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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED MARCH 31, 2002 COMMISSION FILE NO. 0-23981
WASTE CONNECTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
94-3283464
(I.R.S. Employer Identification No.)
620 COOLIDGE DRIVE, SUITE 350, FOLSOM, CA 95630
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (916) 608-8200
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 the number of shares outstanding of each of the issuer's classes of
Common Stock:
As of April 30, 2002: 27,666,561 Shares of Common Stock
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets - December 31, 2001 and March 31, 2002
Condensed Consolidated Statements of Income for the three months ended
March 31, 2001 and 2002
Condensed Consolidated Statements of Cash Flows for the three months ended
March 31, 2001 and 2002
Notes to Condensed Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities and Use of Proceeds
Signatures
1
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, MARCH 31,
2001 2002
------------ ------------
(UNAUDITED)
ASSETS
------
Current assets:
Cash and equivalents $ 7,279 $ 4,109
Accounts receivable, less allowance for doubtful
accounts of $2,167 and $2,163 at December 31, 2001
and March 31, 2002, respectively 51,372 55,034
Prepaid expenses and other current assets 8,123 9,714
------------ ------------
Total current assets 66,774 68,857
Property and equipment, net 465,806 496,794
Goodwill 411,757 445,866
Intangible assets, net 16,248 17,095
Other assets, net 18,768 20,371
------------ ------------
$ 979,353 $ 1,048,983
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ 29,224 $ 30,603
Accrued liabilities 23,555 27,301
Deferred revenue 13,355 14,377
Current portion of long-term debt and notes payable 5,305 4,407
------------ ------------
Total current liabilities 71,439 76,688
Long-term debt and notes payable 416,171 462,197
Other long-term liabilities 13,264 15,770
Deferred income taxes 78,689 78,689
------------ ------------
Total liabilities 579,563 633,344
Commitments and contingencies
Minority interests 19,825 20,366
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;
27,423,669 and 27,567,874 shares issued and outstanding
at December 31, 2001 and March 31, 2002, respectively 274 276
Additional paid-in capital 316,594 318,749
Retained earnings 68,032 80,203
Unrealized loss on market value of interest rate swaps (4,935) (3,955)
------------ ------------
Total stockholders' equity 379,965 395,273
------------ ------------
$ 979,353 $ 1,048,983
============ ============
See accompanying notes.
2
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 31, 2001 AND 2002
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
------------------------------
2001 2002
------------ ------------
Revenues $ 85,114 $ 105,742
Operating expenses:
Cost of operations 47,017 59,179
Selling, general and administrative 6,659 9,390
Depreciation and amortization 8,192 8,028
------------ ------------
Income from operations 23,246 29,145
Interest expense (7,602) (7,505)
Other income (expense), net (6,232) (400)
------------ ------------
Income before income tax provision and
minority interests 9,412 21,240
Minority interests (1,330) (1,766)
------------ ------------
Income before income tax provision 8,082 19,474
Income tax provision (3,226) (7,303)
------------ ------------
Net income before extraordinary item 4,856 12,171
Extraordinary item - extinguishment of debt,
net of tax benefit of $96 (144) --
------------ ------------
Net income $ 4,712 $ 12,171
============ ============
Basic earnings per common share:
Income before extraordinary item $ 0.18 $ 0.44
Extraordinary item (0.00) --
------------ ------------
Net income per common share $ 0.18 $ 0.44
============ ============
Diluted earnings per common share:
Income before extraordinary item $ 0.18 $ 0.43
Extraordinary item (0.01) --
------------ ------------
Net income per common share $ 0.17 $ 0.43
============ ============
Shares used in the per share calculations:
Basic 26,635,813 27,469,415
============ ============
Diluted 27,413,073 31,920,243
============ ============
See accompanying notes.
