "CLEAN WATER
ACT")
The Clean Water Act regulates the discharge of pollutants from a variety of
sources, including solid waste disposal sites and transfer stations, into waters
of the United States. If run-off from our owned or operated transfer stations or
run-off or collected leachate from our owned or operated landfills is discharged
into streams, rivers or other surface waters, the Clean Water Act would require
us to apply for and obtain a discharge permit, conduct sampling and monitoring
and, under certain circumstances, reduce the quantity of pollutants in such
discharge. Also, virtually all landfills are required to comply with the EPA's
storm water regulations issued in November 1990, which are designed to prevent
contaminated landfill storm water runoff from flowing into surface waters. We
believe that our facilities comply in all material respects with the Clean Water
Act requirements. Various states in which we operate or in which we may operate
in the future have been delegated authority to implement the Clean Water Act
permitting requirements, and some of these states have adopted regulations that
are more stringent than the federal requirements. For example, states often
require permits for discharges to ground water as well as surface water.
THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION, AND LIABILITY ACT OF
1980 ("CERCLA")
CERCLA established a regulatory and remedial program intended to provide
for the investigation and cleanup of facilities where or from which a release of
any hazardous substance into the environment has occurred or is threatened.
CERCLA's primary mechanism for remedying such problems is to impose strict joint
and several liability for cleanup of facilities on current owners and operators
of the site, former owners and operators of the site at the time of the disposal
of the hazardous substances, any person who arranges for the transportation,
disposal or treatment of the hazardous substances, and the transporters who
select the disposal and treatment facilities. CERCLA also imposes liability for
the cost of evaluating and remedying any damage to natural resources. The costs
of CERCLA investigation and cleanup can be very substantial. Liability under
CERCLA does not depend on the existence or disposal of "hazardous waste" as
defined by RCRA; it can also be based on the existence of even very small
amounts of the more than 700 "hazardous substances" listed by the EPA, many of
which can be found in household waste. In addition, the definition of "hazardous
substances" in CERCLA incorporates substances designated as hazardous or toxic
under the federal Clean Water Act, Clear Air Act and Toxic Substances Control
Act. If we were found to be a responsible party for a CERCLA cleanup, the
enforcing agency could hold us, or any other generator, transporter or the owner
or operator of the contaminated facility, responsible for all investigative and
remedial costs, even if others were also liable. CERCLA also authorizes the
imposition of a lien in favor of the United States on all real property subject
to, or affected by, a remedial action for all costs for which a party is liable.
CERCLA gives a responsible party the right to bring a contribution action
against other responsible parties for their allocable shares of investigative
and remedial costs. Our ability to obtain reimbursement from others for their
allocable shares of such costs would be limited by our ability to find other
responsible parties and prove the extent of their responsibility and by the
financial resources of such other parties. Various state laws also impose
liability for investigation, cleanup and other damages associated with hazardous
substance releases.
THE CLEAN AIR ACT
The Clean Air Act generally, through state implementation of federal
requirements, regulates emissions of air pollutants from certain landfills based
on factors such as the date of the landfill construction and tons per year of
emissions of regulated pollutants. Larger landfills and landfills located in
areas where the ambient air does not meet certain requirements of the Clean Air
Act may be subject to even more extensive air pollution controls and emission
limitations. In addition, the EPA has issued standards regulating the disposal
of asbestos-containing materials. Air permits to construct may be required for
gas collection and flaring systems, and operating permits may be required,
depending on the potential air emissions. State air regulatory programs may
implement the federal requirements but may impose additional restrictions. For
example, some state air programs uniquely regulate odor and the emission of
toxic air pollutants.
8
THE OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970 (THE "OSH ACT")
The OSH Act is administered by the Occupational Safety and Health
Administration ("OSHA"), and in many states by state agencies whose programs
have been approved by OSHA. The OSH Act establishes employer responsibilities
for worker health and safety, including the obligation to maintain a workplace
free of recognized hazards likely to cause death or serious injury, to comply
with adopted worker protection standards, to maintain certain records, to
provide workers with required disclosures and to implement certain health and
safety training programs. Various OSHA standards may apply to our operations,
including standards concerning notices of hazards, safety in excavation and
demolition work, the handling of asbestos and asbestos-containing materials, and
worker training and emergency response programs.
FLOW CONTROL/INTERSTATE WASTE RESTRICTIONS
Certain permits and approvals, as well as certain state and local
regulations, may limit a landfill or transfer station to accepting waste that
originates from specified geographic areas, restrict the importation of
out-of-state waste or wastes originating outside the local jurisdiction or
otherwise discriminate against non-local waste. These restrictions, generally
known as flow control restrictions, are controversial, and some courts have held
that some flow control schemes violate constitutional limits on state or local
regulation of interstate commerce. From time to time, federal legislation is
proposed that would allow some local flow control restrictions. Although no such
federal legislation has been enacted to date, if such federal legislation should
be enacted in the future, states in which we own or operate landfills could
limit or prohibit the importation of out-of-state waste or direct that wastes be
handled at specified facilities. Such state actions could adversely affect our
landfills. These restrictions could also result in higher disposal costs for our
collection operations. If we were unable to pass such higher costs through to
our customers, our business, financial condition and operating results could be
adversely affected.
Certain state and local jurisdictions may also seek to enforce flow control
restrictions through local legislation or contractually. In certain cases, we
may elect not to challenge such restrictions. These restrictions could reduce
the volume of waste going to landfills in certain areas, which may adversely
affect our ability to operate our landfills at their full capacity and/or reduce
the prices that we can charge for landfill disposal services. These restrictions
may also result in higher disposal costs for our collection operations. If we
were unable to pass such higher costs through to our customers, our business,
financial condition and operating results could be adversely affected.
STATE AND LOCAL REGULATION
Each state in which we now operate or may operate in the future has laws
and regulations governing the generation, storage, treatment, handling,
transportation and disposal of solid waste, occupational safety and health,
water and air pollution and, in most cases, the siting, design, operation,
maintenance, closure and post-closure maintenance of landfills and transfer
stations. State and local permits and approval for these operations may be
required and may be subject to periodic renewal, modification or revocation by
the issuing agencies. In addition, many states have adopted statutes comparable
to, and in some cases more stringent than, CERCLA. These statutes impose
requirements for investigation and cleanup of contaminated sites and liability
for costs and damages associated with such sites, and some provide for the
imposition of liens on property owned by responsible parties. Furthermore, many
municipalities also have ordinances, local laws and regulations affecting our
operations. These include zoning and health measures that limit solid waste
management activities to specified sites or activities, flow control provisions
that direct or restrict the delivery of solid wastes to specific facilities,
laws that grant the right to establish franchises for collection services and
then put such franchises out for bid, and bans or other restrictions on the
movement of solid wastes into a municipality.
Permits or other land use approvals with respect to a landfill, as well as
state or local laws and regulations, may specify the quantity of waste that may
be accepted at the landfill during a given time period, and/or specify the types
of waste that may be accepted at the landfill. Once an operating permit for a
landfill is obtained, it must generally be renewed periodically.
There has been an increasing trend at the state and local level to mandate
and encourage waste reduction at the source and waste recycling, and to prohibit
or restrict the disposal of certain types of solid wastes, such as yard wastes,
leaves and tires, in landfills. The enactment of regulations reducing the volume
and types of wastes available for transport to and disposal in landfills could
prevent us from operating our facilities at their full capacity.
9
Some state and local authorities enforce certain federal laws in addition
to state and local laws and regulations. For example, in some states, RCRA, the
OSH Act, parts of the Clean Air Act and parts of the Clean Water Act are
enforced by local or state authorities instead of by the EPA, and in some states
those laws are enforced jointly by state or local and federal authorities.
PUBLIC UTILITY REGULATION
In many states, public authorities regulate the rates that landfill
operators may charge. The adoption of rate regulation or the reduction of
current rates in states in which we own or operate landfills could adversely
affect our business, financial condition and operating results.
Solid waste collection services in all unincorporated areas of Washington
and in electing municipalities in Washington are provided under G certificates
awarded by the WUTC. The WUTC also sets rates for regulated solid waste
collection services in Washington.
RISK MANAGEMENT, INSURANCE AND PERFORMANCE BONDS
We maintain environmental and other risk management programs appropriate
for our business. Our environmental risk management program includes evaluating
existing facilities and potential acquisitions for environmental law compliance.
We do not presently expect environmental compliance costs to increase above
current levels, but we cannot predict whether future acquisitions will cause
such costs to increase. We also maintain a worker safety program that encourages
safe practices in the workplace. Operating practices at all Waste Connections
operations emphasize minimizing the possibility of environmental contamination
and litigation. Our facilities comply in all material respects with applicable
federal and state regulations.
We carry a broad range of insurance, which our management considers
adequate to protect our assets and operations. The coverage includes general
liability, comprehensive property damage, workers' compensation and other
coverage customary in the industry. These policies generally exclude coverage
for damages associated with environmental conditions. Because of the limited
availability and high cost of environmental impairment liability insurance, we
have obtained such coverage only for selected sites. If a site without such
coverage were to incur liability for environmental cleanups, corrective action
or damage, our financial condition could be materially and adversely affected.
We will continue to investigate obtaining environmental impairment liability
insurance for our sites without such coverage, particularly if we acquire or
operate additional landfills. We believe that most other landfill operators do
not carry such insurance.
Municipal solid waste collection contracts may require performance bonds or
other means of financial assurance to secure contractual performance. Certain
environmental regulations also require demonstrated financial assurance to meet
closure and post-closure requirements for landfills. We have experienced
decreased availability of performance bonds for our current operations due to
changes in the insurance industry. At December 31, 2001, we had provided
customers and various regulatory authorities with surety in the aggregate amount
of approximately $20.6 million to secure our obligations (exclusive of letters
of credit backing certain municipal bond obligations). If we are unable to
obtain surety bonds or letters of credit in sufficient amounts or at acceptable
rates, we could be precluded from entering into additional municipal solid waste
collection contracts or obtaining or retaining landfill operating permits.
EMPLOYEES
At December 31, 2001, we employed approximately 2,400 full-time employees,
including approximately 266 persons classified as professionals or managers,
approximately 1,856 employees involved in collection, transfer, disposal and
recycling operations, and approximately 277 sales, clerical, data processing or
other administrative employees.
Approximately 116 of our drivers and mechanics are represented by the
Teamsters Union in various locations. These employees are subject to labor
agreements that are subject to renegotiation periodically. We do not expect any
significant disruption in our business as a result of labor negotiations.
We are not aware of any other organizational efforts among our employees
and believe that our relations with our employees are good.
10
RISK FACTORS
RISKS RELATED TO OUR BUSINESS
Difficulties in making acquisitions, acquiring exclusive contracts and
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generating internal growth may cause our growth to be slower than expected.
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Our growth strategy includes expanding through acquisitions, acquiring
additional exclusive arrangements and generating internal growth. Since
inception, most of our growth has been through acquisitions. Internally
generated growth for the industry and Waste Connections has been less than 8%
per year. Although we have identified numerous acquisition candidates that we
believe are suitable, we may not be able to acquire them at prices or on terms
and conditions favorable to us. Our ability to grow also depends on several
other factors, including
o the availability of capital to support our growth,
o our ability to compete with existing and emerging companies,
o our ability to maintain profit margins in the face of competitive
pressures,
o our ability to continue to recruit, train and retain qualified employees
and
o continued strong demand for our services.
Difficulties in any of these areas could hinder our growth.
Our acquisitions may not be successful, resulting in changes in strategy,
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operating losses or a loss on sale of the business acquired.
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Even if we are able to make acquisitions on advantageous terms and are able
successfully to integrate them into our operations and organization, some may
not successfully fulfill our strategy in a given market due to factors that we
cannot control, such as market position or customer base. As a result, operating
margins could be less than we originally anticipated when we made the
acquisition. We then may change our strategy with respect to the market or
businesses acquired in the market and decide to sell the operation at a loss.
Rapid growth may strain our management, operational, financial and other
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resources.
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From inception through December 31, 2001,we acquired 134 solid waste
services related businesses. To maintain and manage our growth, we will need to
expand our management information systems capabilities and our operational and
financial systems and controls. We will also need to attract, train, motivate,
retain and manage additional senior managers, technical professionals and other
employees. Failure to do any of these things would restrict our ability to
maintain and improve our profitability while continuing to grow.
Our growth and future financial performance depend significantly on our ability
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to integrate acquired businesses into our organization and operations.
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Part of our strategy is to achieve economies of scale and operating
efficiencies by growing through acquisitions. We may not achieve these goals
unless we effectively combine the operations of acquired businesses with our
existing operations. Our senior management team may not be able to integrate our
completed and future acquisitions. Any difficulties we encounter in the
integration process could interfere with our operations and reduce our operating
margins.
We compete for acquisition candidates with other purchasers, some of which have
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greater financial resources than Waste Connections. These competitors may be
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able to offer more favorable acquisition terms, thus limiting our ability to
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grow through acquisition.
-------------------------
Other companies have adopted or will probably adopt our strategy of
acquiring and consolidating regional and local businesses. We expect that
increased consolidation in the solid waste services industry will increase
competitive pressures. Increased competition for acquisition candidates may make
fewer acquisition opportunities available to us, and may cause us to make
acquisitions on less attractive terms, such as higher purchase prices.
Acquisition costs may increase to levels beyond our financial capability or to
levels that would adversely affect our operating results and financial
condition. Our ongoing ability to make acquisitions will depend in part on the
relative attractiveness of our common stock as consideration for potential
acquisition candidates. This attractiveness may depend largely on the relative
market price and capital appreciation prospects of our common stock compared to
the common stock of
11
our competitors. If the market price of our common stock were to decline
materially over a prolonged period of time, we may find it difficult to make
acquisitions on attractive terms.
Timing of acquisitions may cause fluctuations in our quarterly results, which
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may cause our stock price to decline.
-------------------------------------
We are not always able to control the timing of our acquisitions. Obtaining
third party consents and regulatory approvals, completing due diligence on the
acquired businesses, and finalizing transaction terms and documents are not
entirely within our control and may take longer than we anticipate, causing
certain transactions to be delayed. Our inability to complete acquisitions in
the time frames that we expect may cause our operating results to be less
favorable than expected, which could cause our stock price to decline.
We may be unable to compete effectively with governmental service providers and
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larger and better capitalized companies, which may result in reduced revenues
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and lower profits.
------------------
Our industry is highly competitive, fragmented and requires substantial labor
and capital resources. Some of the markets in which we compete or will likely
compete are served by one or more large, national solid waste companies, as well
as by numerous regional and local solid waste companies of varying sizes and
resources, some of which have accumulated substantial goodwill in their markets.
We also compete with counties, municipalities and solid waste districts that
maintain their own waste collection and disposal operations. These operators may
have financial advantages over Waste Connections because of their access to user
fees and similar charges, tax revenues and tax-exempt financing. Some of our
competitors may also be better capitalized, have greater name recognition or be
able to provide services at a lower cost than Waste Connections.
We may lose contracts through competitive bidding, early termination or
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governmental action, which would cause our revenues to decline.
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We derive a substantial portion of our revenue from services provided under
exclusive municipal contracts, franchise agreements and governmental
certificates. Many of these will be subject to competitive bidding at some time
in the future. We also intend to bid on additional municipal contracts and
franchise agreements. We may not be the successful bidder. In addition, some of
our customers may terminate their contracts with us before the end of the
contract term. Municipalities in Washington may by law annex unincorporated
territory, which would likely remove such territory from the area covered by
governmental certificates issued to us by the Washington Utilities and
Transportation Commission ("WUTC"). Annexation would reduce the areas covered by
our governmental certificates and subject more of our Washington operations to
competitive bidding in the future. Moreover, legislative action could amend or
repeal the laws governing WUTC regulation, which could harm our competitive
position by subjecting more areas to competitive bidding. If we were not able to
replace revenues from contracts lost through competitive bidding or early
termination or from the renegotiation of existing contracts with other revenues
within a reasonable time period, our revenues could decline.
We may not have enough capital or be able to raise enough additional capital on
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satisfactory terms to meet our capital requirements, which would limit our
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growth through acquisitions.
----------------------------
Continued growth will require additional capital. We expect to finance
future acquisitions through cash from operations borrowings under our credit
facility, issuing additional equity or debt securities and/or seller financing.
If acquisition candidates are unwilling to accept, or we are unwilling to issue,
shares of our common stock as part of the consideration for acquisitions or if
our common stock does not maintain a sufficient market value, we may have to use
more of our cash or borrowings under our credit facility to fund acquisitions.
Using cash for acquisitions limits our financial flexibility and makes us more
likely to seek additional capital through future debt or equity financings. If
available cash from operations and borrowings under the credit facility are not
sufficient to fund acquisitions, we will need additional equity and/or debt
financing. If we seek more debt, our interest expense would increase and we may
have to agree to financial covenants that limit our operational and financial
flexibility. We have pledged all of our assets as collateral for our credit
facility, which could restrict our ability to obtain additional debt on
attractive terms .If we seek more equity, we may dilute the ownership interests
of our then-existing stockholders. If we are unable to obtain additional equity
and/or debt financing on attractive terms, our rate of growth through
acquisitions may decline. We will also need to make substantial capital
expenditures to develop or acquire new landfills, transfer stations and other
facilities and to maintain such properties.
12
We depend significantly on the services of the members of our management team,
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and the departure of any of those persons could cause our operating results to
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suffer.
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Our success depends significantly on the continued individual and
collective contributions of our senior and district management team. Key members
of our management have entered into employment agreements, but we may not be
able to enforce these agreements. The loss of the services of any member of our
senior or district management or the inability to hire and retain experienced
management personnel could harm our operating results.
Our decentralized decision making structure could allow local managers to make
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decisions that adversely affect our operating results.
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We manage our operations on a decentralized basis. Local managers have the
authority to make many decisions concerning their operations without obtaining
prior approval from executive officers, subject to compliance with general
company-wide policies. Poor decisions by local managers could result in loss of
customers or increases in costs, in each case reducing operating results.
The geographic concentration of our business makes our results vulnerable to
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factors affecting the western U.S., and seasonal fluctuations may cause our
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business and financial results to vary among quarters, which could negatively
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affect our stock price.
-----------------------
Our business and financial results would be harmed by downturns in the
general economy of the western U.S. and other factors affecting the region, such
as state regulations affecting the solid waste services industry and severe
weather conditions. Based on historic trends experienced by the businesses we
have acquired, we expect our operating results to vary seasonally, with revenues
typically lowest in the first quarter, higher in the second and third quarters,
and lower in the fourth quarter than in the second and third quarters. This
seasonality reflects the lower volume of solid waste generated during the late
fall, winter and early spring months because of decreased construction and
demolition activities during the winter months in the western U.S. In addition,
some of our operating costs should be generally higher in the winter months.
Adverse winter weather conditions slow waste collection activities, resulting in
higher labor and operational costs. Greater precipitation in the winter
increases the weight of collected waste, resulting in higher disposal costs,
which are calculated on a per ton basis. Because of these factors, we expect
operating income to be generally lower in the winter months, and our stock price
may be negatively affected by these variations.