3
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2001 AND 2002
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
--------------------------
2001 2002
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,712 $ 12,171
Adjustments to reconcile net income to
net cash provided by operating activities:
Loss on sale of assets 21 132
Loss on termination of interest rate swap 6,337 --
Depreciation 5,607 7,745
Amortization of intangibles 2,584 283
Minority interests 1,330 1,766
Amortization of debt issuance costs and debt guarantee fees 195 487
Extraordinary item - early extinguishment of debt 240 --
Net change in operating assets and liabilities, net of acquisitions (13,378) 7,719
---------- ----------
Net cash provided by operating activities 7,648 30,303
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of assets -- 1,367
Payments for acquisitions, net of cash acquired (24,019) (32,628)
Capital expenditures for property and equipment (6,022) (9,007)
Decrease in other assets (88) (881)
---------- ----------
Net cash used in investing activities (30,129) (41,149)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 27,700 72,000
Principal payments on long-term debt (6,783) (65,090)
Distributions to minority interest holders -- (1,225)
Proceeds from options and warrants 3,942 2,055
Debt issuance costs (632) (64)
---------- ----------
Net cash provided by financing activities 24,227 7,676
---------- ----------
Net increase (decrease) in cash and equivalents 1,746 (3,170)
Cash and equivalents at beginning of period 2,461 7,279
---------- ----------
Cash and equivalents at end of period $ 4,207 $ 4,109
========== ==========
See accompanying notes.
4
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
1. BASIS OF PRESENTATION AND SUMMARY
The accompanying financial statements relate to Waste Connections, Inc. and its
subsidiaries (the "Company") as of March 31, 2002 and for the three month
periods ended March 31, 2001 and 2002. The consolidated financial statements of
the Company include the accounts of Waste Connections, Inc. and its wholly-owned
and majority-owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. Operating results for the three month period ended March
31, 2002 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2002.
The Company's consolidated balance sheet as of March 31, 2002, the consolidated
statements of income for the three months ended March 31, 2001 and 2002, and the
consolidated statements of cash flows for the three months ended March 31, 2001
and 2002 are unaudited. In the opinion of management, such financial statements
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the Company's financial position, results
of operations, and cash flows for the periods presented. The consolidated
financial statements presented herein should be read in conjunction with the
Company's annual report on Form 10-K for the year 2001.
2. ADOPTION OF NEW ACCOUNTING STANDARDS
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 adopted the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. 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 in the future as the cumulative effect of a change in
accounting principle that was effective beginning 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.
Net income for the three months ended March 31, 2001, adjusted for the
nonamortization provisions of Statement 142, was $6,372. Basic and diluted
shares outstanding at March 31, 2001 were 26,635,813 and 27,413,073,
respectively.
Effective January 1, 2002, the Company adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The adoption of SFAS No. 144 did not have a material impact on the Company's
financial statements and related disclosures.
5
3. ACQUISITIONS
For the three months ended March 31, 2002, the Company acquired six
non-hazardous solid waste collection businesses that were accounted for using
the purchase method of accounting. Aggregate consideration, exclusive of debt
assumed, for the acquisitions consisted of $32,628 in cash (net of cash
acquired) and warrants valued at $102.
In connection with an acquisition occurring in 2002, the Company is required to
pay contingent consideration to certain former shareholders, subject to the
occurrence of specified events. As of March 31, 2002, the estimated potential
contingent payments relating to the 2002 acquisitions totaled approximately $8.5
million in cash, and is to be earned based upon the achievement of certain
milestones and targeted earnings. The Company has not included any of the
contingent consideration from the 2002 acquisitions in these financial
statements as it is too early in the contingency period to assess the
probability of the achievement of the milestones and targeted earnings.
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 acquisition, the
"allocation period" for finalizing purchase price allocations generally does not
exceed one year from the consummation of a business combination.
As of March 31, 2002, the Company had 21 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 preliminary purchase price
allocations for the acquisitions consummated in the three months ended March 31,
2002 is as follows:
Acquired assets:
Accounts receivable $ 5,574
Prepaid expenses and other current assets 399
Property and equipment 31,125
Goodwill 34,221
Contracts 792
Non-competition agreements 326
Other assets 24
Assumed liabilities:
Deferred revenue (1,378)
Accounts payable (4,025)
Debt and other liabilities assumed (34,328)
-----------
$ 32,730
===========
Goodwill acquired in the three months ended March 31, 2002 totaling $7,692 is
expected to be deductible for tax purposes.