Unusually adverse weather conditions may interfere with our operations, harming
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our operating results.
----------------------
Our collection and landfill operations could be adversely affected, beyond
the normal seasonal variations described above, by unusually long periods of
inclement weather, which could interfere with collection and landfill
operations, reduce the volume of waste generated by our customers and delay the
development of landfill capacity. Periods of particularly harsh weather may
force us to temporarily suspend certain of our operations.
Increases in the costs of labor, fuel or energy could reduce our operating
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margins.
--------
Our continued success will depend on our ability to attract and retain
qualified personnel. We compete with other businesses in our markets for
qualified employees. The labor market is currently tight in many of our markets.
A shortage of qualified employees would require us to enhance our wage and
benefits packages to compete more effectively for employees or to hire more
expensive temporary employees. Labor is our second largest cost, and even
relatively small increases in labor costs per employee could materially affect
our cost structure. If we fail to attract and retain qualified employees, to
control our labor costs, or to recover any increased labor costs through
increased prices we charge for our services or otherwise offset such increases
with cost savings in other areas, our operating margins could suffer. Although
fuel and energy costs account for a relatively small portion of our total
operating expenses, the price of fuel and energy is volatile, and shortages
sometimes occur. Although the recent energy crisis affecting California and
other western states in which we operate did not materially affect our
operations or profitability in those regions, further significant increases in
the cost of fuel or energy, or shortages of fuel or energy, could interrupt or
curtail our operations and lower our operating margins.
Each business that we acquire or have acquired may have liabilities that we fail
--------------------------------------------------------------------------------
or are unable to discover, including liabilities that arise from prior owners'
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failure to comply with environmental laws, which may harm our financial
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condition.
----------
As a successor owner, we may be legally responsible for these liabilities.
Even if we obtain legally enforceable representations, warranties and
indemnities from the sellers of such businesses, they may not cover the
liabilities fully. Some environmental liabilities, even if we do not expressly
assume them, may be imposed on Waste Connections under various legal theories.
Our insurance program
13
does not cover liabilities associated with any environmental cleanup or
remediation of our own sites. A successful uninsured claim against Waste
Connections could harm our financial condition.
Our growth may be limited by the inability to obtain new landfills and expand
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existing ones.
--------------
We currently own and operate a number of landfills. Based on current waste
flows, the estimated remaining lives of our landfills range from approximately
10 to 313 years, with an average remaining life of approximately 82 years. Our
ability to meet our growth objectives may depend in part on our ability to
acquire, lease and expand landfills and develop new landfill sites. We may not
be able to obtain new landfill sites or expand the permitted capacity of our
landfills when necessary. Obtaining new landfill sites is important to our
expansion into new non-exclusive markets; if we do not believe that we can
obtain a landfill site in a non-exclusive market, we may choose not to enter
into that market. Expanding existing landfill sites is important in those
markets where the remaining life of our landfills is relatively short. We may
choose to forego acquisitions and internal growth in these markets because
increased volumes would further shorten the life of these landfills. Either of
these circumstances could result in slower growth.
In some areas in which we operate, suitable land for new sites or expansion of
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existing landfill sites may be unavailable which could increase our disposal
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costs and reduce our operating margins.
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Operating permits for landfills in states where we operate must generally
be renewed at least every five years. It has become increasingly difficult and
expensive to obtain required permits and approvals to build, operate and expand
solid waste management facilities, including landfills and transfer stations.
The process often takes several years, requires numerous hearings and compliance
with zoning, environmental and other requirements and is resisted by citizen,
public interest or other groups. We may not be able to obtain or maintain the
permits we require to expand, and such permits may contain burdensome terms and
conditions. Even when granted, final permits to expand are often not approved
until the remaining permitted disposal capacity of a landfill is very low. Local
laws and ordinances also may affect our ability to obtain permits to expand
landfills. If we were to exhaust our permitted capacity at a landfill, our
ability to expand internally would be limited, and we could be required to cap
and close that landfill and forced to dispose of collected waste at more distant
landfills or at landfills operated by our competitors. The resulting increased
costs would reduce our operating margins.
Our accruals for our landfill closure and post-closure costs may be inadequate,
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and our earnings would be lowered if we are required to pay additional amounts.
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We may be required to pay closure and post-closure costs of landfills and
any disposal facilities that we own or operate. We accrue for future closure and
post-closure costs of our owned landfills, generally for a term of 30 years
after final closure of a landfill, based on engineering estimates of future
requirements associated with the final landfill design and closure and
post-closure process. Our obligations to pay closure or post-closure costs may
exceed the amount we accrued and reserved and other amounts available from funds
or reserves established to pay such costs. Paying additional amounts would lower
our earnings and could cause our stock price to decline.
We may incur additional charges related to capitalized expenditures, which would
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lower our earnings.
-------------------
In accordance with accounting principles generally accepted in the United
States, we capitalize some expenditures and advances relating to acquisitions,
pending acquisitions and landfill development projects. We expense indirect
acquisition costs such as executive salaries, general corporate overhead, public
affairs and other corporate services as we incur those costs. We charge against
earnings any unamortized capitalized expenditures and advances (net of any
amount that we estimate we will recover, through sale or otherwise)that relate
to any operation that is permanently shut down, any pending acquisition that is
not consummated and any landfill development project that we do not expect to
complete. Therefore, Waste Connections may incur charges against earnings in
future periods, which could lower our stock price.
Recent accounting pronouncements may require a write-down of our goodwill, which
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could materially impair our net worth.
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In July 2001, the Financial Accounting Standards Board issued Statement No.
142, Goodwill and Other Intangible Assets. ("FAS 142"). FAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition and supercedes APB 17, Intangible Assets. The most significant
changes made by FAS 142 are: (1) goodwill and indefinite-lived intangible assets
will no longer be amortized; (2) goodwill will be tested for impairment at least
annually at the reporting unit level; and (3) intangible assets deemed to have
an indefinite life will be tested for impairment at least annually.
14
As a result of our acquisition strategy, we have a material amount of
goodwill recorded on our financial statements. Under FAS 142, effective January
1, 2002, we no longer amortize our existing goodwill. In addition, we will test
goodwill for impairment using the two-step process prescribed in Statement 142.
The first step is a screen for potential impairment, while the second step
measures the amount of the impairment, if any. Prior to June 30, 2002, we expect
to perform the first of the required impairment tests of goodwill and indefinite
lived intangible assets based on the carrying values as of January 1, 2002. If,
as a result of the implementation of FAS 142, we are required to write-down any
of our goodwill, our net worth will be reduced. Our credit agreement contains a
covenant requiring us to maintain a minimum funded debt to capitalization ratio,
and net worth is one of the components of capitalization. A reduction in net
worth, therefore, if substantial, could limit the amount that we can borrow
under our credit agreement and any failure to comply with the agreement could
result in an event of default under the credit agreement. We will not be able to
determine if a reduction in our goodwill will be required until completion of
the impairment tests upon adoption of FAS 142.
If we fail to comply with covenants and conditions of our credit facility, we
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may be unable to make acquisitions and may be required to repay our debt early,
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which could harm our financial results.
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Our credit facility requires us to obtain the consent of the lending banks
before acquiring any other business for more than $25 million in cash and
assumed debt. If we are not able to obtain our banks' consent to acquisitions of
this size, we may not be able to complete them, which could inhibit our growth.
Our credit facility also contains financial covenants based on our current and
projected financial condition after completing an acquisition. If we cannot
satisfy these financial covenants on a pro forma basis after completing an
acquisition, we would not be able to complete the acquisition without a waiver
from our lending banks. Whether or not a waiver is needed, if the results of our
future operations differ materially from what we expect, we may no longer be
able to comply with the covenants in the credit facility. Our failure to comply
with these covenants may result in a default under the credit facility, which
would allow our lending banks to accelerate the date for repayment of debt
incurred under the credit facility and could harm our business and financial
results.
Provisions in our charter and bylaws may deter changes in control that could
----------------------------------------------------------------------------
benefit our stockholders.
-------------------------
Provisions in our Certificate of Incorporation and By-Laws, and in the
Delaware General Corporation Law, may deter tender offers and hostile takeovers
and delay or prevent changes in control or management of Waste Connections,
including transactions in which stockholders might be paid more than current
market prices for their shares. These provisions may also limit our
stockholders' ability to approve transactions that they believe are in their
best interests.
We do not intend to pay cash dividends on our common stock.
-----------------------------------------------------------
We have never paid cash dividends on our common stock. We do not currently
anticipate paying any cash dividends on the common stock. We intend to retain
all earnings to fund the operation and expansion of our business. In addition,
our existing credit facility restricts the payment of cash dividends.
RISKS RELATED TO OUR INDUSTRY
Extensive and evolving environmental laws and regulations may restrict our
--------------------------------------------------------------------------
operations and growth and increase our costs.
---------------------------------------------
Environmental laws and regulations have been enforced more and more
stringently in recent years because of greater public interest in protecting the
environment. These laws and regulations impose substantial costs on us and
affect our business in many ways, including as described below. In addition,
federal, state and local governments may change the rights they grant to and the
restrictions they impose on solid waste services companies, and those changes
could restrict our operations and growth.
We may be unable to obtain and maintain licenses or permits and zoning,
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environmental and/or other land use approvals that we need to own and operate
-----------------------------------------------------------------------------
our landfills.
--------------
These licenses or permits and approvals are difficult and time-consuming to
obtain and renew, and elected officials and citizens' groups frequently oppose
them. Failure to obtain and maintain the permits and approvals we need to own or
operate landfills (including increasing their capacity) could increase our
disposal costs and reduce our operating margins.
15
Extensive regulations that govern the design, operation and closure of landfills
--------------------------------------------------------------------------------
may restrict our landfill operations or increase our costs of operating
-----------------------------------------------------------------------
landfills.
----------
These regulations include the regulations that establish minimum federal
requirements adopted by the U.S. Environmental Protection Agency in October 1991
under Subtitle D of the Resource Conservation and Recovery Act of 1976. If we
fail to comply with these regulations, we could be required to undertake
investigatory or remedial activities, curtail operations or close a landfill
temporarily or permanently. Future changes to these regulations may require us
to modify, supplement or replace equipment or facilities at substantial costs.
If regulatory agencies fail to enforce these regulations vigorously or
consistently, our competitors whose facilities do not comply with the Subtitle D
regulations or their state counterparts may obtain an advantage over us. Our
financial obligations arising from any failure to comply with these regulations
could harm our business and earnings.
We may be subject in the normal course of business to judicial and
------------------------------------------------------------------
administrative proceedings involving federal, state or local agencies or
------------------------------------------------------------------------
citizens' groups, which could interrupt our operations, require expensive
-------------------------------------------------------------------------
remediation, and create negative publicity.
-------------------------------------------
Governmental agencies may impose fines or penalties on us. They may also
attempt to revoke or deny renewal of our operating permits, franchises or
licenses for violations or alleged violations of environmental laws or
regulations, or to require us to remediate potential environmental problems
relating to waste that we or our predecessors collected, transported, disposed
of or stored. Individuals or community groups might also bring actions against
us in connection with our operations. Any adverse outcome in these proceedings
could harm our operations and financial results and create adverse publicity
about Waste Connections, which could damage our competitive position and stock
price.
Liabilities for environmental damage may adversely affect our business and
--------------------------------------------------------------------------
earnings.
---------
We are liable for any environmental damage that our solid waste facilities
cause, including damage to neighboring landowners or residents, particularly as
a result of the contamination of soil, groundwater or surface water, and
especially drinking water. We may be liable for damage resulting from conditions
existing before we acquired these facilities. We may also be liable for any
on-site environmental contamination caused by pollutants or hazardous substances
whose transportation, treatment or disposal that we or our predecessors
arranged. Any substantial liability for environmental damage could harm our
business and earnings.
Fluctuations in prices for recycled commodities that we sell may cause our
--------------------------------------------------------------------------
revenues and operating results to decline.
------------------------------------------
We provide recycling services to some of our customers. The sale prices of
and demand for recyclable materials, particularly paper products, are frequently
volatile and when they decline our revenues and operating results may decline.
ITEM 2. PROPERTIES
As of December 31, 2001, we owned and operated 74 collection operations, 26
transfer stations, 17 Subtitle D landfills and 18 recycling facilities and
operated an additional nine transfer stations and nine Subtitle D landfills. We
lease various offices and facilities, including our corporate offices in Folsom,
California. We own various equipment, including waste collection and
transportation vehicles, related support vehicles, carts, containers, and heavy
equipment used in landfill operations. We believe that our existing facilities
and equipment are generally adequate for our current operations. However, we
expect to make additional investments in property and equipment for expansion
and replacement of assets and in connection with future acquisitions.
Our corporate headquarters are located in Folsom, California, where we
lease approximately 14,800 square feet of space.
ITEM 3. LEGAL PROCEEDINGS
In January 2002, the Oklahoma Department of Environmental Quality Land
Protection Division ("the Department") issued an order to Waste Connections
requiring it to cease accepting more than 200 tons per day of out-of-state waste
at its Red Carpet Landfill location in Oklahoma due to the alleged failure of
Waste Connections to file an approved disposal plan from the Department.
Additionally, the Department assessed Waste Connections fines totaling $220,000
for past violations related to accepting more than 200 tons per day of
out-of-state waste prior to filing an approved disposal plan. We believe, based
on advice from our legal counsel, that the order issued by the Department is
without merit as we have properly complied with Oklahoma statutes related to
disposal plan submission. Additionally, we believe that certain Oklahoma
statutes provide exemption from the disposal plan requirement if the landfill
meets certain design, construction and operating requirements. We believe that
our landfill meets such requirements.
16
Therefore, we believe that any payment resulting from the order will not have a
material impact on our cash flows, financial condition or results of operations.
Additionally, we are a 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. Our management does not believe that these
proceedings, either individually or in the aggregate, are likely to have a
material adverse effect on our business, financial condition, operating results
or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 2001.
MANAGEMENT
EXECUTIVE OFFICERS
The following table sets forth certain information concerning our executive
officers as of March 15, 2002:
NAME AGE POSITIONS
---- --- ---------
Ronald J. Mittlestaedt(1) 38 President, Chief Executive Officer and
Chairman
Steven F. Bouck 45 Executive Vice President and Chief
Financial Officer
Darrell W. Chambliss 37 Executive Vice President - Operations,
Secretary
David M. Hall 44 Vice President - Business Development
Michael R. Foos 36 Vice President - Finance and Chief
Accounting Officer
Eric J. Moser 35 Vice President - Corporate Controller,
Treasurer
Jerri L. Hunt 50 Vice President - Human Resources and Risk
Management
James M. Little 40 Vice President - Engineering
Eric Hansen 37 Vice President - Information Technology
(1) Member of the Executive Committee of the Board of Directors.
Ronald J. Mittelstaedt has been President, Chief Executive Officer and a
director since Waste Connections was formed, and was elected Chairman in January
1998. He also served as a consultant to Waste Connections in August and
September 1997. Mr. Mittelstaedt has more than 14 years of experience in the
solid waste industry. He served as a consultant to United Waste Systems, Inc.,
with the title of Executive Vice President, from January 1997 to August 1997,
where he was responsible for corporate development for all states west of
Colorado. As Regional Vice President of USA Waste Services, Inc. (including
Sanifill, Inc., which was acquired by USA Waste Services, Inc.) from November
1993 to January 1997, he was responsible for all operations in 16 states and
Canada. Mr. Mittelstaedt held various positions at Browning-Ferris Industries,
Inc. from August 1987 to November 1993, most recently as Division Vice President
in northern California, overseeing the San Jose market. Previously he was the
District Manager responsible for BFI's operations in Sacramento and the
surrounding areas. He holds a B.S. in Finance from the University of California
at Santa Barbara.
Steven F. Bouck has been Executive Vice President and Chief Financial
Officer since February 1998. Mr. Bouck held various positions with First
Analysis Corporation from 1986 to 1998, including most recently as Managing
Director coordinating corporate finance. In that capacity, he provided merger
and acquisition advisory services to companies in the environmental industry.
Mr. Bouck was also responsible for assisting in investing venture capital funds
focused on the environmental industry that were managed by First Analysis. In
connection with those investments, he served on the boards of directors of
several companies. While at First Analysis, Mr. Bouck also provided analytical
research coverage of a number of publicly traded environmental services
companies. Mr. Bouck holds B.S. and M.S. degrees in mechanical engineering from
Rensselaer Polytechnic Institute and an M.B.A. in Finance from the Wharton
School. He has been a Chartered Financial Analyst since 1990.
Darrell W. Chambliss has been Executive Vice President - Operations and
Secretary since October 1, 1997. Mr. Chambliss held various management positions
at USA Waste Services, Inc. (including Sanifill, Inc. and United Waste, Inc.,
both of which were acquired by USA Waste Services, Inc.) from April 1995 to
September 1997, including most recently Division Manager in Corning, California,
where he was responsible for the operations of 19 operating companies as well as
supervising and integrating acquisitions. From July 1989 to April 1995, he held
various management positions with Browning-Ferris Industries, Inc., including
serving as Assistant District Manager in San Jose, California, where he was
responsible for a significant hauling operation, and serving as District Manager
in Tucson, Arizona for more than three years. Mr. Chambliss holds a B.S. in
Business Administration from the University of Arkansas.
17
David M. Hall has been Vice President - Business Development since August
1, 1998. Mr. Hall has more than 15 years of experience in the solid waste
industry with extensive operating and marketing experience in the Western U.S.
From October, 1995 to July 1998, Mr. Hall was the Divisional Vice President of
USA Waste Services, Inc., Rocky Mountain Division (including for Sanifill, Inc.
which was acquired by USA Waste Services, Inc.). In that position, he oversaw
all operations and business development in six Rocky Mountain states. Prior to
his employment with Sanifill, Mr. Hall held various management positions with
BFI from October 1986 to October 1995, including Vice President of Sales for the
Western United States. Mr. Hall was employed from 1979 to 1986 in a variety of
sales and marketing management positions in the high technology sector. Mr. Hall
received a BS degree in Management and Marketing in 1979 from Southwest Missouri
State University.
Michael R. Foos has been Vice President - Finance and Chief Accounting
Officer since October 1999. From October 1997 to September 1999, Mr. Foos served
as Vice President and Corporate Controller of Waste Connections. Mr. Foos served
as Division Controller of USA Waste Services, Inc. (including Sanifill, Inc.,
which was acquired by USA Waste Services, Inc.) from October 1996 to September
1997, where he was responsible for financial compilation and reporting and
acquisition due diligence for a seven-state region. Mr. Foos served as Assistant
Regional Controller at USA Waste Services, Inc. from August 1995 to September
1996, where he was responsible for internal financial reporting for operations
in six states and Canada. Mr. Foos also served as District Controller for Waste
Management, Inc. from February 1990 to July 1995, and was a member of the audit
staff of Deloitte & Touche from 1987 to 1990. Mr. Foos holds a B.S. in
Accounting from Ferris State University.
Eric J. Moser has been Vice President - Corporate Controller and Treasurer
since October 1999. From October 1997 to September 1999, Mr. Moser served as
Waste Connections' Treasurer and Assistant Corporate Controller. From August
1995 to September 1997, Mr. Moser held various finance positions at USA Waste
Services, Inc. (including Sanifill, Inc., which was acquired by USA Waste
Services, Inc.), most recently as Controller of the Ohio Division, where he was
responsible for internal financial compilation and reporting and acquisition due
diligence. Previously Mr. Moser was Controller of the Michigan Division of USA
Waste Services, Inc., where he was responsible for internal financial reporting.
Mr. Moser served as Controller for Waste Management, Inc. from June 1993 to
August 1995, where he was responsible for internal financial reporting for a
hauling company, landfill and transfer station. Mr. Moser holds a B.S. in
Accounting from Illinois State University.
Jerri L. Hunt has been Vice President - Human Resources and Risk Management
since December 1999. From 1994 to 1999, Ms. Hunt held various positions with
First Union National Bank (including the Money Store, which was acquired by
First Union National Bank), most recently Vice President of Human Resources in
which she managed all aspects of human resources for over 5,000 employees
located throughout the United States. From 1989 to 1994, Ms. Hunt served as
Manager of Human Resources and Risk Management for BFI, where she was
responsible for all aspects of human resources and safety and environmental
compliance matters. Ms. Hunt also served as a Human Resources Supervisor for
United Parcel Service from 1976 to 1989. She holds a B.S. degree from California
State University, Sacramento and a masters degree in Human Resources from Golden
Gate University.
James M. Little has been Vice President - Engineering since September 1999.
Mr. Little held various management positions with Waste Management, Inc.
(formerly USA Waste Services, Inc., which was acquired by Waste Management, Inc.
and Chambers Development Co. Inc., which was acquired by USA Waste Services,
Inc.) from April 1990 to September 1999, including Regional Environmental
Manager and Regional Landfill Manger, and most recently Division Manager in
Ohio, where he was responsible for the operations of ten operating companies in
the Northern Ohio area. Mr. Little is a certified professional geologist and
holds a B.S. in Geology from Slippery Rock University of Pennsylvania.
Eric Hansen has been Vice President - Information Technology since January
2001. From April 1998 to December 2000, Mr. Hansen served as Waste Connections'
Director of Management Information Systems. Mr. Hansen served as Information
Systems Manager with Fibres International from October 1997 to April 1998. Mr.
Hansen held various positions including NT Administrator for the Multnomah
Athletic Club in Portland, Oregon from August 1989 to October 1997. Mr. Hansen
earned a Bachelor of Science degree from Portland State University in 1989.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock trades on The Nasdaq Stock Market(R) - National Market
under the symbol "WCNX". The following table shows the high and low sale prices
for the common stock as reported by the Nasdaq National Market for the periods
indicated.
HIGH LOW
----------- -----------
2000
First Quarter $ 14.94 $ 9.25
Second Quarter 19.75 9.75
Third Quarter 25.94 17.13
Fourth Quarter 35.25 21.69
2001
First Quarter $ 33.50 $ 23.00
Second Quarter 37.31 25.70
Third Quarter 34.90 22.20
Fourth Quarter 32.90 25.47
On March 13, 2002, there were 76 record holders of Waste Connections common
stock.
We have never paid cash dividends on our common stock. We do not currently
anticipate paying any cash dividends on our common stock. We intend to retain
all earnings to fund the operation and expansion of our business. In addition,
our existing credit facility restricts the payment of cash dividends.
ITEM 6. SELECTED FINANCIAL DATA
This table sets forth selected financial data of Waste Connections and our
predecessors for the periods indicated. This data should be read in conjunction
with and is qualified by reference to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Item 7 in this Annual
Report on Form 10-K and our audited consolidated financial statements, including
the notes thereto and the independent auditors' report thereon and the other
financial information included in Item 8 in this Form 10-K. The selected data in
this section are not intended to replace the consolidated financial statements
included in this Report.
The entities Waste Connections acquired in September 1997 from
Browning-Ferris Industries, Inc. ("BFI") are collectively referred to as Waste
Connections' predecessors.
19
WASTE CONNECTIONS, INC. AND PREDECESSORS
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PREDECESSORS
COMBINED
NINE MONTHS WASTE CONNECTIONS, INC.
ENDED YEARS ENDED DECEMBER 31,
SEPTEMBER 30, -------------------------------------------------------------------
1997 1997 1998 1999 2000 2001
----------- ----------- ----------- ----------- ----------- -----------
STATEMENT OF OPERATIONS DATA (1):
Revenues $ 18,114 $ 47,510 $ 99,624 $ 184,225 $ 304,355 $ 377,533
Operating expenses:
Cost of operations 14,753 36,213 71,635 112,686 174,510 210,590
Selling, general and administrative 3,009 5,088 9,967 15,754 25,416 32,007
Depreciation and amortization 1,083 3,180 8,008 14,769 27,195 36,138
Start-up and integration -- 493 -- -- -- --
Loss on disposal of operations -- -- -- -- 833 4,879
Stock compensation -- 4,395 632 265 163 --
Acquisition-related expenses -- -- -- 9,003 150 --
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations (731) (1,859) 9,382 31,748 76,088 93,919
Interest expense (456) (1,957) (3,458) (11,531) (28,705) (30,045)
Other income (expense), net 14 449 410 (66) 116 (5,891)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income tax
provision and minority interests (1,173) (3,367) 6,334 20,151 47,499 57,983
Minority interests -- -- -- -- -- (7,338)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before income tax
provision (1,173) (3,367) 6,334 20,151 47,499 50,645
Income tax provision -- (332) (3,040) (10,924) (19,310) (19,932)
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item (1,173) (3,699) 3,294 9,227 28,189 30,713
Extraordinary item - early extinguishment
of debt, net of tax benefits -- -- (1,027) -- -- (185)
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) $ (1,173) $ (3,699) $ 2,267 $ 9,227 $ 28,189 $ 30,528
=========== =========== =========== =========== =========== ===========
Redeemable convertible preferred
stock accretion -- (531) (917) -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) applicable to common
stockholders $ (1,173) $ (4,230) $ 1,350 $ 9,227 $ 28,189 $ 30,528
=========== =========== =========== =========== =========== ===========
Basic income (loss) per common share:
Income (loss) before extraordinary item $ (0.73) $ 0.23 $ 0.49 $ 1.21 $ 1.14
Extraordinary item -- (0.10) -- -- (.01)
----------- ----------- ----------- ----------- -----------
Net income (loss) per common share $ (0.73) $ 0.13 $ 0.49 $ 1.21 $ 1.13
=========== =========== =========== =========== ===========
Diluted income (loss) per common share:
Income (loss) before extraordinary item $ (0.73) $ 0.19 $ 0.46 $ 1.17 $ 1.11
Extraordinary item -- (0.08) -- -- (.01)
----------- ----------- ----------- ----------- -----------
Net income (loss) per common share $ (0.73) $ 0.11 $ 0.46 $ 1.17 $ 1.10
=========== =========== =========== =========== ===========
Shares used in calculating basic income
(loss) per share 5,825,142 10,412,868 18,655,801 23,301,358 27,069,685
=========== =========== =========== =========== ===========
Shares used in calculating diluted income
(loss) per share 5,825,142 12,323,990 19,929,539 23,994,994 27,675,639
=========== =========== =========== =========== ===========
See footnotes on page 21.
20
WASTE CONNECTIONS, INC.
---------------------------------------------------------------------
DECEMBER 31,
---------------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash and equivalents $ 1,327 $ 3,351 $ 2,393 $ 2,461 $ 7,279
Working capital (deficit) (5,380) (14,167) (10,149) (10,398) (4,665)
Property and equipment, net 23,275 51,422 335,260 384,237 465,806
Total assets 45,905 176,659 617,958 810,104 979,353
Long-term debt (2) 14,500 68,274 275,145 334,194 416,171
Redeemable convertible preferred stock 7,523 -- -- -- --
Total stockholders' equity 5,374 66,837 218,521 334,208 379,965
(1) The entities Waste Connections acquired in September 1997 from BFI are
collectively referred to as Waste Connections' predecessors.
(2) Excludes redeemable convertible preferred stock, which converted into common
stock upon our May 1998 initial public offering.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial and Operating Data," our Consolidated Financial Statements and the
notes thereto included elsewhere herein.
Overview
Waste Connections, Inc. is a regional, integrated solid waste services
company that provides solid waste collection, transfer, disposal and recycling
services in secondary markets of the Western U.S. As of December 31, 2001, we
served more than 800,000 commercial, industrial and residential customers in
California, Colorado, Iowa, Kansas, Kentucky, New Mexico, Minnesota,
Mississippi, Montana, Nebraska, Oklahoma, Oregon, South Dakota, Tennessee,
Texas, Utah, Washington, and Wyoming. As of that date, we owned 74 collection
operations and operated or owned 35 transfer stations, 26 Subtitle D landfills
and 18 recycling facilities.
We intend to pursue an acquisition-based growth strategy, and we have
acquired 134 businesses from our inception in September 1997 through December
31, 2001, with 18 of these acquisitions occurring in 2001. Excluding debt
assumed, the aggregate consideration for acquisitions occurring in 2001, using
the purchase method of accounting, was approximately $63.6 million. From
inception through December 31, 2001, the results of operations of these acquired
businesses have been included in our financial statements only from the
respective dates of acquisition, except for 14 acquisitions accounted for under
the poolings-of-interests method of accounting, which are included for all
periods presented. We anticipate that a substantial part of our future growth
will come from acquiring additional solid waste collection, transfer and
disposal businesses and, as a consequence, additional acquisitions could
continue to affect period-to-period comparisons of our operating results.
Critical Accounting Policies
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Allowance for doubtful accounts. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. If the financial condition of our customers was to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. In addition, if certain customer and
billing information is not properly integrated from acquisitions that we close,
additional allowances may be required.
Impairment of intangible assets. We periodically evaluate acquired
businesses for potential impairment indicators. Our judgments regarding the
existence of impairment indicators are based on regulatory factors, market
conditions and operational performance of our acquired businesses. Future events
could cause us to conclude that impairment indicators exist and that goodwill or
other intangibles associated with our acquired businesses is impaired. Any
resulting impairment loss could have a material adverse impact on our financial
condition and results of operations. As of December 31, 2001, intangible assets
represented 43.7% of our total assets.
21
Accounting for landfills. Landfill permitting, acquisition and preparation
costs are amortized using a units-of-production method as permitted airspace of
the landfill is consumed. Landfill preparation costs include the costs of
construction associated with excavation, liners, site berms and the installation
of leak detection and leachate collection systems. In determining the
amortization rate for a landfill, preparation costs include the total estimated
costs to complete construction of the landfill's permitted capacity.
Units-of-production amortization rates are determined annually for our operating
landfills.
We periodically evaluate our landfill sites for potential impairment
indicators. Our judgments regarding the existence of impairment indicators are
based on regulatory factors, market conditions and operational performance of
our landfills. Future events could cause us to conclude that impairment
indicators exist and that our landfill carrying costs are impaired. Any
resulting impairment loss could have a material adverse impact on our financial
condition and results of operations.
Landfill depletion rates are determined by management based on estimates
provided by our internal and third party engineers and consider the information
provided by surveys which are performed at least annually. Significant changes
in our estimates could result in material increases to our landfill depletion
rates which could have a material adverse impact on our financial condition and
results of operations.
We reserve for estimated landfill closure and post-closure maintenance
costs at the landfills we own. We will have additional material financial
obligations relating to closure and post-closure costs of the other disposal
facilities that we currently own or operate and that we may own or operate in
the future. The net present value of the closure and post closure commitment is
calculated assuming an inflation rate of 3% and a discount rate of 7.5%.
Discounted amounts previously recorded are accreted to reflect the effect of the
passage of time. Significant reductions in our estimates of the remaining lives
of our landfills or significant increases in our estimates of the landfill
closure and post-closure maintenance costs could have a material adverse impact
on our financial condition and results of operations.
General
Our revenues consist mainly of fees we charge customers for solid waste
collection, transfer, disposal and recycling services. A large part of our
collection revenues comes from providing commercial, industrial and residential
services. We frequently perform these services under service agreements or
franchise agreements with counties or municipal contracts. Our existing
franchise agreements and all of our existing municipal contracts give Waste
Connections 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. Approximately 50% of our revenues
for the year ended December 31, 2001 were derived from services provided under
exclusive franchise agreements, long term municipal contracts and governmental
certificates. Governmental certificates grant Waste Connections 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 Waste Connections. Our collection business also generates revenues
from the sale of recyclable commodities. The table below shows for the periods
indicated the percentage of our total reported revenues attributable to services
provided, prior to intercompany eliminations. The data below have been restated
to give effect to acquisitions that were accounted for using the
pooling-of-interests method for business combinations.
22
Year Ended December 31,
---------------------------------
1999 2000 2001
----- ----- -----
Collection 71.1% 70.8% 67.9%
Transfer and processing 14.8 9.3 9.6
Landfill 10.1 13.4 18.7
Recycling 3.0 6.0 3.4
Other 1.0 0.5 0.4
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
We charge transfer station and landfill customers a tipping fee on a per
ton basis for disposing of their solid waste at the transfer stations and the
landfill facilities we own and operate. Most 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 for 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 typically contain a formula, generally based on
a published price index that automatically adjusts fees to cover increases in
some, but not all, operating costs.
We derive a substantial portion of our revenues from services provided
under exclusive municipal contracts and franchise agreements. No single contract
or customer accounted for more than 5% of our revenues for the years ended
December 31, 1999, 2000 and 2001.
Costs of operations include labor, fuel, equipment maintenance and tipping
fees paid to third party disposal facilities, worker's compensation and vehicle
insurance, the cost of materials we purchase for recycling, third party
transportation expense, district and state taxes and host community fees and
royalties. As of December 31, 2001, Waste Connections owned and/or operated 35
transfer stations, which reduce our costs by allowing us to use collection
personnel and equipment more efficiently and by consolidating waste to gain more
favorable disposal rates that may be available for larger quantities of waste.
Selling, general and administrative ("SG&A") expenses include management,
clerical and administrative compensation overhead costs associated with our
marketing and sales force, professional services and community relations
expense.
Depreciation and amortization expense includes depreciation of fixed assets
over their estimated useful lives using the straight-line method and
amortization of goodwill (for businesses acquired prior to July 1, 2001) and
other intangible assets using the straight-line method. As discussed more fully
below, goodwill and indefinite-lived intangible assets from acquisitions closed
after June 30, 2001 will no longer be amortized.
Waste Connections capitalizes 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 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. In 2001, we
capitalized $213,000 of interest related to landfill and transfer station
development projects. At December 31, 2001, we had $129,000 in capitalized
expenditures relating to pending acquisitions.
We continually evaluate the value and future benefits of our intangible
assets, including goodwill. We assess the recoverability from future operations
using cash flows and income from operations of the related acquired businesses
as measures. Under this approach, the carrying value is reduced if it becomes
probable that our best estimate for expected future cash flows of the related
business would be less than the carrying amount of the intangible assets. As of
December 31, 2001, there have been no adjustments to the carrying amounts of
intangibles resulting from these evaluations. As of December 31, 2001, goodwill
and other intangible assets represented approximately 43.7% of total assets and
112.6% of stockholders' equity.
Goodwill represents the excess of the purchase price over the fair value of
the net assets of the acquired entities. In allocating the purchase price of an
acquired company among its assets, we first assign value to the tangible assets,
followed by intangible assets, including covenants not to compete and certain
contracts that are determinable both in terms of size and life. We determine the
value of the other intangible assets by considering, among other things, the
present value of the cash flows associated with those assets. Goodwill resulting
from acquisitions completed on or before June 30, 2001 is amortized on a
straight-line basis over the period of
23
expected benefit of 40 years. Accumulated amortization of goodwill amounted to
$13.1 million and $22.2 million as of December 31, 2000 and 2001, respectively.
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and No. 142, "Goodwill and Other Intangible Assets",
(collectively, the "Statements") effective for fiscal years beginning after
December 15, 2001. Under the new rules, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be subject to annual
impairment tests in accordance with the Statements. Other intangible assets,
including those meeting new recognition criteria under the Statements, will
continue to be amortized over their estimated useful lives.
We will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002, except, as provided
for under the Statements, goodwill and indefinite lived intangible assets
resulting from acquisitions completed after June 30, 2001 will not be amortized.
In 2001, we recognized $7,349 of tax deductible goodwill amortization expense
and $2,232 of non-tax deductible goodwill amortization expense. Application of
the nonamortization provisions of Statement 142 is expected to result in an
increase in net income of approximately $6,788 in 2002 based on goodwill
amortization occurring in 2001 that will not occur in 2002. We estimate our 2002
earnings per share will be calculated using basic and diluted shares of 27.3
million and 32.0 million, respectively. We will test goodwill for impairment
using the two-step process prescribed in Statement 142. The first step is a
screen for potential impairment, while the second step measures the amount of
the impairment, if any. Prior to June 30, 2002, we expect to perform the first
of the required impairment tests of goodwill and indefinite lived intangible
assets based on the carrying values as of January 1, 2002. Any impairment charge
resulting from these transitional tests will be reflected as the cumulative
effect of a change in accounting principle in the first quarter of 2002. The
Company has not yet determined what the effect of these tests will be on the
earnings and financial position of the Company.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations", effective for fiscal years
beginning after June 15, 2002. This statement addresses financial accounting and
reporting for legal obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. We are currently
evaluating the effect SFAS No. 143 will have on our financial statements and
related disclosures.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets", effective
for fiscal years beginning after December 15, 2001. This Statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. We are currently evaluating the effect SFAS No. 144 will have on our
financial statements and related disclosures.
Results of Operations
The following table sets forth items in our consolidated statement of
operations in thousands and as a percentage of revenues for the periods
indicated:
Year Ended December 31,
-----------------------------------------------------------------------------
1999 as a 2000 as a 2001 as a
% of % of % of
1999 Revenue 2000 Revenue 2001 Revenue
---- ------- ---- ------- ---- -------
Revenues $ 184,225 100.0% $ 304,355 100.0% $ 377,533 100.0%
Cost of operations 112,686 61.2 174,510 57.3 210,590 55.8
Selling, general and administrative 15,754 8.6 25,416 8.4 32,007 8.5
Depreciation and amortization 14,769 8.0 27,195 8.9 36,138 9.5
Loss on disposal of operations -- -- 833 0.3 4,879 1.3
Stock compensation 265 0.1 163 0.1 -- --
Acquisition-related expenses 9,003 4.9 150 0.0 -- --
--------- ----- --------- ----- --------- -----
Income from operations 31,748 17.2 76,088 25.0 93,919 24.9
Interest expense, net (11,531) (6.3) (28,705) (9.4) (30,045) (8.0)
Other income (expense), net (66) 0.0 116 0.0 (5,891) (1.6)
Minority interests -- -- -- -- (7,338) (1.9)
Income tax provision (10,924) (5.9) (19,310) (6.3) (19,932) (5.3)
Extraordinary charges -- -- -- -- (185) (0.0)
--------- ----- --------- ----- --------- -----
Net income $ 9,227 5.0% $ 28,189 9.3% $ 30,528 8.1%
========= ===== ========= ===== ========= =====
EBITDA margin (1) 25.3% 33.9% 34.4%
----- ----- -----
24
(1) EBITDA margin represents EBITDA expressed as a percentage of revenues.