6
4. INTANGIBLE ASSETS
Intangible assets, exclusive of goodwill, consist of the following as of March
31, 2002:
GROSS WEIGHTED-AVERAGE
CARRYING ACCUMULATED AMORTIZATION
AMOUNT AMORTIZATION PERIOD IN YEARS
------ ------------ ---------------
Amortizable intangible assets:
Long-term franchise agreements
and contracts $ 4,176 $ (680) 13
Non-competition agreements 3,184 (1,536) 5
Other, net 2,229 (487) 13
-------- --------
$ 9,589 $ (2,703)
======== ========
Nonamortized intangible assets:
Indefinite-lived intangible
assets $ 10,209 - -
======== ========
The amounts assigned to indefinite-lived intangible assets consist of the value
of certain perpetual rights to provide solid waste collection and transportation
services in specified territories. These indefinite-lived intangible assets were
subject to amortization prior to the Company's adoption of SFAS No. 142.
Estimated future amortization expense for amortizable intangible assets is as
follows:
For year ended December 31, 2002 $ 1,027
For year ended December 31, 2003 931
For year ended December 31, 2004 795
For year ended December 31, 2005 662
For year ended December 31, 2006 504
5. EARNINGS PER SHARE CALCULATION
The following table sets forth the numerator and denominator used in the
computation of earnings per common share:
THREE MONTHS ENDED
MARCH 31,
2001 2002
------------ ------------
Numerator:
Net income before extraordinary item $ 4,856 $ 12,171
Extraordinary item (144) -
------------ ------------
Net income for basic earnings per share 4,712 12,171
Interest expense on
convertible subordinated notes, net of
tax effects - 1,459
------------ ------------
Net income for diluted earnings per share $ 4,712 $ 13,630
============ ============
Denominator:
Basic shares outstanding 26,635,813 27,469,415
Dilutive effect of convertible
subordinated notes - 3,944,775
Dilutive effect of options and warrants 777,260 506,053
------------ ------------
Basic shares outstanding 27,413,073 31,920,243
============ ============
7
6. COMPREHENSIVE INCOME
Comprehensive income includes changes in the fair value of interest rate
swaps that qualify for hedge accounting. The difference between net income and
comprehensive income for the three months ended March 31, 2001 and 2002 is as
follows::
THREE MONTHS ENDED MARCH 31,
2001 2002
------------ ------------
Net income $ 4,712 $ 12,171
Unrealized gain (loss) on interest rate swaps, net of tax
benefit (expense) of $2,036 and $(836) for the three
months ended March 31, 2001 and 2002, respectively (3,067) 980
------------ ------------
Comprehensive income $ 1,645 $ 13,151
============ ============
The components of other comprehensive income and related tax effects for the
three months ended March 31, 2001 and 2002 are as follows:
THREE MONTHS ENDED MARCH 31, 2001
Gross Tax effect Net of tax
Cumulative effect of accounting change $ (5,940) $ (2,370) $ (3,570)
Amounts reclassified into earnings 6,747 2,707 4,040
Changes in fair value of interest rate swaps (5,910) (2,373) (3,537)
------------ ------------ ------------
$ (5,103) $ (2,036) $ (3,067)
============ ============ ============
THREE MONTHS ENDED MARCH 31, 2002
Gross Tax effect Net of tax
Amounts reclassified into earnings $ 1,522 $ 571 $ 951
Changes in fair value of interest rate swaps 294 265 29
------------ ------------ ------------
$ 1,816 $ 836 $ 980
============ ============ ============
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 March 31, 2002 (based on
the interest rate yield curve at that date) included in accumulated other
comprehensive income expected to be reclassified into pre-tax earnings as
payments are made under the terms of the interest rate swap agreements within
the next 12 months is approximately $4,557. The timing of actual amounts
reclassified into earnings is dependent on future movements in interest rates.
8
7. SUBSEQUENT EVENT
Subsequent to March 31, 2002, Waste Connections issued Floating Rate Convertible
Subordinated Notes due 2022 (the "Notes") with an aggregate principal amount of
$175,000 in a Rule 144A private placement. The Notes are unsecured and rank pari
passu with the Company's 5.5% Convertible Subordinated Notes due 2006 and junior
to all other existing and future senior indebtedness, as defined in the
indenture governing the Notes. The Notes bear interest at the 3-month LIBOR rate
plus 50 basis points, payable quarterly.