EBITDA represents income from operations plus depreciation and
amortization. EBITDA does not represent and should not be considered as an
alternative to net income or cash flow from operations as determined by
generally accepted accounting principles. Further, EBITDA does not
necessarily indicate whether cash flow will be sufficient for items such
as working capital, capital expenditures, or to react to changes in our
industry or the economy in general. We believe that EBITDA is a frequently
used measure that provides additional information for determining our
ability to meet debt service requirements and that it is one of the
indicators upon which we, our lenders and certain investors assess our
financial performance and our capacity to service debt. We therefore
interpret the trends that EBITDA depicts as one measure of our liquidity.
Because EBITDA is not calculated by all companies and analysts in the same
fashion, the EBITDA measures presented by us may not necessarily be
comparable to other similarly titled measures of other companies.
Therefore, in evaluating EBITDA data, investors should consider, among
other factors:
o the non-GAAP nature of EBITDA data;
o actual cash flow;
o the actual availability of funds for debt service, capital expenditures
and working capital; and
o the comparability of our EBITDA data to similarly titled measures
reported by other companies.
Years Ended December 31, 2001 and 2000
Revenues. Total revenues for 2001 increased $73.2 million, or 24.0%, to
$377.5 million from $304.4 million in 2000. Approximately $39 million of the
increase resulted from acquisitions accounted for using the purchase method of
accounting that closed since the beginning of 2001. The remaining increase was
primarily attributable to the inclusion in 2001 of 12 months of revenues from
businesses acquired in 2000, selective price increases and growth in the base
business, partially offset by a decline in commodity prices and the loss of
revenues previously generated by certain Utah operations that were sold in 2001.
Cost of Operations. Total cost of operations for 2001 increased $36.1
million, or 20.7%, to $210.6 million from $174.5 million in 2000. The increase
was primarily attributable to the inclusion of the cost of operations of
acquisitions closed since the beginning of the year and the inclusion in 2001 of
12 months of operating costs from businesses acquired in 2000. Cost of
operations as a percentage of revenues declined by 1.5 percentage points to
55.8% in 2001 from 57.3% in 2000. The decline in cost of operations as a
percentage of revenues was primarily attributable to the effect of tuck-in
acquisitions closed since the beginning of 2001, economies of scale from the
larger revenue base, greater integration of collection volumes into landfills we
own or operate and selective price increases.
SG&A. SG&A expenses increased $6.6 million, or 25.9%, to $32.0 million for
2001 from $25.4 million for 2000. Our SG&A increased as a result of additional
personnel from companies acquired, additional corporate overhead to accommodate
our growth and the incurrence of $879,000 in expenses related to the termination
of negotiations and due diligence for a large potential acquisition. SG&A as a
percentage of revenues increased 0.1 percentage points to 8.5% for 2001 from
8.4% for 2000. The increase in SG&A as a percentage of revenues was due to the
incurrence of terminated acquisition expenses, offset by the result of spreading
overhead expenses over a larger base of revenue from the acquisitions completed
in 2001.
Depreciation and Amortization. Depreciation and amortization expense
increased $8.9 million, or 32.9% to $36.1 million in 2001 from $27.2 million in
2000. The increase resulted primarily from the inclusion of depreciation and
amortization of businesses acquired in 2001, the inclusion in 2001 of 12 months
of depreciation and amortization from businesses acquired in 2000, the
amortization of goodwill and other intangible assets associated with
acquisitions accounted for using the purchase method of accounting and a greater
percentage of revenues derived from landfill activity. Depreciation and
amortization as a percentage of revenues increased 0.6 percentage points to 9.5%
for 2001 from 8.9% for 2000. The increase in depreciation and amortization as a
percentage of revenues in 2001 was due to the increased amortization of landfill
airspace associated with landfills purchased in 2001 and the roll over effect of
landfills acquired in 2000, partially offset by not having to amortize goodwill
on acquisitions closed subsequent to June 30, 2001. The landfill amortization
rates as a percentage of revenues are generally higher than the depreciation and
amortization rates associated with collection assets.
Loss on Disposal of Operations. During 2001, we sold some of our Utah
operations that were deemed to no longer be of strategic importance. We
recognized a pre-tax loss of $4,879 from this sale. During 2000, we sold our
Idaho operations and recognized a pre-tax loss of $833 from this sale.
Stock Compensation Expense. Stock compensation expense was $163,000 in
2000, which was attributable to the valuation of common stock options and
warrants with exercise prices less than the estimated fair value of our common
stock on the date of the grant and relates solely to stock options granted prior
to the initial public offering in May 1998. This compensation expense was fully
amortized in 2000.
25
Acquisition Related Expenses. Acquisition related expenses decreased to $0
for 2001 from $150,000 in 2000. The prior year acquisition related expenses were
for commissions, professional fees, and other direct costs resulting from the
one acquisition that was accounted for using the pooling-of-interests method.
Operating Income. Operating income increased $17.8 million, or 23.4%, to
$93.9 in 2001 from $76.1 million in 2000. The increase was attributable to
operating income recognized from acquisitions closed in 2001, the inclusion in
2001 of 12 months of operating income from acquisitions closed in 2000,
selective price increases, economies of scale from a greater revenue base and
greater integration of collection volumes into transfer stations and landfills
we own or operate, partially offset by increased losses from the disposal of
certain operations, increased depreciation and amortization expenses and SG&A
expenses. Operating income as a percentage of revenues decreased 0.1 percentage
points to 24.9% for 2001 from 25.0% for 2000. The decrease in operating income
as a percentage of revenues is attributable to the increased losses on the
disposal of certain operations, and increases in depreciation and amortization
and SG&A as a percentage of revenues, partially offset by the improvement in
gross margins and economies of scale from a greater revenue base, and the
elimination of stock compensation and acquisition related expenses.
Interest Expense. Interest expense increased $1.3 million, or 4.7%, to
$30.0 million for 2001 from $28.7 million in 2000. The increase is attributable
to higher debt levels to fund certain of our acquisitions, partially offset by
lower interest rates on our revolving credit facility and our payment of a
portion of the borrowings under our revolving credit facility with funds
received from our issuance of convertible subordinated debt obligations bearing
lower interest rates.
Other Expense. Other expense increased $6.0 million to $5.9 million in 2001
from other income of $0.1 million in 2000. The primary components of other
expense in 2001 was $6.3 million of expenses resulting from cash payments made
to terminate an interest rate swap prior to its due date, partially offset by
gains on the sale of certain assets. During the first quarter of 2001, we
determined that the debt, the specific cash flows of which an interest rate swap
was designated as hedging, would be repaid prior to its due date from the net
proceeds of our convertible subordinated debt offering; therefore, it was
probable that the future variable interest payments under the related debt (the
hedged transactions) would not occur.
Minority Interests. Minority interests were $7.3 million in 2001, compared
to $0 in 2000. The increase is attributable to the purchase by Waste Connections
during the first quarter of 2001 of majority interests in two unrelated
entities.
Provision for Income Taxes. Income taxes increased $0.6 million, or 3.2%,
to $19.9 million in 2001 from $19.3 million in 2000. The effective income tax
rate in 2001 was 39.4%, which is above the federal statutory rate of 35.0% as
the result of state and local taxes and non-deductible goodwill associated with
certain acquisitions.
Extraordinary Item. Extraordinary item was $0.2 million in 2001, compared
to $0 in 2000. Extraordinary item consisted of costs associated with the early
termination of long-term debt.
Net Income. Net income increased $2.3 million, or 8.3%. to $30.5 million in
2001 from $28.2 million in 2000. The increase was primarily attributable to the
increase in operating income, offset by the increases in interest expense, other
expense, minority interests and income tax expense. Net income as a percentage
of revenues decreased by 1.2 percentage points to 8.1% for 2001 from 9.3% for
2000. The decrease was attributable to the decrease in operating income as a
percentage of revenues, and the increases in minority interests and other
expense, partially offset by decreases in interest expense and income tax
expense as a percentage of revenues.
Years Ended December 31, 2000 and 1999
Revenues. Revenues for 2000 increased $120.2 million, or 65.2%, to $304.4
million from $184.2 million for 1999. Approximately $37 million of the increase
resulted from acquisitions accounted for using the purchase method of accounting
that closed since the beginning of 2000. The remaining increase was primarily
attributable to the inclusion in 2000 of 12 months of revenues from businesses
acquired in 1999 and selective price increases and growth in the base business.
Cost of Operations. Cost of operations for 2000 increased $61.8 million, or
54.9%, to $174.5 million from $112.7 million for 1999. The increase was
primarily attributable to the inclusion of the cost of operations of
acquisitions closed since the beginning of the year and the inclusion in 2000 of
12 months of operating costs from businesses acquired in 1999. Cost of
operations as a percentage of revenues declined by 3.9 percentage points to
57.3% in 2000 from 61.2% in 1999. The decline in cost of operations as a percent
of revenues was primarily attributable to the effect of tuck-in acquisitions
closed since the beginning of 2000, economies of scale from the greater revenue
base, elimination of overhead in privately held companies acquired in
acquisitions accounted for as poolings-of-interests, greater integration of
collection volumes into landfills we own or operate and selective price
increases.
SG&A. SG&A expenses increased $9.6 million, or 61.3%, to $25.4 million for
2000 from $15.8 million for 1999. The increase resulted primarily from
additional personnel from companies acquired in 2000, the inclusion in 2000 of
12 months of SG&A costs from businesses acquired in 1999 and additional
corporate overhead to accommodate our growth. SG&A as a percentage of revenues
26
declined by 0.2 percentage points to 8.4% for 2000 from 8.6% for 1999. The
decline in SG&A as a percentage of revenues was a result of spreading of
overhead expenses over a larger base of revenue from the acquisitions completed
in 2000, offset by increases in corporate overhead.
Depreciation and Amortization. Depreciation and amortization expense
increased $12.4 million, or 84.1%, to $27.2 million for 2000 from $14.8 million
for 1999. The increase resulted primarily from the inclusion of depreciation and
amortization of businesses acquired in 2000, the inclusion in 2000 of 12 months
of depreciation and amortization from businesses acquired in 1999, the
amortization of goodwill and other intangible assets associated with
acquisitions accounted for using the purchase method of accounting and a greater
percentage of revenues derived from landfill activity. Depreciation and
amortization as a percentage of revenues increased 0.9 percentage points to 8.9%
for 2000 from 8.0% for 1999. The increase in depreciation and amortization as a
percentage of revenues in 2000 was due to the increased amortization of landfill
airspace associated with landfills purchased in 2000 and the roll over effect of
landfills acquired in 1999. The landfill amortization rates as a percentage of
revenues are generally higher than the historical depreciation and amortization
rates of our collection companies.
Stock Compensation Expense. Stock compensation expense decreased $102,000,
or 38.5%, to $163,000 for 2000 from $265,000 for 1999. Our stock compensation
expense is attributable to the valuation of common stock options and warrants
with exercise prices less than the estimated fair value or our common stock on
the date of grant and relates solely to stock options and warrants granted prior
to the initial public offering in May 1998. The expense attributable to these
options and warrants was fully amortized between 1998 and 2000. Stock
compensation as a percentage of revenues was 0.1% for 2000 and 1999.
Acquisition-Related Expenses. Acquisition-related expenses decreased $8.85
million to $150,000 for 2000 from $9.0 million for 1999. The decrease is related
primarily to the decline in the number and size of acquisitions accounted for
using the pooling-of-interests method of accounting in 2000 relative to 1999.
These expenses arise from commissions, professional fees, and other direct costs
resulting from the one acquisition in 2000 and the 13 acquisitions in 1999 that
were accounted for using the pooling-of-interests method.
Operating Income. Operating income increased $44.4 million, or 140.1%, to
$76.1 million in 2000 from $31.7 million in 1999. The increase was attributable
to operating income recognized from acquisitions closed in 2000, the inclusion
in 2000 of 12 months of operating income from acquisitions closed in 1999, the
reduction of acquisition-related expenses associated with 13 acquisitions that
were accounted for using the pooling-of-interest method in 1999, economies of
scale from a greater revenue base and greater integration of collection volumes
into transfer stations and landfills we own or operate. Operating income as a
percentage of revenues increased by 7.8 percentage points to 25.0% for 2000 from
17.2% for 1999. The increase was attributable to improvements in gross margins
coupled with declines in SG&A, acquisition related expenses and stock
compensation expenses as a percentage of revenue.
Interest Expense. Interest expense increased $17.2 million, or 148.9%, to
$28.7 million for 2000 from $11.5 million for 1999. The increase was primarily
attributable to higher debt levels incurred to fund certain of our acquisitions.
Other Income (Expense). Other income (expense) increased from an expense
total of $66,000 in 1999 to an income total of $116,000 in 2000. Other income
(expense) is primarily comprised of the gains and losses on sales of
miscellaneous assets.
Provision for Income Taxes. Income taxes increased $8.4 million, or 76.8%,
to $19.3 million for 2000 from $10.9 million for 1999. The effective income tax
rate in 2000 was 40.6%, which is above the federal statutory rate of 35.0% as
the result of the non-deductibility of certain expenses associated with
acquisitions accounted for as poolings-of-interests, state and local taxes,
non-deductible goodwill associated with certain acquisitions and the
non-deductibility of the stock compensation expense.
Net Income. Net income increased by $19.0 million, or 205.5%, to $28.2
million in 2000 from $9.2 million in 1999. The increase was attributable to the
increase in operating income, offset by the increases in interest expense,
income tax expense and other expense. Net income as a percentage of revenues
increased by 4.3 percentage points to 9.3% for 2000 from 5.0% for 1999. The
increase was attributable to improvements in gross margins coupled with declines
in SG&A, acquisition related expenses and stock compensation expenses as a
percentage of revenue offset by increases in interest expense and income taxes.
Liquidity and Capital Resources
Our business is capital intensive. Our capital requirements include
acquisitions and fixed asset purchases. We expect that we will also make capital
expenditures for landfill cell construction, landfill development and landfill
closure activities in the future. We plan to meet our capital needs through
various financing sources, including internally generated funds, debt and equity
financings.
As of December 31, 2001, we had a working capital deficit of $4.7 million,
including cash and cash equivalents of $7.3 million. Our strategy in managing
our working capital is generally to apply the cash generated from our operations
that remains after satisfying
27
our working capital and capital expenditure requirements to reduce our
indebtedness under our bank revolving credit facility and to minimize our cash
balances.
At inception, we sold 2,300,000 shares of common stock at $0.01 per share
to our founders and 2,499,998 shares of Series A Preferred Stock at $2.80 per
share. In May and June 1998, we received approximately $24.0 million in net
proceeds from the sale of 2,300,000 shares in our initial public offering
(including exercise by the underwriters of their over-allotment option). In
February 1999, we received approximately $65.1 million in net proceeds from the
sale of 3,999,307 shares in a secondary public offering (including exercise by
the underwriters of their over-allotment option) and used the proceeds to pay
down approximately $50.2 million of our outstanding debt. In August 2000, we
received approximately $82.1 million in net proceeds from the sale of 4,427,500
shares in a secondary public offering (including exercise by the underwriters of
their over-allotment option) and used the proceeds to pay down approximately
$69.7 million of our outstanding debt. In April 2001, we issued $150 million of
5.5% Convertible Subordinated Notes Due April 2006 in a Rule 144A private
placement. We received proceeds of approximately $144.4 million from our private
placement of the notes and used these proceeds to repay certain outstanding
indebtedness under our credit facility. As of December 31, 2001, we had options
and warrants outstanding to purchase 1,992,472 shares of common stock at a
weighted average exercise price of $19.50 per share.
We have a $435 million revolving credit facility with a syndicate of banks
for which Fleet Boston Financial Corp. acts as agent (the "Credit Facility").
However, bank covenant restrictions existing as of December 31, 2001 limited our
maximum borrowings (including standby letters of credit) under the Credit
Facility to $372.9 million. As of December 31, 2001, we had an aggregate of
$232.5 million outstanding under the Credit Facility, with the interest on $4.5
million of the outstanding borrowings at prime plus 75 basis points and the
interest on $228.0 million of the outstanding borrowings at LIBOR plus 225 basis
points. The Credit Facility allows us to issue up to $40 million in stand-by
letters of credit, which reduce the amount of total borrowings available under
the Credit Facility. As of December 31, 2001, we had $1.9 million of outstanding
letters of credit issued under the Credit Facility. Virtually all of our assets,
including our interest in the equity securities of our subsidiaries, secure our
obligations under the Credit Facility. The Credit Facility matures in 2005 and
bears interest at a rate per annum equal to, at our discretion, either the Fleet
Boston Financial Corp. Base Rate plus applicable margin, or the Eurodollar Rate
plus applicable margin. The Credit Facility places certain business, financial
and operating restrictions on Waste Connections relating to, among other things,
the incurrance of additional indebtedness, investments, acquisitions, asset
sales, mergers, dividends, distributions and repurchases and redemption of
capital stock. The Credit Facility also contains covenants requiring that
specified financial ratios and balances be maintained. As of December 31, 2001,
we are in compliance with these covenants. The Credit Facility also requires the
lenders' approval of acquisitions in certain circumstances. The Credit Facility
is used for (i) acquisitions; (ii) capital expenditures; (iii) working capital;
(iv) standby letters of credit; and (v) general corporate purposes.
As of December 31, 2001, we had the following contractual obligations and
commercial commitments (in thousands):
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------------------------------
Contractual Less Than
Obligations Total 1 Year 1 to 3 Years 4 to 5 Years Over 5 Years
----------- ----- --------- ------------ ------------ ------------
Long-Term Debt(1) $ 421,476 $ 5,305 $ 9,106 $ 386,706 $ 20,359
Operating Leases 7,449 1,479 2,548 1,948 1,474
Unconditional Purchase
Obligations 6,105 6,105 - - -
Total Contractual Cash
Obligations $ 435,030 $ 12,889 $ 11,654 $ 388,654 $ 21,833
(1) Long-term debt payments include $232.5 million due 2005 under our
Credit Facility. As of December 31, 2001, our Credit Facility allows us to
borrow up to $435 million.
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
---------------------------------------------------------------------------------------------------------
Commercial Total Amounts
Commitments Committed Less Than 1 Year 1 to 3 Years 4 to 5 Years Over 5 Years
----------- ------------- ---------------- ------------ ------------ ------------
Standby Letters of Credit $ 1,889 $ 1,829 $ 60 $ - $ -
Performance Bonds(2) 20,551 20,473 58 20 -
Total Commercial Commitments $ 22,440 $ 22,302 $ 118 $ 20 $ -
28
(2) We can issue up to $50 million of performance bonds under our surety
bond facility. This facility does not have a stated expiration date; however,
individual performance bonds issued typically have expiration dates ranging from
one to five years.
For the year ended December 31, 2001, net cash provided by operations was
approximately $87.2 million. $12.3 million of cash provided by operations was
used to fund increases in working capital for the period.
For the year ended December 31, 2001, net cash used by investing activities
was $90.8 million. Of this, $52.9 million was used to fund the cash portion of
acquisitions and $1.0 million was used to fund increases in restricted cash.
Cash used for capital expenditures was $40.2 million, which was primarily for
investments in fixed assets, consisting primarily of trucks, containers and
other equipment. Cash inflows from investing activities include $3.0 million
received from the disposal of assets.
For the year ended December 31, 2001, net cash provided by financing
activities was $8.5 million, which was provided by $16.9 million of net
borrowings under our various debt arrangements and $7.6 million of proceeds from
stock option and warrant exercises, less $6.3 million of cash paid for debt
issuance costs, $6.3 million of cash paid to terminate an interest rate swap and
$3.4 million of cash distributions to minority interest holders.
We made approximately $40.2 million in capital expenditures during the year
ended December 31, 2001. We expect to make capital expenditures of approximately
$47 million in 2002 in connection with our existing business. We intend to fund
our planned 2002 capital expenditures principally through existing cash,
internally generated funds, and borrowings under our existing credit facility.
In addition, we may make substantial additional capital expenditures in
acquiring solid waste collection and disposal businesses. If we acquire
additional landfill disposal facilities, we may also have to make significant
expenditures to bring them into compliance with applicable regulatory
requirements, obtain permits or expand our available disposal capacity. We
cannot currently determine the amount of these expenditures because they will
depend on the number, nature, condition and permitted status of any acquired
landfill disposal facilities. We believe that our credit facility and the funds
we expect to generate from operations will provide adequate cash to fund our
working capital and other cash needs for the foreseeable future.
From time to time we evaluate our existing operations and their strategic
importance to Waste Connections. If we determine that a given operating unit
does not have future strategic importance, we may sell or otherwise dispose of
those operations. Although we believe our operations would not be impaired by
such dispositions, we could incur losses on them.
INFLATION
To date, inflation has not significantly affected our operations.
Consistent with industry practice, many of our contracts allow us to pass
through certain costs to our customers, including increases in landfill tipping
fees and, in some cases, fuel costs. Therefore, we believe that we should be
able to increase prices to offset many cost increases that result from
inflation. However, competitive pressures may require us to absorb at least part
of these cost increases, particularly during periods of high inflation.
SEASONALITY
Based on historic trends experienced by the businesses we have acquired, we
expect our operating results to vary seasonally, with revenues typically lowest
in the first quarter, higher in the second and third quarters and lower in the
fourth quarter than in the second and third quarters.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the normal course of business, we are exposed to market risk, including
changes in interest rates and certain commodity prices. We use hedge agreements
to manage a portion of our risks related to interest rates. While we are exposed
to credit risk in the event of non-performance by counterparties to our hedge
agreements, in all cases such counterparties are highly rated financial
institutions and we do not anticipate non-performance. We do not hold or issue
derivative financial instruments for trading purposes. We monitor our hedge
positions by regularly evaluating the positions at market and by performing
sensitivity analyses.
In December 1999, we entered into an interest rate swap with Fleet Boston
Financial Corporation. Under the swap agreement, which was effective through
December 2001, the interest rate on a $125 million LIBOR-based note under the
Credit Facility was effectively fixed with an interest rate of 6.1% plus an
applicable margin. This rate remained at 6.1% if LIBOR was less than 7.0%. If
LIBOR exceeded 7.0%, the interest rate under the swap agreement would increase
one basis point for every LIBOR basis point above 7.0%.
29
In May 2000, we entered into another interest rate swap with Union Bank of
California. Under the swap agreement, which was effective through December 2003,
the interest rate on a separate $125 million LIBOR-based notes under the Credit
Facility was effectively fixed with an interest rate of 7.0% plus an applicable
margin.
In December 2000, we restructured both of the two aforementioned interest
rate swap agreements, extending their maturity through December 2003 and
removing the embedded option features of the agreements. As of December 31,
2000, the Fleet Boston swap had a notional amount of $125 million at a fixed
rate of 6.17% plus applicable margin and the Union Bank of California swap had a
notional amount of $125 million at a fixed rate of 7.01% plus applicable margin.
In March 2001, $110 million of the notional amount under the Union Bank of
California swap was terminated because we used the proceeds from our Convertible
Subordinated Notes offering to repay $110 million of the LIBOR note, the cash
flows of which this swap was designated as hedging.
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 represents 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 $92.5 million remaining floating
rate balance owed under our credit facility and floating rate municipal bond
obligations of approximately $1.8 million associated with Madera. A one
percentage point increase in interest rates on our variable-rate debt as of
December 31, 2001 would decrease our annual pre-tax income by approximately
$943,000. 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 18 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. To the extent 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 which pass commodity risk along to
the customers, we believe, given historical trends and fluctuations within the
recycling commodities market, that a 10% decrease in average recycled commodity
prices from the prices that were in effect at December 31, 2001 would not have a
material impact on our cash flows or pre-tax income.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14 of Part IV of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
30
INDEX TO FINANCIAL STATEMENTS
WASTE CONNECTIONS, INC.
Page
----
Report of Ernst & Young LLP, Independent Auditors 32
Consolidated Balance Sheets as of December 31, 2000 and 2001 33
Consolidated Statements of Income for the years ended
December 31, 1999, 2000 and 2001 34
Consolidated Statements of Stockholders' Equity and Comprehensive
Income for the years ended December 31, 1999, 2000 and 2001 35
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000 and 2001 36
Notes to Consolidated Financial Statements 38
31
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Waste Connections, Inc.
We have audited the accompanying consolidated balance sheets of Waste
Connections, Inc. as of December 31, 2000 and 2001, and the related consolidated
statements of income, stockholders' equity and comprehensive income, and cash
flows for each of the three years in the period ended December 31, 2001. Our
audits also included the financial statement schedule listed in Item 14.(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Waste Connections,
Inc. at December 31, 2000 and 2001, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken as
a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Sacramento, California
February 15, 2002
32
WASTE CONNECTIONS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
-------------------------
2000 2001
---------- ----------
ASSETS
Current assets:
Cash and equivalents $ 2,461 $ 7,279
Accounts receivable, less allowance for
doubtful accounts of $1,899 and $2,167
at December 31, 2000 and 2001, respectively 42,155 51,372
Prepaid expenses and other current assets 4,419 8,123
---------- ----------
Total current assets 49,035 66,774
Property and equipment, net 384,237 465,806
Intangible assets, net 363,505 428,005
Other assets, net 13,327 18,768
---------- ----------
$ 810,104 $ 979,353
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,636 $ 29,224
Accrued liabilities 20,558 23,555
Deferred revenue 9,595 13,355
Current portion of long-term debt and notes payable 3,644 5,305
---------- ----------
Total current liabilities 59,433 71,439
Long-term debt and notes payable 334,194 416,171
Other long-term liabilities 6,095 13,264
Deferred income taxes 76,174 78,689
---------- ----------
Total liabilities 475,896 579,563
Commitments and contingencies
Minority interests -- 19,825
Stockholders' equity:
Preferred stock: $0.01 par value; 7,500,000 shares
authorized; none issued and outstanding -- --
Common stock: $0.01 par value; 50,000,000 shares
authorized; 26,480,046 and 27,423,669 shares
issued and outstanding at December 31, 2000
and 2001, respectively 265 274
Additional paid-in capital 296,439 316,594
Retained earnings 37,504 68,032
Unrealized loss on market value of interest rate swaps -- (4,935)
---------- ----------
Total stockholders' equity 334,208 379,965
---------- ----------
$ 810,104 $ 979,353
========== ==========
See accompanying notes.
33
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
YEARS ENDED DECEMBER 31,
------------------------------------------------
1999 2000 2001
------------ ------------ ------------
Revenues $ 184,225 $ 304,355 $ 377,533
Operating expenses:
Cost of operations 112,686 174,510 210,590
Selling, general and administrative 15,754 25,416 32,007
Depreciation and amortization 14,769 27,195 36,138
Loss on disposal of operations -- 833 4,879
Stock compensation 265 163 --
Acquisition-related expenses 9,003 150 --
------------ ------------ ------------
Income from operations 31,748 76,088 93,919
Interest expense (11,531) (28,705) (30,045)
Other income (expense), net (66) 116 (5,891)
------------ ------------ ------------
Income before income tax provision and minority interests 20,151 47,499 57,983
Minority interests -- -- (7,338)
------------ ------------ ------------
Income before income tax provision 20,151 47,499 50,645
Income tax provision (10,924) (19,310) (19,932)
------------ ------------ ------------
Income before extraordinary item 9,227 28,189 30,713
Extraordinary item - early extinguishment
of debt, net of tax benefit of $120 -- -- (185)
------------ ------------ ------------
Net income $ 9,227 $ 28,189 $ 30,528
============ ============ ============
Basic income per common share:
Income before extraordinary item $ 0.49 $ 1.21 $ 1.14
Extraordinary item -- -- (.01)
------------ ------------ ------------
Net income per common share $ 0.49 $ 1.21 $ 1.13
============ ============ ============
Diluted income per common share:
Income before extraordinary item $ 0.46 $ 1.17 $ 1.11
Extraordinary item -- -- (.01)
------------ ------------ ------------
Net income per common share $ 0.46 $ 1.17 $ 1.10
============ ============ ============
Shares used in calculating basic income per share 18,655,801 23,301,358 27,069,685
============ ============ ============
Shares used in calculating diluted income per share 19,929,539 23,994,994 27,675,639
============ ============ ============
See accompanying notes.
34
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
STOCKHOLDERS' EQUITY
------------------------------------------------------------------------------------------
UNREALIZED
LOSS ON
MARKET
COMMON STOCK ADDITIONAL VALUE OF DEFERRED
COMPREHENSIVE ----------------------- PAID-IN INTEREST STOCK RETAINED
INCOME SHARES AMOUNT CAPITAL RATE SWAPS COMPENSATION EARNINGS TOTAL
--------- ---------- -------- --------- -------- -------- -------- ---------
Balances at December 31, 1998 13,387,808 $ 134 $ 66,585 $ -- $ (428) $ 546 $ 66,837
Issuance of common stock
warrants -- -- 572 -- -- -- 572
Issuance of common stock 7,011,269 70 140,514 -- -- -- 140,584
Amortization of deferred
stock compensation -- -- -- -- 265 -- 265
Exercise of stock
options and warrants 810,588 8 1,486 -- -- -- 1,494
Dividends paid -- -- -- -- -- (458) (458)
Net income -- -- -- -- -- 9,227 9,227
---------- -------- --------- -------- -------- -------- ---------
Balances at December 31, 1999 21,209,665 212 209,157 -- (163) 9,315 218,521
Issuance of common stock
warrants -- -- 183 -- -- -- 183
Issuance of common stock 4,472,413 45 82,886 -- -- -- 82,931
Amortization of deferred
stock compensation -- -- -- -- 163 -- 163
Exercise of stock
options and warrants 797,968 8 4,213 -- -- -- 4,221
Net income -- -- -- -- -- 28,189 28,189
---------- -------- --------- -------- -------- -------- ---------
Balances at December 31, 2000 26,480,046 265 296,439 -- -- 37,504 334,208
Issuance of common stock
warrants -- -- 105 -- -- -- 105
Issuance of common stock 337,905 3 8,634 -- -- -- 8,637
Exercise of stock
options and warrants 605,718 6 11,416 -- -- -- 11,422
Unrealized loss on
market value of
interest rate swaps -- -- -- (4,935) -- -- (4,935)
Net income $ 30,528 -- -- -- -- -- 30,528 30,528
Other comprehensive
income - unrealized
loss on interest
rate swaps (8,144) -- -- -- -- -- -- --
Income tax effect of
other comprehensive
income 3,209 -- -- -- -- -- -- --
---------
Comprehensive income $ 25,593 -- -- -- -- -- -- --
========= ---------- -------- --------- -------- -------- -------- ---------
Balances at December 31, 2001 27,423,669 $ 274 $ 316,594 $ (4,935) $ -- $ 68,032 $ 379,965
========== ======== ========= ======== ======== ======== =========
See accompanying notes.
35
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,227 $ 28,189 $ 30,528
Adjustments to reconcile net income to net
cash provided by operating activities:
Loss on disposal of assets 155 804 4,868
Depreciation 10,545 18,627 25,687
Amortization of intangibles 4,223 8,568 10,451
Loss on termination of interest rate swap -- -- 6,337
Deferred income taxes 2,222 1,303 12,442
Minority interests -- -- 7,338
Amortization of debt issuance costs and debt guarantee fees 256 668 1,592
Stock and non-cash acquisition related compensation 1,448 163 --
Extraordinary item - early extinguishment of debt -- -- 305
Changes in operating assets and liabilities, net
of effects from acquisitions:
Accounts receivable, net (5,203) (8,014) (1,978)
Prepaid expenses and other current assets (1,256) (674) (3,556)
Accounts payable (955) 716 (1,677)
Deferred revenue 1,895 508 3,760
Accrued liabilities 2,301 3,631 (8,469)
Other liabilities (2,885) (713) (430)
---------- ---------- ----------
Net cash provided by operating activities 21,973 53,776 87,198
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of assets 990 311 3,049
Payments for acquisitions, net of cash acquired (233,745) (168,307) (52,853)
Capital expenditures for property and equipment (18,739) (25,408) (40,215)
Increase in restricted cash (3,731) (99) (989)
Decrease (increase) in other assets (1,052) 529 168
---------- ---------- ----------
Net cash used in investing activities (256,277) (192,974) (90,840)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 275,101 162,413 263,521
Principal payments on notes payable and long-term debt (103,646) (107,508) (246,638)
Proceeds from sale of common stock 65,118 82,110 --
Proceeds from option and warrant exercises 1,494 4,221 7,620
Payments on short-term borrowings (1,500) -- --
Payments on advances from a related party (571) -- --
Payment of capital distributions and dividends (458) -- --
Termination of interest rate swap -- -- (6,337)
Distributions to minority interest holders -- -- (3,370)
Debt issuance costs (2,192) (1,970) (6,336)
---------- ---------- ----------
Net cash provided by financing activities 233,346 139,266 8,460
---------- ---------- ----------
Net increase (decrease) in cash and equivalents (958) 68 4,818
Cash and equivalents at beginning of year 3,351 2,393 2,461
---------- ---------- ----------
Cash and equivalents at end of year $ 2,393 $ 2,461 $ 7,279
========== ========== ==========
See accompanying notes.
36
WASTE CONNECTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
---------- ---------- ----------
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION AND NON-CASH TRANSACTIONS:
Cash paid for income taxes $ 2,636 $ 13,123 $ 13,607
========== ========== ==========
Cash paid for interest $ 10,117 $ 27,815 $ 28,232
========== ========== ==========
In connection with its acquisitions, the
Company assumed liabilities as follows:
Fair value of assets acquired $ 426,702 $ 186,459 $ 164,956
Cash paid for acquisitions (including
acquisition costs) (233,745) (168,307) (52,853)
---------- ---------- ----------
Liabilities assumed, stock and notes
payable issued to sellers $ 192,957 $ 18,152 $ 112,103
========== ========== ==========
See accompanying notes.
37
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Waste Connections, Inc. ("WCI" or "the Company") was incorporated in
Delaware on September 9, 1997 and commenced its operations on October 1, 1997
through the purchase of certain solid waste operations in Washington. The
Company is a regional, integrated, non-hazardous solid waste services company
that provides collection, transfer, disposal and recycling services to
commercial, industrial and residential customers in California, Colorado, Iowa,
Kansas, Kentucky, Minnesota, Mississippi, Montana, Nebraska, New Mexico,
Oklahoma, Oregon, South Dakota, Tennessee, Texas, Utah, Washington and Wyoming.
Basis of Presentation
These consolidated financial statements include the accounts of WCI and
its wholly-owned and majority-owned subsidiaries. The consolidated entity is
referred to herein as the Company. All intercompany accounts and transactions
have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets", (collectively, the "Statements") effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill and intangible assets
deemed to have indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets, including those meeting new recognition criteria under the Statements,
will continue to be amortized over their estimated useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002, except, as provided
for under SFAS No. 142, goodwill and indefinite-lived intangible assets
resulting from acquisitions completed after June 30, 2001 will not be amortized.
In 2001, the Company recognized $7,349 of tax deductible goodwill amortization
expense and $2,232 of non-tax deductible goodwill amortization expense.
Application of the nonamortization provisions of Statement 142 is expected to
result in an increase in net income of approximately $6,788 in 2002 based on
goodwill amortization occurring in 2001 that will not occur in 2002. The Company
estimates its 2002 earnings per share will be calculated using basic and diluted
shares of 27.3 million and 32.0 million, respectively. The Company will test
goodwill for impairment using the two-step process prescribed in Statement 142.
The first step is a screen for potential impairment, while the second step
measures the amount of the impairment, if any. Prior to June 30, 2002, the
Company expects to perform the first of the required impairment tests of
goodwill and indefinite lived intangible assets based on the carrying values as
of January 1, 2002. Any impairment charge resulting from these transitional
tests will be reflected as the cumulative effect of a change in accounting
principle in the first quarter of 2002. The Company has not yet determined what
the effect of these tests will be on the earnings and financial position of the
Company.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 143,
"Accounting for Asset Retirement Obligations", effective for fiscal years
beginning after June 15, 2002. This Statement addresses financial accounting and
reporting for legal obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. The Company is
currently evaluating the effect, if any, SFAS No. 143 will have on its financial
statements and related disclosures.
In August 2001, the Financial Accounting Standards Board issued SFAS No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets", effective
for fiscal years beginning after December 15, 2001. This Statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. The Company is currently evaluating the effect, if any, SFAS No. 144
will have on its financial statements and related disclosures.
38
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at purchase to be cash equivalents. As of December 31, 2000
and 2001, cash equivalents consisted of demand money market accounts.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risks consist primarily of accounts receivable. The
Company does not require collateral on its trade receivables. Credit risk on
accounts receivable is minimized as a result of the large and diverse nature of
the Company's customer base. The Company maintains allowances for losses based
on the expected collectibility of accounts receivable. Credit losses have been
within management's expectations.
Property and Equipment
Property and equipment are stated at cost. Improvements or betterments
which significantly extend the life of an asset are capitalized. Expenditures
for maintenance and repair costs are charged to expense as incurred. The cost of
assets retired or otherwise disposed of and the related accumulated depreciation
are eliminated from the accounts in the year of disposal. Gains and losses
resulting from disposals of property and equipment are included in other income
(expense). Depreciation is computed using the straight-line method over the
estimated useful lives of the assets or the lease term, whichever is shorter.