The holders may surrender notes for conversion into common stock at a conversion
price of $48.39 per share on or after August 1, 2002, but prior to the maturity
date, only if any of the following conditions are satisfied: (a) the closing
sale price per share for at least 20 trading days in the period of 30
consecutive trading days ending on the last trading day of the calendar quarter
preceding the calendar quarter in which the conversion occurs is more than 110%
of the conversion price per share on that thirtieth trading day; (b) during such
period, if any, that the credit rating assigned to the Notes by Moody's
Investors Service, Inc. and Standard & Poor's Rating Group (the "Rating
Agencies") are reduced below B3 or B-, respectively; (c) if neither Rating
Agency is rating the Notes; (d) during the five business day period after any
nine consecutive trading day period in which the trading price of the Notes (per
$1,000 principal amount) for each day of such period is less than 95% of the
product of the closing sale price of the Company's common stock multiplied by
the number of shares issuable upon conversion of $1,000 principal amount of the
Notes; (e) upon the occurrence of specified corporate transactions; and (f) if
the Notes have been called for redemption and the redemption has not yet
occurred.
The Company may redeem all or a portion of the Notes for cash at any time on or
after May 7, 2006. Holders of the Notes may require the Company to purchase
their Notes at a price of $1,000 per Note in cash plus accrued interest, if any,
on any of the following dates: May 1, 2009, May 1, 2012 or May 1, 2017.
The proceeds from the sale of the Notes are being used to repay a portion of the
outstanding indebtedness and related costs under the Company's credit facility
and for general corporate purposes.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included elsewhere herein.
FORWARD LOOKING STATEMENTS
Certain information contained in this Quarterly Report on Form 10-Q, including,
without limitation, information appearing under Part I, Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," 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 Quarterly
Report on Form 10-Q. Factors that could cause actual results to differ from
those projected include, but are not limited to, the following: (1) 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 realize for our
services, (2) we depend in part on acquisitions for growth; we may be required
to pay higher prices for acquisitions, and we may experience difficulty in
integrating and deriving synergies from acquisitions, (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 to reflect events or
circumstances after the date any such statement is made.
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 located primarily in the Western U.S. As of March 31, 2002,
we served more than 925,000 commercial, industrial and residential customers in
California, Colorado, Georgia, 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 79 collection
operations and operated or owned 39 transfer stations, 28 Subtitle D landfills
and 18 recycling facilities.
We generally intend to pursue an acquisition-based growth strategy and as of
March 31, 2002 had acquired 140 businesses since our inception in September
1997. We anticipate that a substantial part of our future growth will come from
acquiring additional solid waste collection, transfer and disposal businesses
and, therefore, we expect additional acquisitions could continue to affect
period-to-period comparisons of our operating results.
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 deteriorated,
impairing 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 are impaired. Any
10
resulting impairment loss could have a material adverse effect on our financial
condition and results of operations. As of March 31, 2002, intangible assets
represented 44.1% of our total assets.
ACCOUNTING FOR LANDFILLS. We amortize landfill permitting, acquisition and
preparation costs 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, we include in preparation costs the total
estimated costs to complete construction of the landfill's permitted capacity.
We determine units-of-production amortization rates 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 effect on our financial condition
and results of operations.
Our management determines landfill depletion rates based on estimates provided
by our internal and third party engineers and information provided by surveys
that are performed at least annually. Significant changes in our estimates could
materially increase our landfill depletion rates, which could have a material
adverse effect on our financial condition and results of operations.
We reserve for estimated closure and post-closure maintenance costs at the
landfills we own. We could 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. We
calculate the net present value of the closure and post closure commitment
assuming an inflation rate of 3% and a discount rate of 7.5%. We accrete
discounted amounts previously recorded to reflect 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 effect 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. Our collection business
also generates revenues from the sale of recyclable commodities, which have
significant variability. A large part of our collection revenues comes from
providing commercial, industrial and residential services. We frequently perform
these services under service agreements 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 three months ended March
31, 2002 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.
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.