The estimated useful lives are as follows:
Buildings 20 years
Machinery and equipment 3 - 15 years
Rolling stock 10 years
Containers 5 - 15 years
Capitalized landfill costs include expenditures for land and related
airspace, permitting costs and preparation costs. Landfill permitting and
preparation costs represent only direct costs related to those activities,
including legal, engineering and construction. Interest is capitalized on
landfill permitting and construction projects and other projects under
development while the assets are undergoing activities to ready them for their
intended use. The interest capitalization rate is based on the Company's
weighted average cost of indebtedness. Total interest capitalized in 2000 and
2001 was $8 and $213, respectively. Landfill permitting, acquisition and
preparation costs are amortized as permitted airspace of the landfill is
consumed. Landfill preparation costs include the costs of construction
associated with excavation, liners, site berms and the installation of leak
detection and leachate collection systems. In determining the amortization rate
for a landfill, preparation costs include the total estimated costs to complete
construction of the landfills' permitted capacity. Units-of-production
amortization rates are determined annually for the Company's operating
landfills. The rates are determined by management based on estimates provided by
the Company's internal and third party engineers, and consider the information
provided by surveys which are performed at least annually.
Goodwill
Goodwill represents the excess of the purchase price over the estimated
fair value of the net tangible and intangible assets of the acquired entities.
Goodwill resulting from acquisitions completed on or before June 30, 2001 is
amortized on a straight-line basis over the period of expected benefit of 40
years. In accordance with the provisions of SFAS No. 142, goodwill and other
indefinite-lived intangible assets resulting from acquisitions completed
subsequent to June 30, 2001, which totaled $59,451, is not amortized. The impact
of this change resulted in an increase of $330 in income before extraordinary
item and net income ($0.01 per share) for the year ended December 31, 2001.
Accumulated amortization of goodwill amounted to $13,074 and $22,202 as of
December 31, 2000 and 2001, respectively.
The Company continually evaluates the value and future benefits of its
intangible assets, including goodwill. The Company assesses recoverability from
future operations using cash flows and income from operations of the related
acquired business as
39
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
measures. In accordance with Statement of Financial Accounting Standards
("SFAS") No. 121, the carrying value would be reduced to estimated net
realizable value if it becomes probable that the Company's best estimate for
expected future cash flows of the related business would be less than the
carrying amount of the related intangible assets. There have been no adjustments
to the carrying amount of intangible assets resulting from these evaluations as
of December 31, 2000 and 2001.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, trade
receivables, restricted funds held in trust, trade payables, debt instruments
and interest rate swaps. As of December 31, 2000 and 2001, the carrying values
of cash, trade receivables, restricted funds held in trust, and trade payables
are considered to be representative of their respective fair values. The
carrying values of the Company's debt instruments, excluding the Convertible
Subordinated Notes, approximate their fair values as of December 31, 2000 and
2001, based on current incremental borrowing rates for similar types of
borrowing arrangements. As of December 31, 2001, the Company's Convertible
Subordinated Notes had a carrying value of $150,000 and a fair value of
approximately $163,320, based on the publicly quoted trading price of these
notes. The Company's interest rate swaps are recorded at their estimated fair
values based on estimated cash flows calculated using interest rate yield curves
as of December 31, 2001.
Derivative Financial Instruments
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivatives and Hedging Activities", which was amended by SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities (an Amendment of FASB Statement 133)," (collectively "SFAS 133").
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS 133 requires the Company to
recognize all derivatives on the balance sheet at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the derivative
is a hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income (Note 11) until the hedged item is recognized in earnings.
The ineffective portion of a derivative's change in fair value is immediately
recognized in earnings.
The Company's objective for utilizing derivative instruments is to reduce
its exposure to fluctuations in cash flows due to changes in the variable
interest rates of certain borrowings issued under its credit facility. The
Company's strategy to achieve that objective involves entering into interest
rate swaps that are specifically designated to certain variable rate instruments
under its credit facility and accounted for as cash flow hedges pursuant to SFAS
133.
The Company adopted SFAS 133 effective January 1, 2001. The Company has
evaluated its derivative instruments, consisting solely of two interest rate
swaps effective through December 2003, and believes these instruments qualify
for hedge accounting pursuant to SFAS 133. Upon adoption of SFAS 133, the
Company recorded the fair value of these interest rate swaps as an obligation of
$3,600, net of taxes of $2,340, with an equal amount recorded as an unrealized
loss in other comprehensive income. The adoption of SFAS 133 did not have a
material effect on the Company's results of operations. Because the relevant
terms of the interest rate swaps and the specific cash flows related to the
debts they have been designated to hedge are virtually identical, there was no
material ineffectiveness required to be recognized in earnings. In addition,
there are no components of the derivative instruments' gain or loss that have
been excluded from the assessment of hedge effectiveness.
Income Taxes
The Company uses the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that are
expected to be in effect when the differences are expected to reverse.
Revenue Recognition
Revenues are recognized as services are provided. Certain customers are
billed in advance and, accordingly, recognition of the related revenues is
deferred until the services are provided.
The Company reviews its revenue producing contracts in the ordinary course
of business to determine if the direct costs to service the contractual
arrangements exceed the revenues to be produced by the contract. Any resulting
excess costs over the life of the contract are expensed at the time of such
determination.
40
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Stock-Based Compensation
As permitted under the provisions of SFAS No. 123 "Accounting for Stock
Based Compensation", the Company has elected to account for stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("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.
Per Share Information
Basic net income per share is computed using the weighted average number of
common shares outstanding. Diluted net income per share is computed using the
weighted average number of common and potential common shares outstanding.
Potential common shares are excluded from the computation if their effect is
anti-dilutive.
Closure and Post-Closure Costs
Accrued closure and post-closure costs represent an estimate of the current
value of the future obligation associated with closure and post-closure
monitoring of non-hazardous solid waste landfills currently owned and/or
operated by the Company. Closure and post-closure monitoring and maintenance
costs represent the costs related to cash expenditures yet to be incurred when a
landfill facility ceases to accept waste and closes. Accruals for closure and
post-closure monitoring and maintenance requirements in the U.S. consider final
capping of the site, site inspection, groundwater monitoring, leachate
management, methane gas control and recovery, and operating and maintenance
costs to be incurred during the period after the facility closes. Certain of
these environmental costs, principally capping and methane gas control costs,
are also incurred during the operating life of the site in accordance with the
landfill operation requirements of Subtitle D and the air emissions standards.
Site specific closure and post-closure engineering cost estimates are prepared
annually for landfills owned and/or operated by the Company for which it is
responsible for closure and post-closure. The impact of changes determined to be
changes in estimates, based on the annual update, are accounted for on a
prospective basis. The present value of estimated future costs are accreted at
an annual interest rate of 7.5% to reflect the passage of time. Discounting of
future costs is applied where the Company believes that both the amounts and
timing of related payments are reliably determinable.
Advertising Costs
Advertising costs are expensed as incurred. Advertising expense for the
years ended December 31, 1999, 2000 and 2001 was $500, $871 and $829,
respectively.
Segment Information
The Company identifies its operating segments based on business activities,
management responsibility and geographical location. The Company considers each
of its three operating regions and one division that report stand-alone
financial information and have segment managers that report to the Company's
chief operating decision maker to be an operating segment; however, all
operating segments have been aggregated together and are reported as a single
segment consisting of the collection, transfer, recycling and disposal of
non-hazardous solid waste primarily in the Western United States.
Comprehensive Income
Comprehensive income, as defined, includes all changes in equity (net
assets) during a period from non-owner sources. For the year ended December 31,
2001, the Company recorded in comprehensive income an unrealized pre-tax loss of
$8,144 resulting from changes in the fair value of interest rate swaps that
qualify for cash flow hedge accounting (Note 11).
Reclassifications
Certain amounts reported in the Company's prior years' financial statements
have been reclassified to conform with the 2001 presentation.
41
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
2. ACQUISITIONS
Poolings-of-Interests
On January 19, 1999, the Company consummated a business combination with
Murrey's Disposal Company, Inc., American Disposal Company, Inc., D.M. Disposal
Co., Inc. and Tacoma Recycling Company, Inc. (all privately held and
collectively referred to as the "Murrey Companies") that included the exchange
of 2,888,880 shares of WCI common stock for all outstanding shares of the Murrey
Companies. In connection with the business combination with the Murrey
Companies, the Company incurred transaction-related costs of approximately
$6,200 that were charged to operations.
The Company consummated six other business combinations in 1999 with
privately held companies that included the exchange of 960,380 shares of WCI
common stock for all of the outstanding shares of the merged entities. In
connection with these mergers, the Company incurred transaction-related costs of
approximately $2,803 which were charged to operations.
During 2000, the Company consummated one business combination with a
privately held company which included the exchange of 103,315 shares of WCI
common stock for all the outstanding shares of the merged company. In connection
with this business combination, the Company incurred transactions related costs
of approximately $150 that were charged to operations.
The table below sets forth the combined revenues and net income of WCI, the
Murrey Companies, and all other entities acquired in pooling of interests
transactions for the years ended December 31, 1999 and 2000:
Waste The Murrey
Connections, Inc. Companies Other Restated
Before Pooling Pooling Pooling For Pooling
Acquisitions Acquisitions Acquisitions Acquisitions
-------- -------- -------- --------
YEAR ENDED DECEMBER 31, 1999:
Revenues $175,773 $ 1,788 $ 6,664 $184,225
Net income 8,763 245 219 9,227
YEAR ENDED DECEMBER 31, 2000:
Revenues 304,311 - 44 304,355
Net income 28,186 - 3 28,189
2000 and 2001 Acquisitions
During 2000, the Company acquired 25 non-hazardous solid waste businesses
that were accounted for as purchases. Aggregate consideration, exclusive of debt
assumed, for the acquisitions consisted of $168,307 in cash, (net of cash
acquired), $3,212 in notes payable to sellers and 44,913 shares of common stock
valued at $821.
During 2001, the Company acquired 18 non-hazardous solid waste businesses
that were accounted for as purchases. Aggregate consideration, exclusive of debt
assumed, for the acquisitions consisted of $52,853 in cash, (net of cash
acquired), $2,042 in notes payable to sellers and 337,905 shares of common stock
and common stock warrants valued at $8,742.
During 2001, the Company sold some of its Utah operations that were deemed
to no longer be of strategic importance. The Company recognized a pre-tax loss
of $4,879 from this sale.
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 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
42
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
acquisition, the "allocation period" for finalizing purchase price allocations
generally does not exceed one year from the consummation of a business
combination.
As of December 31, 2001, the Company had 14 acquisitions for which purchase
price allocations were preliminary mainly as a result of tax-related
settlements. 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 purchase price
allocations for acquisitions consummated in 2000 and preliminary purchase price
allocations for the acquisitions consummated in 2001 is as follows:
2000 2001
Acquisitions Acquisitions
------------ ------------
Acquired assets:
Accounts receivable $ 5,533 $ 7,322
Prepaid expenses and other current assets 222 345
Property and equipment 44,489 64,039
Goodwill 133,629 71,258
Indefinite-lived intangible assets -- 8,695
Long-term franchise agreements and other 1,016 701
Non-competition agreements 572 375
Other assets 998 2,727
Deferred income taxes -- 9,494
Assumed liabilities:
Deferred revenue (3,746) --
Accounts payable and accrued liabilities (5,624) (20,146)
Long-term liabilities assumed (4,298) (65,315)
Minority interests -- (15,858)
Deferred income taxes (451) --
--------- ---------
$ 172,340 $ 63,637
========= =========
Goodwill acquired in 2001 totaling $12,244 is expected to be deductible for
tax purposes.
In connection with certain of the acquisitions in 2000 and 2001, the
Company is required to pay contingent consideration to certain former
shareholders of the respective companies, subject to the occurrence of specified
events. As of December 31, 2001, the maximum potential contingent payments
relating to these acquisitions total approximately $6,417 in cash and 51,746
shares placed into escrow, and are to be earned based upon the achievement of
certain milestones and targeted earnings. The Company has included $1,417 of the
contingent cash payments in these financial statements as the events which would
give rise to such payments are considered probable. The Company has not included
in these financial statements $5,000 of the potential contingent cash payments
related to the achievement of certain targeted earnings for a 12 month period
ending September 30, 2002 (the "Contingency Period") by one company acquired in
2001, as it is too early in the Contingency Period to assess the probability of
the achievement of such targeted earnings. No amounts related to the contingent
shares have been included in these financial statements, as the events which
would give rise to such payments have not yet occurred and are not considered
probable.
The following unaudited pro forma results of operations assume that the
Company's significant acquisitions occurring in 2000 and 2001, accounted for
using the purchase method of accounting, were acquired as of January 1, 2000:
Year Ended December 31,
2000 2001
--------- ---------
Total revenue $ 365,734 $ 389,823
Net income 30,671 28,838
Basic income per share 1.32 1.07
Diluted income per share 1.28 1.04
43
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The unaudited pro forma results do not purport to be indicative of the
results of operations which actually would have resulted had the acquisitions
occurred on January 1, 2000, nor are they necessarily indicative of future
operating results.
3. INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31,
2000 2001
--------- ---------
Goodwill $ 371,206 $ 436,001
Indefinite-lived intangible assets -- 8,695
Long-term franchise agreements
and contracts 2,485 3,084
Non-competition agreements 2,559 2,858
Other, net 2,126 2,229
--------- ---------
378,376 452,867
Less - accumulated amortization (14,871) (24,862)
--------- ---------
$ 363,505 $ 428,005
========= =========
The Company acquired certain indefinite-lived intangible assets, long-term
franchise agreements, contracts and non-competition agreements in connection
with certain of its acquisitions. The amounts assigned to indefinite-lived
intangible assets consist of the value of certain perpetual rights to provide
solid waste collection and transportation services in specified territories. The
estimated fair value of the acquired indefinite-lived intangible assets,
long-term franchise agreements and contracts was determined by management based
on the discounted net cash flows associated with the rights, agreements and
contracts. The estimated fair value of the non-competition agreements reflects
management's estimates based on the amount of revenue protected under such
agreements. The amounts assigned to the franchise agreements, contracts, and
non-competition agreements are being amortized on a straight-line basis over the
expected term of the related agreements (ranging from 5 to 20 years). In
accordance with the provisions of SFAS No. 142, indefinite-lived intangible
assets resulting from acquisitions completed subsequent to June 30, 2001 are not
amortized; however, they are required to be classified separately from goodwill.
Total goodwill amortization expense for the years ended December 31, 1999, 2000
and 2001 was $3,766, $7,857 and $9,581, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
December 31,
2000 2001
--------- ---------
Landfill site costs $ 283,892 $ 325,060
Land, buildings and improvements 35,936 56,994
Rolling stock 56,611 73,121
Containers 35,796 42,257
Machinery and equipment 20,838 41,391
--------- ---------
433,073 538,823
Less accumulated depreciation and depletion (48,836) (73,017)
--------- ---------
$ 384,237 $ 465,806
========= =========
The Company's landfill depletion expense for the years ended December 31,
1999, 2000 and 2001 was $2,163, $5,853 and $8,008, respectively.
44
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
5. OTHER ASSETS
Other assets consist of the following:
December 31,
2000 2001
------- -------
Restricted cash $ 8,842 $ 8,108
Loan fees 3,488 7,992
Other 997 2,668
------- -------
$13,327 $18,768
======= =======
Restricted cash is included as part of other assets and consists of amounts
on deposit with various banks that support the Company's financial assurance
obligations for its landfill facilities' closure and post-closure costs and
amounts outstanding under the Madera and Wasco bonds (Note 8).
6. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31,
2000 2001
------- -------
Income taxes $ 9,912 $ 1,421
Payroll and payroll-related 4,989 4,009
Interest payable 3,258 3,392
Insurance claims and premiums 223 1,931
Acquisition-related -- 9,964
Other 2,176 2,838
------- -------
$20,558 $23,555
======= =======
7. CLOSURE AND POST-CLOSURE COSTS
The net present value of the closure and post-closure commitment is
calculated assuming inflation of 3% and a discount interest rate of 7.5%.
Discounted amounts previously recorded are accreted to reflect the effects of
the passage of time. The Company's current estimate of total future payments for
closure and post-closure, in accordance with Subtitle D, is $111,805,393,
adjusted for inflation, while the present value of such estimate is $7,683. At
December 31, 2000 and 2001, respectively, accruals for landfill closure and
post-closure costs (including costs assumed through acquisitions) were $5,194
and $7,683, respectively, and are recorded as other long-term liabilities on the
balance sheet. The accruals reflect landfills with estimated remaining lives,
based on current waste flows, that range from 10 to 313 years, with an estimated
average remaining life of approximately 82 years. The Company estimates that its
closure and post-closure payment commitments for one closed landfill will begin
in 2002, with total estimated closure and post-closure expenditures for this
landfill totaling $60.
8. LONG-TERM DEBT
Credit Facility
In May 2000, the Company entered into a new revolving credit facility with
a syndicate of banks for which Fleet Boston Financial Corporation acts as agent
(the "Credit Facility"). The maximum amount available under the Credit Facility
was $425,000 (including $40,000 in stand-by letters of credit, of which $24,410
and $1,889 were issued as of December 31, 2000 and 2001, respectively) and the
borrowings bear interest at various variable rates based on a spread over LIBOR
(approximately 8.8% and 4.3% as of December 31, 2000 and 2001, respectively) or
the applicable Base Rate (approximately 8.5% and 5.5% as of December 31, 2000
and 2001, respectively) at the Company's option. The Credit Facility was amended
on December 29, 2000, increasing the maximum amount
45
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
available to $435,000. The Credit Facility requires the Company to pay a
commitment fee ranging from .25% to .50% of the unused portion of the Credit
Facility. The Credit Facility requires quarterly interest payments for LIBOR
rate borrowings, monthly interest payments for Base Rate borrowings and matures
in May 2005. Borrowings under the Credit Facility are secured by virtually all
of the Company's assets. The Credit Facility places certain business, financial
and operating restrictions on the Company relating to, among other things, the
incurrance of additional indebtedness, investments, acquisitions, asset sales,
mergers, dividends, distributions and repurchases and redemption of capital
stock. The Credit Facility also requires that specified financial ratios and
balances be maintained. As of December 31, 2001, the Company was in compliance
with these covenants.
Convertible Subordinated Notes
In April 2001, the Company issued 5.5% Convertible Subordinated Notes Due
April 2006 (the "Convertible Subordinated Notes") with an aggregate principal
amount of $150,000 in a Rule 144A offering. The Convertible Subordinated Notes
are unsecured, rank junior to existing and future Senior Indebtedness, as
defined in the indenture governing the notes, and are convertible at any time at
the option of the holder into common stock at a conversion price of $38.03 per
share. The proceeds from the sale of the Convertible Subordinated Notes were
used to repay a portion of the outstanding indebtedness and related costs under
the Credit Facility.
Wasco Bond
In December 1999, the Company completed a $13,600 tax-exempt bond financing
for its Wasco subsidiary (the "Wasco Bond"). These funds were used for the
acquisition, construction, furnishing, equipping and improving of a landfill
located in Wasco County, Oregon (the "Landfill Project"). In March 2001, the
Company refinanced the Wasco Bond by completing $13,600 of tax-exempt revenue
bond financing through the issuance of three bonds (the "2001 Wasco Bonds"). The
Company incurred debt extinguishment costs of $144, net of tax, related to this
refinancing. The 2001 Wasco Bonds consist of $1,040 of 6.5% term bonds due March
1, 2004, $4,085 of 7.0% term bonds due March 1, 2012 and $8,475 of 7.25% term
bonds due March 1, 2021. At December 31, 2001, approximately $2,100 of the funds
from the bond offering are held by a trustee and can be used by the Company to
finance capital expenditures on the Landfill Project. These unused funds held by
the trustee are classified as restricted cash and included in other assets in
the accompanying consolidated balance sheet.
CRC Bond
In December 1991, Columbia Resource Company, a wholly-owned subsidiary of
the Company acquired in 1999, received $13,000 in financing through an
Industrial Revenue Bond (the "CRC Bond") issued by Clark County, Washington.
These funds were used for the acquisition of real property and construction
thereon of a solid waste transfer station. The CRC Bond required escalating
annual principal payments ranging from $1,000 in December 2000 to $1,505 in
December 2006 (the maturity date), bore interest at rates ranging from 7.1% to
7.5%, and was secured by the real property and solid waste transfer station and
backed by a letter of credit issued by Fleet Boston Financial Corporation.
The CRC Bond agreement allowed the Company to redeem the bonds prior to the
maturity date at any time during the period from December 2001 to December 2006.
In December 2001, the Company redeemed the CRC Bonds in full. The Company
incurred debt extinguishment costs of $41, net of tax, resulting from the
redemption.
Madera Bond
In June 1998, the Company completed a $1,800 tax-exempt bond financing for
its Madera subsidiary (the "Madera Bond"). These funds were used for specified
capital expenditures and improvements, including installation of a landfill gas
recovery system. The bonds mature on May 1, 2016 and bear interest at variable
rates based on market conditions for California tax exempt bonds (approximately
4.6% and 1.1% at December 31, 2000 and 2001, respectively). The bonds are backed
by a letter of credit issued by Fleet Boston Financial Corporation under the
Credit Facility for $1,829.
Interest Rate Swaps
In December 1999, the Company entered into an interest rate swap with Fleet
Boston Financial Corporation. Under the swap agreement, which was effective
through December 2001, the interest rate on a $125,000 LIBOR-based note under
the Credit Facility was effectively fixed with an interest rate of 6.1% plus an
applicable margin. This rate remained at 6.1% if LIBOR was less than
46
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
7.0%. If LIBOR exceeded 7.0%, the interest rate under the swap agreement would
increase one basis point for every LIBOR basis point above 7.0%.
In May 2000, the Company entered into another interest rate swap with Union
Bank of California. Under the swap agreement, which was effective through
December 2003, the interest rate on a separate $125,000 LIBOR-based note under
the Credit Facility was effectively fixed with an interest rate of 7.0% plus an
applicable margin.
In December 2000, the Company restructured both of the two aforementioned
interest rate swap agreements, extending their maturity through December 2003
and removing the embedded option features of the agreements. As of December 31,
2000, the Fleet Boston swap had a notional amount of $125,000 at a fixed rate of
6.17% plus applicable margin and the Union Bank of California swap had a
notional amount of $125,000 at a fixed rate of 7.01% plus applicable margin. In
March 2001, $110,000 of the notional amount under the Union Bank of California
swap was terminated because the Company used the proceeds from its Convertible
Subordinated Notes offering to repay $110,000 of the LIBOR note the cash flows
of which this swap was designated to hedge. The Company made a cash payment of
$6,337 to terminate the swap prior to its due date.
Long-term debt consists of the following:
December 31,
---------------------------
2000 2001
--------- ---------
Credit Facility $ 308,000 $ 232,500
Convertible Subordinated Notes -- 150,000
2001 Wasco Bonds 13,600 13,600
CRC Bond 7,625 --
Madera Bond 1,800 1,800
Notes payable to sellers in connection
with acquisitions, unsecured, bearing
interest at 6.0% to 9.0%, principal and
interest payments due periodically with
due dates ranging from 2002 to 2012 2,891 4,070
Notes payable to third parties, secured by
substantially all assets of certain
subsidiaries the Company, interest at
5.6% to 11.0%, principal and interest
payments due periodically with due
dates ranging from 2002 to 2010 3,922 19,506
--------- ---------
337,838 421,476
Less - current portion (3,644) (5,305)
--------- ---------
$ 334,194 $ 416,171
========= =========
As of December 31, 2001, aggregate contractual future principal payments by
calendar year on long-term debt are due as follows:
2002 $ 5,305
2003 6,165
2004 2,941
2005 234,574
2006 152,132
Thereafter 20,359
---------
$ 421,476
=========
47
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
9. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Leases
The Company leases its facilities and certain equipment under
non-cancelable operating leases for periods ranging from one to five years. The
Company's total rent expense under operating leases during the years ended
December 31, 1999, 2000 and 2001 was $1,233, $2,188 and $2,699, respectively.
As of December 31, 2001, future minimum lease payments under these leases,
by calendar year, are as follows:
2002 $ 1,479
2003 1,322
2004 1,226
2005 1,108
2006 840
Thereafter 1,474
---------
$ 7,449
=========
Performance Bonds
Municipal solid waste collection contracts may require performance bonds or
other means of financial assurance to secure contractual performance. As of
December 31, 2000 and 2001, WCI had provided customers and various regulatory
authorities with bonds of approximately $9,901 and $20,551, respectively, to
secure its obligations (exclusive of letters of credit backing certain municipal
bond obligations). The Company can issue up to $50 million of performance bonds
under its surety bond facility. This facility does not have a stated expiration
date; however, individual performance bonds issued typically have expiration
dates ranging from one to five years. If the Company were unable to obtain
surety bonds or letters of credit in sufficient amounts or at acceptable rates,
it could be precluded from entering into additional municipal solid waste
collection contracts or obtaining or retaining landfill operating permits.
Unconditional Purchase Obligation
The Company has an unconditional obligation to purchase diesel fuel under a
12 month agreement expiring on December 31, 2002. The total minimum diesel fuel
purchase under the agreement is $6,105.
CONTINGENCIES
Environmental Risks
The Company is subject to liability for any environmental damage that its
solid waste facilities may cause to neighboring landowners or residents,
particularly as a result of the contamination of soil, groundwater or surface
water, and especially drinking water, including damage resulting from conditions
existing prior to the acquisition of such facilities by the Company. The Company
may also be subject to liability for any off-site environmental contamination
caused by pollutants or hazardous substances whose transportation, treatment or
disposal was arranged by the Company or its predecessors. Any substantial
liability for environmental damage incurred by the Company could have a material
adverse effect on the Company's financial condition, results of operations or
cash flows. As of December 31, 2001, the Company is not aware of any significant
environmental liabilities.
Legal Proceedings
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, the Company is subject to
various judicial and administrative proceedings involving federal, state or
local agencies. In these proceedings,
48
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
an agency may seek to impose fines on the Company or to revoke or deny renewal
of an operating permit held by the Company. From time to time the Company may
also be subject to actions brought by citizens' groups or adjacent landowners or
residents in connection with the permitting and licensing of landfills and
transfer stations, or alleging environmental damage or violations of the permits
and licenses pursuant to which the Company operates.
In January 2002, the Oklahoma Department of Environmental Quality Land
Protection Division ("the Department") issued an order to the Company requiring
it to cease accepting more than 200 tons per day of out-of-state waste at its
Red Carpet Landfill location in Oklahoma due to the alleged failure of the
Company to file an approved disposal plan from the Department. Additionally, the
Department assessed the Company fines totaling $220 for past violations related
to accepting more than 200 tons per day of out-of-state waste prior to obtaining
an approved disposal plan. The Company believes, based on advice from legal
counsel, that the order issued by the Department is without merit as it has
properly complied with Oklahoma statutes related to disposal plan submission.
Additionally, the Company believes that certain Oklahoma statutes provide
exemption from the disposal plan requirement if the landfill meets certain
design, construction and operating requirements. The Company believes that its
landfill meets such requirements. Therefore, the Company believes any payment
resulting from the order will not have a material impact on the Company's cash
flows, financial condition, or results of operations.
In addition, the Company is a party to various claims and suits pending for
alleged damages to persons and property, alleged violations of certain laws and
alleged liabilities arising out of matters occurring during the normal operation
of the waste management business. However, as of December 31, 2001 there is no
current proceeding or litigation involving the Company that the Company believes
will have a material adverse impact on its business, financial condition,
results of operations or cash flows.
Employees
Approximately 116 of the Company's drivers and mechanics are represented by
the Teamsters Union in various locations. These employees are subject to labor
agreements that are subject to renegotiation periodically. The Company does not
expect any significant disruption in our business as a result of labor
negotiations.
The Company is not aware of any other organizational efforts among its
employees and believes that its relations with its employees are good.
10. STOCKHOLDERS' EQUITY
Common Stock
Of the 22,576,331 shares of common stock authorized but unissued as of
December 31, 2001, the following shares were reserved for issuance:
Stock option plan 2,264,548
Stock purchase warrants 90,603
Shares held in escrow 51,746
----------
2,406,897
==========
Stock Options
In November 1997, the Company's Board of Directors adopted a stock option
plan in which all officers, employees, directors and consultants may participate
(the "1997 Option Plan"). Options granted under the 1997 Option Plan may either
be incentive stock options or nonqualified stock options (the "Options"),
generally have a term of 10 years from the date of grant, and will vest over
periods determined at the date of grant. The exercise prices of the options are
determined by the Company's Board of Directors and will be at least 100% or 110%
of the fair market value of the Company's common stock on the date of grant as
provided for in the Option Plan.
The 1997 Option Plan provides for the reservation of common stock for
issuance thereunder equal to 3,500,000 shares. The amount of common stock
reserved for issuance under the 1997 Option Plan is decreased for options
exercised and increased for
49
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
previously granted options that have been forfeited or cancelled. As of December
31, 2001, options for 362,679 shares of common stock were available for future
grants under the 1997 Option Plan.
In February 2002, the Company's Board of Directors authorized two
additional equity-based compensation plans: the 2002 Stock Option Plan and 2002
Senior Management Equity Incentive Plan (Note 17).
As of December 31, 1999, 2000 and 2001, 495,713, 681,560 and 521,396
options to purchase common stock were exercisable under the 1997 Option Plan,
respectively.
A summary of the Company's stock option activity and related information
for the years ended December 31, 1999, 2000 and 2001 is presented below:
Weighted
Number of Average
Shares (Options) Exercise Price
--------- ---------
Outstanding as of December 31, 1998 978,764 $ 7.38
Granted 1,045,350 16.03
Forfeited (28,000) 20.20
Exercised (251,969) 5.92
---------
Outstanding as of December 31, 1999 1,744,145 12.57
Granted 221,500 14.01
Forfeited (135,032) 18.65
Exercised (366,362) 6.82
---------
Outstanding as of December 31, 2000 1,464,251 13.65
Granted 1,050,050 25.26
Forfeited (55,597) 20.58
Exercised (556,835) 13.33
---------
Outstanding as of December 31, 2001 1,901,869 20.00
=========
The following table summarizes information about stock options outstanding
as of December 31, 2001:
Options Outstanding Options Exercisable
-------------------------------------------- -------------------------------
Weighted
Average
Weighted Remaining Weighted
Average Contractual Average
Exercise Life Exercise
Exercise Range Shares Price (In Years) Shares Price
----------------------- ------------- ------------- --------------- ---------------- -------------
$2.80 to 3.50 49,000 $2.88 6.1 45,000 $2.83
$5.00 to 6.00 2,000 5.75 6.1 2,000 5.75
$10.25 to 13.00 502,302 11.17 7.4 294,805 11.15
$15.19 to 23.00 286,984 18.36 7.2 112,922 18.34
$23.63 to 33.37 1,061,583 25.44 9.1 66,669 25.62
------------- -------------
1,901,869 20.00 8.3 521,396 13.82
------------- -------------
50
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The weighted average grant date fair values for options granted during
1999, 2000 and 2001 are as follows:
1999 2000 2001
--------- --------- ---------
Exercise prices equal to market price of stock $ 7.80 $ 5.51 $ 10.32
Pro forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended December 31, 1999, 2000 and 2001: risk-free
interest rate of 5.8%, 5.8% and 4.5%, respectively; dividend yield of zero;
volatility factor of the expected market price of the Company's common stock of
..55, .65 and .45, respectively; and a weighted-average expected life of the
option of 4 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The following
table summarizes the Company's pro forma net income and pro forma basic net
income per share for the years ended December 31, 1999, 2000 and 2001:
Year Ended December 31,
1999 2000 2001
--------- ---------- ----------
Net income applicable to common stockholders:
As reported $ 9,227 $ 28,189 $ 30,528
Pro forma 7,631 25,933 27,393
Basic income per share:
As reported 0.49 1.21 1.13
Pro forma 0.41 1.11 1.01
Diluted income per share:
As reported 0.46 1.17 1.10
Pro forma 0.38 1.08 0.99
During the year ended December 31, 1998, the Company recorded deferred
stock compensation of $821 relating to stock options granted during the period
with exercise prices less than the estimated fair value of the Company's common
stock on the date of grant. The deferred stock compensation was amortized into
expense over the vesting periods of the stock options, which generally ranged
from 1 to 3 years. During the years ended December 31, 1999 and 2000,
compensation expense of $265 and $163, respectively, was recorded relating to
these options. The deferred stock compensation was fully amortized as of
December 31, 2000.
51
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
Stock Purchase Warrants
The following table summarizes information about warrants outstanding as of
December 31, 2000 and 2001:
Issue Warrants Exercise Fair Value Outstanding at December 31,
Date Issued Range of Warrants 2000 2001
------------------ ---------- ---------------- ----------- -------------- ------------
Warrants issued in connection
with an acquisition February 1998 200,000 $ 4.00 $ 954 113,333 73,333
Warrants issued to third party
acquisition consultants Throughout 1999 102,634 10.88 to 30.50 572 43,060 -
Warrants issued to third party
acquisition consultants Throughout 2000 40,438 10.88 to 27.88 183 26,232 5,771
Warrants issued to third party
acquisition consultants Throughout 2001 11,499 28.28 to 33.45 104 - 11,499
---------- ----------
182,625 90,603
========== ==========
The warrants are exercisable when granted and expire between 2002 and 2008.
Warrants issued to third party acquisition consultants are valued using the
Black-Scholes pricing model with assumed stock price volatility and risk-free
interest rates similar to those used for stock options, and the warrants'
contractual term of 2 years. These warrants are recorded as an element of the
related cost of acquisitions.
11. COMPREHENSIVE INCOME
The components of other comprehensive income and related tax effects for
the year ended December 31, 2001 are as follows:
Year Ended December 31, 2001
----------------------------
Gross Tax effect Net of tax
----- ---------- ----------
Cumulative effect of accounting change $ (5,940) $ (2,340) $ (3,600)
Amounts reclassified into earnings 9,648 3,801 5,847
Changes in fair value of interest rate swaps (11,852) (4,670) (7,182)
-------- -------- --------
$ (8,144) $ (3,209) $ (4,935)
======== ======== ========
In March 2001, the Company determined that the debt, the specific cash
flows of which an interest rate swap was designated to hedge, would be repaid
prior to its due date as a result of the convertible subordinated debt offering
(Note 8); therefore, it was probable that the future variable interest payments
under the related debt (the hedged transactions) would not occur and
accordingly, unrealized losses of $6,337 in other comprehensive income related
to the swap were reclassified to earnings. The interest rate swap was terminated
for a cash payment equal to its then fair value of $(6,337).
The estimated net amount of the existing losses as of December 31, 2001
(based on the interest rate yield curve at that date) included in accumulated
other comprehensive income expected to be reclassified into earnings as payments
are made under the terms of the interest rate swap agreements within the next 12
months is approximately $5,164. The timing of actual amounts reclassified into
earnings is dependent on future movements in interest rates.
Further, the estimated net amount of the gains or losses as of January 1,
2001 (based on the interest rate yield curve at that date) recorded in
accumulated other comprehensive income upon adoption of SFAS 133 that was
expected to be reclassified into earnings as payments were either made or
received under the terms of the interest rate protection agreements within the
next 12 months was $2,702.
52
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
12. INCOME TAXES
The provision for income taxes for the years ended December 31, 1999, 2000
and 2001 consists of the following:
Year Ended December 31,
-------------------------------------
1999 2000 2001
---- ---- ----
Current:
Federal $ 7,800 $15,971 $ 6,912
State 865 2,055 578
Deferred:
Federal 2,053 607 12,388
State 206 677 54
------- ------- -------
$10,924 $19,310 $19,932
======= ======= =======
Significant components of deferred income tax assets and liabilities are as
follows as of December 31, 2000 and 2001:
2000 2001
-------- --------
Deferred income tax assets:
Basis step-up in acquired assets $ 362 $ --
Accounts receivable reserves 746 821
Accrued expenses 377 502
State taxes 54 93
Other 173 10
-------- --------
Total deferred income tax assets: 1,712 1,426
-------- --------
Deferred income tax liabilities:
Net asset basis difference in
non-taxable acquisitions (65,696) (54,907)
Amortization (3,251) (5,965)
Depreciation (7,193) (16,976)
Other liabilities (550) --
Prepaid expenses (1,196) (2,267)
-------- --------
Total deferred income tax liabilities (77,886) (80,115)
-------- --------
Net deferred income tax liability $(76,174) $(78,689)
======== ========
A reduction in the Company's effective state tax rate in 2001 resulted in
its deferred tax liabilities decreasing by $1,672 during the year ended December
31, 2001.
During the year ended December 31, 2001, the Company recognized a tax
benefit of $3,802 as a result of the exercise of non-qualified stock options.
53
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
The differences between the Company's provision for income taxes as
presented in the accompanying statements of operations and benefit for income
taxes computed at the federal statutory rate consist of the items shown in the
following table as a percentage of pre-tax income:
Year Ended December 31,
1999 2000 2001
---- ---- ----
Income tax provision at the statutory rate 35.0% 35.0% 35.0%
State taxes, net of federal benefit 3.5 3.7 2.0
Acquisition charges 10.3 -- --
Goodwill amortization 2.1 1.5 1.5
Subchapter S 1.1 -- --
Stock compensation expense 0.5 0.1 --
Other 1.7 0.3 0.9
---- ---- ----
54.2% 40.6% 39.4%
---- ---- ----
13. NET INCOME PER SHARE INFORMATION
The following table sets forth the calculation of the numerator and
denominator used in the computation of basic and diluted net income per share
for the years ended December 31, 1999, 2000 and 2001:
Year Ended December 31,
----------------------------------------------------
1999 2000 2001
------------ ------------ ------------
Numerator:
Income applicable to common stockholders
before extraordinary item $ 9,227 $ 28,189 $ 30,713
============ ============ ============
Extraordinary item -- -- (185)
------------ ------------ ------------
Net income applicable to common stockholders $ 9,227 $ 28,189 $ 30,528
============ ============ ============
Denominator:
Weighted average common shares outstanding 18,655,801 23,301,358 27,069,685
Dilutive effect of stock options and warrants outstanding 1,273,738 693,636 605,954
------------ ------------ ------------
19,929,539 23,994,994 27,675,639
============ ============ ============
The Company's Convertible Subordinated Notes are convertible at any time at
the option of the holders into a total of 3,944,775 shares of common stock.