11
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 March 31, 2002, Waste Connections owned and/or operated 39
transfer stations, which reduce our costs by allowing us to use collection
personnel and equipment more efficiently and by consolidating waste to reduce
transportation costs to remote sites and 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 expense includes depreciation of fixed assets over their estimated
useful lives using the straight-line method. Prior to January 1, 2002,
amortization expense included the 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, beginning January 1, 2002,
goodwill and indefinite-lived intangible assets 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. During the three
months ended March 31, 2002, we did not capitalize interest related to landfill
and transfer station development projects. At March 31, 2002, we had $0.4
million in capitalized expenditures relating to pending acquisitions.
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. 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.
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 are no longer amortized but are 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 adopted the new rules on accounting for goodwill and other intangible assets
beginning in the first quarter of 2002. In 2001, we recognized $7.4 million of
tax deductible goodwill amortization expense and $2.2 million of non-tax
deductible goodwill amortization expense. We expect application of the
nonamortization provisions of Statement 142 to result in an increase in pre-tax
income of approximately $9.6 million and net income of approximately $6.8
million 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 27.7 million and 32.4 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 that was effective
beginning in the first quarter of 2002. We have not yet determined what the
effect of these tests will be on our earnings and financial position.
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
12
asset retirement costs. We are currently evaluating the effect SFAS No. 143 will
have on our financial statements and related disclosures.
Effective January 1, 2002, we adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This Statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
The adoption of SFAS No. 144 did not materially affect our financial statements
and related disclosures.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2002
The following table sets forth items in Waste Connections' consolidated
statement of operations as a percentage of revenues for the periods indicated.
THREE MONTHS ENDED
MARCH 31,
---------
2001 2002
------------ ------------
Revenues 100.0% 100.0%
Cost of operations 55.2 56.0
Selling, general and
administrative expenses 7.9 8.9
Depreciation and
amortization expense 9.6 7.6
------------ ------------
Operating income 27.3 27.5
Interest expense, net (8.9) (7.1)
Other expense, net (7.3) (0.4)
Minority interests (1.6) (1.6)
Extraordinary item (0.2) -
Income tax expense (3.8) (6.9)
------------ ------------
Net income 5.5% 11.5%
============ ============
REVENUES. Total revenues increased $20.6 million, or 24.2%, to $105.7 million
for the three months ended March 31, 2002 from $85.1 million for the three
months ended March 31, 2001. The increase was primarily attributable to the
inclusion of the acquisitions closed throughout the balance of 2001 and the
first quarter of 2002, selected price increases, a one-time clean-up project in
Oklahoma and growth in our existing business, partially offset by declines in
commodity prices.
COST OF OPERATIONS. Total cost of operations increased $12.2 million, or 25.9%,
to $59.2 million for the three months ended March 31, 2002 from $47.0 million
for the three months ended March 31, 2001. The increase was primarily
attributable to acquisitions closed over the course of 2001 and the first
quarter of 2002, growth in our existing business and higher insurance costs,
partially offset by greater integration of collection volumes into landfills we
own or operate. Cost of operations as a percentage of revenues increased 0.8
percentage points to 56.0% for the three months ended March 31, 2002, from 55.2%
for the three months ended March 31, 2001. The increase as a percentage of
revenues was primarily attributable to a lower margin one-time clean-up project
in Oklahoma, acquisitions closed during the first quarter of 2002 that had lower
margins than our overall company average and higher insurance costs.
SG&A. SG&A expenses increased $2.7 million, or 41.0%, to $9.4 million for the
three months ended March 31, 2002, from $6.7 million for the three months ended
March 31, 2001. Our SG&A increased as a result of additional personnel from
companies acquired, additional corporate and district level overhead and higher
insurance costs. SG&A as a percentage of revenues increased 1.0 percentage point
to 8.9% for the three months ended March 31, 2002 from 7.9% for the three months
ended March 31, 2001. The increase in SG&A as a percentage of revenues resulted
from acquisitions closed in the three months ended March 31, 2002 with SG&A
levels higher than our company average, higher insurance costs and additional
corporate, regional and district level overhead to accommodate our growth.