These shares have not been included in the computation of diluted net income per
share because to do so would have been antidilutive. Additionally, as of
December 31, 2000 and 2001, the Company had the following stock options and
warrants that have not been included in the computation of diluted net income
per share because to do so would have been antidilutive:
December 31, 2000 December 31, 2001
---------------------------------- ----------------------------------
Number of Exercise Number of Exercise
Shares Price Range Shares Price Range
-------------- ------------------ -------------- ------------------
Outstanding options 140,283 $18.75 to $26.00 21,500 $30.74 to $33.37
Outstanding warrants 55,001 $19.50 to $30.50 11,134 $30.40 to $33.45
-------------- --------------
195,284 32,634
============== ==============
54
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
14. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1999, the Murrey Companies paid $10,328
in disposal fees to a landfill that is owned and operated by a company in which
one of the Murrey Companies' shareholders had an approximate 33% ownership
interest. The related party ownership of WCI stock was sold in 2000.
15. EMPLOYEE BENEFIT PLANS
WCI has a voluntary savings and investment plan (the "WCI 401(k) Plan").
The WCI 401(k) Plan is available to all eligible, non-union employees of WCI.
Under the WCI 401(k) Plan, WCI's contributions are 40% of the first 5% of the
employee's contributions. The Murrey Companies have a voluntary savings and
investment plan (the "Murrey 401(k) Plan"). The Murrey 401(k) Plan is available
to all eligible, non-union employees of the Murrey Companies. Under the Murrey
401(k) Plan, the Murrey Companies' contributions are at the discretion of
management. During the years ended December 31, 1999, 2000 and 2001, the total
401(k) plan expense for the WCI and Murrey 401(k) plans was approximately $848,
$890 and $1,132 respectively.
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the unaudited consolidated quarterly results
of operations as reported for 2000 and 2001:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Revenues:
2000 as reported $ 64,011 $ 76,022 $ 81,510 $ 82,812
Gross profit:
2000 as reported 27,207 31,973 34,780 35,885
Net income:
2000 as reported 5,690 5,982 7,947 8,570
Basic income per common share:
2000 as reported 0.27 0.28 0.34 0.33
Diluted income per common share:
2000 as reported 0.26 0.27 0.32 0.32
Revenues
2001 as reported 85,114 93,967 97,681 100,771
Gross profit:
2001 as reported 38,097 42,103 42,861 44,127
Net income:
2001 as reported 4,712 6,398 10,236 9,183
Basic income per common share:
2001 as reported 0.17 0.24 0.38 0.34
Diluted income per common share:
2001 as reported 0.17 0.23 0.37 0.33
In December 2001, the Company recorded a fourth quarter charge of
approximately $1.7 million reflecting the write-off of incorrectly billed
receivables in New Mexico, the write-off of the balance of long-term receivables
that the Company settled with two customers in bankruptcy proceedings and the
settlement of outstanding disputes with three former owners.
55
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
17. SUBSEQUENT EVENT
In February 2002, the Company's Board of Directors authorized two
additional equity-based compensation plans: the 2002 Stock Option Plan and 2002
Senior Management Equity Incentive Plan. A total of 2,500,000 shares of the
Company's common stock was reserved for future issuance under the 2002 Stock
Option Plan. Participation in the 2002 Stock Option Plan is limited to
consultants and employees, other than officers and directors. A total of
3,000,000 shares of the Company's common stock was reserved for future issuance
under the 2002 Senior Management Equity Incentive Plan. Participation in the
2002 Senior Management Equity Incentive Plan is limited to officers and
directors of the Company. Approval of the 2002 Senior Management Equity
Incentive Plan by a majority of the Company's stockholders will be required
prior to final ratification of this Plan.
56
WASTE CONNECTIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PART III
Except as set forth above in Part I under "Executive Officers," the
information required by Part III (Items 10 through 13) has been omitted from
this report, and is incorporated by reference to the captions "Principal
Stockholders," "Election of Directors" and "Executive Compensation" in our
definitive Proxy Statement for the 2002 Annual Meeting of Stockholders, which we
will file with the Commission pursuant to Regulation 14A within 120 days after
the end of our 2001 fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K
(a) See Index to Financial Statements on page 31. The following Financial
Statement Schedule is filed herewith and made a part hereof:
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Commission are not required under the related
instructions or are inapplicable, and therefore have been omitted.
(b) No reports on Form 8-K were filed during the last quarter of our fiscal
year ended December 31, 2001.
(c) See Exhibit Index immediately following signature pages.
57
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Waste Connections, Inc.
By: /s/ Ronald J. Mittelstaedt
--------------------------------------
Ronald J. Mittelstaedt
President
Date: March 18, 2002
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Ronald J. Mittelstaedt Chairman, President and Director March 18, 2002
------------------------------ (principal executive officer)
Ronald J. Mittelstaedt
/s/ Steven F. Bouck Chief Financial Officer March 18, 2002
------------------------------ (principal financial officer)
Steven F. Bouck
/s/ Michael R. Foos Chief Accounting Officer and Vice March 18, 2002
------------------------------ President - Finance (principal
Michael R. Foos accounting officer)
/s/ Eugene V. Dupreau Vice President - California March 18, 2002
------------------------------ Division and Director
Eugene V. Dupreau
/s/ Michael W. Harlan Director March 18, 2002
------------------------------
Michael W. Harlan
/s/ William J. Razzouk Director March 18, 2002
------------------------------
William J. Razzouk
/s/ Robert H. Davis Director March 18, 2002
------------------------------
Robert H. Davis
58
WASTE CONNECTIONS, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS Years Ended December 31, 1999,
2000 and 2001 (in thousands)
Additions
------------------------ Deductions
Balance at Charged to Charged (Write-offs, Balance
Beginning Costs and to Other Net of at End
Description of Period Expenses Accounts Collections) of Period
----------- --------- -------- -------- ------------ ---------
Deducted from asset accounts:
Allowance for doubtful accounts:
Year ended December 31, 1999 $ 819 $ 1,549 $ 5 $ (913) $ 1,460
Year ended December 31, 2000 1,460 1,264 - (825) 1,899
Year ended December 31, 2001 1,899 1,922 - (1,654) 2,167
59
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
-------------- -----------------------
3.1* Amended and Restated Certificate of Incorporation of Waste
Connections, in effect as of the date hereof
3.2* Amended and Restated By-Laws of Waste Connections, in effect
as of the date hereof
4.1* Form of Common Stock Certificate
4.2++# Form of Note for Waste Connections, Inc.'s 5.5% Convertible
Subordinated Notes due April 15, 2006
4.3++#(+) Indenture between Waste Connections, Inc., as Issuer, and
State Street Bank and Trust Company, as Trustee, dated as of
April 4, 2001
4.4++#(+) Purchase Agreement between Waste Connections, Inc. and Merrill
Lynch, Pierce, Fenner & Smith Incorporated dated March 30,
2001
4.5++#(+) Registration Rights Agreement between Waste Connections, Inc.
and Merrill Lynch, Pierce, Fenner & Smith Incorporated dated
as of April 4, 2001
10.1**### Third Amended and Restating Revolving Credit Agreement, dated
as of May 16, 2000, between Waste Connections and various
banks represented by Fleet National Bank
10.2### Second Amended and Restated 1997 Stock Option Plan
10.3* Form of Option Agreement
10.4* Form of Warrant Agreement
10.5* Warrant Agreement and related Anti-Dilution Agreement issued
to Imperial Bank
10.6* Warrant Agreement and related Anti-Dilution Agreement issued
to BankBoston, N.A.
10.7* Form of Stock Purchase Agreement dated as of September 30,
1997
10.8*** Form of Third Amended and Restated Investors' Rights Agreement
dated as of December 31, 1998
10.9*# First Amended and Restated Employment Agreement between Waste
Connections and Ronald J. Mittelstaedt, dated as of June 1,
2000
10.10*## Second Amended Employment Agreement between Waste Connections
and Darrell Chambliss, dated as of June 1, 2000
10.11*## Second Amended Employment Agreement between Waste Connections
and Michael Foos, dated as of June 1, 2000
10.12*## Second Amended Employment Agreement between Waste Connections
and Eric Moser, dated as of June 1, 2000
10.13* Employment Agreement between Waste Connections and Steven
Bouck, dated as of February 1, 1998
10.14* Employment Agreement between Waste Connections and Eugene V.
Dupreau, dated as of February 23, 1998
10.15* Employment Agreement between Waste Connections and Charles B.
Youngclaus, dated as of February 23, 1998
10.16*(+) Purchase and Sale Agreement, dated as of September 29, 1997,
between Browning-Ferris Industries, Inc., Browning-Ferris
Industries, Inc., and Browning-Ferris Industries of Idaho,
Inc. as Sellers, and Waste Connections, Waste Connections of
Idaho, Inc. and Continental Paper Recycling, LLC as Buyers
60
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
-------------- -----------------------
10.17*(+) Stock Purchase Agreement, dated as of January 26, 1998, among
Waste Connections, Waste Connections of Idaho, Inc. and the
shareholders of Waste Connections of Idaho, Inc.
10.18*(+) Stock Purchase Agreement, dated as of February 4, 1998, among
Waste Connections and the shareholders of Madera Disposal
Company, Inc.
10.19*(+) Asset Purchase Agreement, dated as of March 1, 1998, among
Waste Connections, Waste Connections of Idaho, Inc., Hunter
Enterprises, Inc. and the shareholder of Hunter Enterprises,
Inc.
10.20* Form of Indemnification Agreement entered into by Waste
Connections and each of its directors and officers
10.21#(+) Asset Purchase Agreement, dated as of June 1, 1998, by and
among Waste Connections, Waste Connections of Utah, Inc.,
Contractor's Waste, L.C., and Brad Kitchen, Heath Johnston,
and R. Scott McQuarrie
10.22##(+) Stock Purchase Agreement, dated as of June 5, 1998, by and
among Waste Connections, B & B Sanitation, Inc., Red Carpet
Landfill, Inc., Darlin Equipment, Inc., Lyle J. Buller, Larue
A. Buller, the Lyle J. Buller Revocable Trust dated 10/11/96
and Larue A. Buller, Trustee of the Larue A. Buller Revocable
Trust dated 10/11/96
10.23++(+) Stock Purchase Agreement dated as of June 17, 1998, by and
among Waste Connections, Arrow Sanitary Service, Inc., Steven
Giusto, Dennis Giusto, John Giusto, Michael Giusto and Kenneth
Giusto
10.24++(+) Stock Purchase Agreement dated as of June 25, 1998, by and
among Waste Connections, Curry Transfer and Recycling, Oregon
Waste Technology, Petty H. Smart, and A. Lewis Rucker
10.25**(+) Purchase and Sale Agreement dated as of June 25, 1998, by and
between Petty H. Smart and Waste Connections
10.26**(+) Loan Agreement dated as of June 1, 1998 between Madera
Disposal Systems, Inc. and the California Pollution Control
Financing Authority
10.27** Employment Agreement between Waste Connections and David M.
Hall, dated as of July 8, 1998
10.28++(+) Agreement and Plan of Merger, dated as of July 30, 1998, by
and among Waste Connections, WCI Acquisition Corporation,
Shrader Refuse and Recycling Service Company, Duane E.
Shrader, Myrlen A. Shrader, Daniel L. Shrader, Mark S.
Shrader, Michael D. Shrader, and Daren L. Shrader
10.29++(+) Purchase and Sale Agreement dated as of July 31, 1998, by and
between Ambler Vincent Development Company and Shrader Refuse
and Recycling Service Company
10.30**(+) Purchase Agreement, dated as of July 31, 1998, by and among
Waste Connections, Waste Connections of Nebraska, Inc., J & J
Sanitation Inc., Big Red Roll Off Inc., Garry L. Jeffords,
Darin L. Mueller, Leslie J. Jeffords, Leland J. Jeffords,
Bradley Rowan, Great Plains Recycling, Inc., Roma L. Jeffords,
Kristie K. Mueller, Sheri L. Jeffords, and Betty L. Hargis
10.31***(+) Agreement and Plan of Merger dated as of October 22, 1998, by
and among Waste Connections, WCI Acquisition Corporation I,
WCI Acquisition Corporation II, WCI Acquisition Corporation
III, WCI Acquisition Corporation IV, Murrey's Disposal
Company, Inc., American Disposal Company, Inc., D.M. Disposal
Co., Inc., Tacoma Recycling Company, Inc., the Murrey Trust
UTA August 5, 1993, as amended, the Bonnie L. Murrey Revocable
Trust UTA August 5, 1993, as amended, Donald J. Hawkins, and
Irmgard R. Wilcox
10.32****(+) Purchase Agreement, dated as of December 11, 1998, by and
among Waste Connections, Butler County Landfill, Inc., Kobus
Construction, Inc., Tom Kobus and Debbie Kobus
61
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS
-------------- -----------------------
10.33####(+) Amendment No. 1 to Purchase Agreement, dated as of January 7,
1999, by and among WCI, Butler County Landfill, Inc., Kobus
Construction, Inc., Tom Kobus and Debbie Kobus
10.34####(+) Amendment No. 2 to Purchase Agreement, dated as of January 8,
1999, by and among WCI, Butler County Landfill, Inc., Kobus
Construction, Inc., Tom Kobus and Debbie Kobus
10.35(+) Stock Purchase Agreement dated as of November 30, 1998, by and
among Waste Connections, Amador Disposal Service, Inc., Mother
Lode Sani-Hut, Inc., and Robert N. Grunigen, Carla Grunigen,
Carol Sesser and Gaye Sue Marchini, as Trustees of the
Marchini 1981 Trust, Bennie L. Ratto, Carol Sesser, John D.
Marchini, Gloria Lehman, Sandra Thomas, John H. Tillman and
Jeffrey R. Tillman
10.36^^(+) Amended and Restated Stock Purchase Agreement dated as of
March 31, 1999, by and among Waste Connections, Inc.,
Management Environmental National, Inc., RH Financial
Corporation and The Shareholder listed on Schedule A thereto
10.37^^^(+) Acquisition Agreement dated as of August 11, 1999, by and
among WCI Acquisition Corporation I, Waste Connections, Inc.,
International Environmental Industries, Inc., J.O. Stewart,
Jr., Ralner Corporation, JOS Enterprises, Ltd. and
International Environmental Industries Equipment Company, L.P.
10.38^^^^(+) Asset Purchase Agreement dated as of October 15, 1999, by and
among Waste Connections of Colorado, Inc., Allied Waste
Transportation, Inc., BFI Services Group, Inc. and Allied
Waste Industries, Inc.
10.39^^^^(+) Stock Purchase Agreement dated as of October 15, 1999, by and
among Waste Connections, Inc., Allied Waste Systems Holdings,
Inc. and Allied Waste Industries, Inc.
10.40^^^^(+) Closing Agreement dated as of November 17, 1999, by and among
Waste Connections, Inc., Allied Waste Systems Holdings, Inc.,
Allied Waste Industries, Inc. and Denver Regional Landfill,
Inc.
10.41^^^^(+) Agreement dated as of November 17, 1999, among Waste
Connections of Colorado, Inc., Allied Waste Transportation,
Inc., BFI Services Group, Inc. and Allied Waste Industries,
Inc.
10.42*### Employment Agreement between Waste Connections and James M.
Little, dated as of September 13, 1999
10.43*### Employment Agreement between Waste Connections and Jerri L.
Hunt, dated as of October 25, 1999
10.44**##(+) Stock Purchase Agreement dated April 17, 2000, among Waste
Connections, BFI Waste Systems of North America, Inc., and
Allied Waste Industries, Inc.
10.45**##(+) Asset Purchase Agreement dated April 17, 2000, among BFI Waste
Systems of North America, Inc., Allied Waste Industries, Inc.
and Finney County Landfill, Inc.
12.1 Statement regarding computation of ratio of earnings to fixed
charges
21.1 Subsidiaries of Waste Connections
23.1 Consent of Ernst & Young LLP, Independent Auditors
99.1 Proxy Statement for Waste Connections' 2002 Annual
Stockholders Meeting scheduled to be held May 16, 2002. (To be
filed with the Commission prior to 120 days after December 31,
2001, and incorporated by reference herein to the extent
indicated in Part III to this Form 10-K.)
62
* Incorporated by reference to the exhibits filed with Waste
Connections' Registration Statement on Form S-1, Registration
No. 333-48029.
** Incorporated by reference to the exhibits filed with Waste
Connections' Registration Statement on Form S-4, Registration
No. 333-59199.
*** Incorporated by reference to the exhibits filed with Waste
Connections' Registration Statement on Form S-4, Registration
No. 333-65615.
**** Incorporated by reference to the exhibits filed with Waste
Connections' Registration Statement on Form S-1, Registration
No. 333-70253.
# Incorporated by reference to the exhibit filed with Waste
Connections' Form 8-K filed on June 15, 1998.
## Incorporated by reference to the exhibit filed with Waste
Connections' Form 8-K filed on June 22, 1998.
++ Incorporated by reference to the exhibit filed with Waste
Connections' Form 8-K Filed on August 11, 1998.
#### Incorporated by reference to the exhibit filed with Waste
Connections' Form 8-K filed on January 13, 1999.
^^ Incorporated by reference to the exhibit filed with Waste
Connections' Form 8-K filed on April 14, 1999.
^^^ Incorporated by reference to the exhibit filed with Waste
Connections' Form 8-K filed on August 25, 1999.
^^^^ Incorporated by reference to the exhibit filed with Waste
Connections' Form 8-K filed on November 24, 1999.
### Incorporated by reference to the exhibit filed with Waste
Connections' Form S-8, Registration No. 333-42096.
*## Incorporated by reference to the exhibit filed with Waste
Connections' Form 10-Q filed on November 14, 2000.
*# Incorporated by reference to the exhibit filed with Waste
Connections' Form 10-Q filed on August 7, 2000.
*### Incorporated by reference to the exhibit filed with Waste
Connections' Form 10-K filed on March 13, 2000.
**## Incorporated by reference to the exhibit filed with Waste
Connections' Form 8-K filed on May 30, 2000.
++# Incorporated by reference to the exhibit filed with Waste
Connections' Form S-3 filed on June 5, 2001.
**### Incorporated by reference to the exhibit filed with Waste
Connections' Form 10-K/A filed on July 18, 2001.
(+) Filed without exhibits and schedules (to be provided
supplementally on request of the Commission).
63