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DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense decreased
$0.2 million, or 2.0%, to $8.0 million for the three months ended March 31, 2002
from $8.2 million for the three months ended March 31, 2001. The decrease
resulted primarily from not amortizing goodwill during the three months ended
March 31, 2002, due to the application of the nonamortization provisions of SFAS
No. 142, partially offset by the inclusion of depreciation and depletion
associated with acquisitions closed throughout the balance of 2001 and the first
quarter of 2002 and increased depletion due to higher volumes of waste disposed
at our landfills. Total goodwill amortization expense recognized in the three
months ended March 31, 2001 was $2.4 million. No goodwill amortization expense
was recognized in the three months ended March 31, 2002. Depreciation and
amortization expense as a percentage of revenues decreased 2.0 percentage points
to 7.6% for the three months ended March 31, 2002, from 9.6% for the three
months ended March 31, 2001. The decrease in depreciation and amortization as a
percentage of revenues was the result of applying the nonamortization provisions
of SFAS No. 142, partially offset by increased depletion due to higher volumes
of waste disposed at our landfills. Goodwill amortization expense as a
percentage of revenues was 2.8% for the three months ended March 31, 2001.
OPERATING INCOME. Operating income increased $5.9 million, or 25.4%, to $29.1
million for the three months ended March 31, 2002, from $23.2 million for the
three months ended March 31, 2001. The increase was primarily attributable to
the growth in revenues and applying the nonamortization provisions of SFAS No.
142, partially offset by higher depreciation and SG&A expenses. Operating income
as a percentage of revenues increased 0.2 percentage points to 27.5% for the
three months ended March 31, 2002 from 27.3% for the three months ended March
31, 2001. The increase in operating income as a percentage of revenues is
attributable to applying the nonamortization provisions of SFAS No. 142,
partially offset by declines in gross margins, higher depreciation expenses and
an increase in SG&A expenses as a percentage of revenues.
INTEREST EXPENSE. Interest expense decreased $0.1 million, or 1.3%, to $7.5
million for the three months ended March 31, 2002, from $7.6 million for the
three months ended March 31, 2001. The decrease was primarily attributable to
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, partially offset by higher debt levels incurred to fund
certain of our acquisitions.
OTHER EXPENSE. Other expense decreased $5.8 million, or 93.6%, to $0.4 million
for the three months ended March 31, 2002, from $6.2 million for the three
months ended March 31, 2001. Other expense for the three months ended March 31,
2001 consisted primarily of cash payments made to terminate an interest rate
swap prior to its due date, partially offset by gains on the disposal 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. Other expense for the three months ended March 31, 2002 consisted
primarily of losses incurred on the disposal of assets.
MINORITY INTERESTS. Minority interests increased $0.5 million, or 32.8%, to $1.8
million for the three months ended March 31, 2002, from $1.3 for the three
months ended March 31, 2001. The increase is attributable to our ownership of
majority interests in two unrelated entities, acquired in February 2001, for the
entire quarter ended March 31, 2002, compared to our ownership of these entities
for approximately two months of the quarter ended March 31, 2001.
PROVISION FOR INCOME TAXES. Income taxes increased $4.1 million, or 126.4%, to
$7.3 million for the three months ended March 31, 2002, from $3.2 million for
the three months ended March 31, 2001. The effective income tax rate for the
three months ended March 31, 2002 was 37.5%, which is above the federal
statutory rate of 35.0% primarily due to state and local taxes.
EXTRAORDINARY ITEM. There was no extraordinary item for the three months ended
March 31, 2002, compared to $0.1 million for the three months ended March 31,
2001. Extraordinary item for the three months ended March 31, 2001 consisted of
costs associated with the early termination of long-term debt.
NET INCOME. Net income increased by $7.5 million, or 158.3%, to $12.2 million
for the three months ended March 31, 2002, from $4.7 million for the three
months ended March 31, 2001. The increase was primarily attributable to an
increase in operating income and a decline in interest expense, other expenses
and extraordinary items, partially offset by an increase in income tax expense
and minority interests.
14
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 March 31, 2002, we had a working capital deficit of $7.8 million,
including cash and equivalents of $4.1 million. Our strategy in managing our
working capital is generally to apply the cash generated from our operations
that remains after satisfying our working capital and capital expenditure
requirements to reduce our indebtedness under our bank revolving credit facility
and to minimize our cash balances.
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 March 31, 2002 limited our
maximum borrowings (including standby letters of credit) under the Credit
Facility to $423.4 million. As of March 31, 2002, we had an aggregate of $279.9
million outstanding under the Credit Facility, and the interest rate on
outstanding borrowings, including unused credit fees and amortization of debt
issuance costs, under the credit facility was approximately 7.2%. 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 March 31, 2002, 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
National Bank 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,
incurring 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 March 31, 2002, we are in
compliance with these covenants. The Credit Facility also requires the lenders'
approval of acquisitions in certain circumstances. We use the Credit Facility
for acquisitions, capital expenditures, working capital, standby letters of
credit and general corporate purposes.
Subsequent to March 31, 2002, we issued $175 million of Floating Rate
Convertible Subordinated Notes due 2022 (the "Notes"). The Notes bear interest
at the 3-month LIBOR rate plus 50 basis points, payable quarterly. The Notes are
unsecured and rank pari passu with our 5.5% Convertible Subordinated Notes due
2006 and junior to all existing and future senior indebtedness, as defined in
the indenture governing the Notes. Upon the incurrence of certain conditions,
the Notes are convertible into common stock at 20.6654 shares per $1,000
principal amount of notes. No change in the available borrowing capacity under
our Credit Facility or material covenants resulted from our issuance of the
Notes. Proceeds from the sale of the Notes were used to repay a portion of the
outstanding indebtedness and related costs under our credit facility and for
general corporate purposes.
15
As of March 31, 2002, 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 $ 466,604 $ 4,407 $ 7,907 $ 434,135 $ 20,155
-------------------------- ---------- ----------- ------------ ------------ ------------
Operating Leases 7,098 1,433 2,506 1,779 1,380
-------------------------- ---------- ----------- ------------ ------------ ------------
Unconditional Purchase
Obligations 4,579 4,579 - - -
-------------------------- ---------- ----------- ------------ ------------ ------------
Total Contractual Cash
Obligations $ 478,281 $ 10,419 $ 10,413 $ 435,914 $ 21,535
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
--------------------------------------------------------------------------------------------------
Total
Commercial Amounts Less Than
Commitments Committed 1 Year 1 to 3 Years 4 to 5 Years Over 5 Years
-------------------------- ---------- ----------- ------------ ------------ ------------
Standby Letters of Credit $ 1,889 $ 1,829 $ 60 $ - $ -
-------------------------- ---------- ----------- ------------ ------------ ------------
Performance Bonds 40,753 31,757 8,986 10 -
-------------------------- ---------- ----------- ------------ ------------ ------------
Total Commercial
Commitments $ 42,642 $ 33,586 $ 9,046 $ 10 $ -
--------------------------------------------------------------------------------------------------
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 less
availability of performance bonds for our current operations due to changes in
the insurance industry. At March 31, 2002, we had provided customers and various
regulatory authorities with surety in the aggregate amount of approximately
$40.8 million to secure our obligations (exclusive of letters of credit backing
certain municipal bond obligations). Our surety bond underwriter has provided us
with a non-binding commitment to issue up to $50 million of performance bonds.
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 we are unable to obtain surety bonds or letters of credit in
sufficient amounts or at acceptable rates, we could have difficulty retaining
existing or entering into new municipal solid waste collection contracts or
obtaining or retaining landfill operating permits.
For the three months ended March 31, 2002, net cash provided by operations was
approximately $30.3 million. Of this, $7.7 million was provided by working
capital for the period.
For the three months ended March 31, 2002, net cash used by investing activities
was $41.1 million. Of this, $32.6 million was used to fund the cash portion of
acquisitions and $1.1 million was used to fund increases in restricted cash.
Cash used for capital expenditures was $9.0 million, which was primarily for
investments in fixed assets, consisting primarily of trucks, containers and
other equipment. Cash inflows from investing activities include $1.4 million
received from the disposal of assets.
For the three months ended March 31, 2002, net cash provided by financing
activities was $7.7 million, which was provided by $6.9 million of net
borrowings under our various debt arrangements and $2.1 million of proceeds from
stock option and warrant exercises, less $1.2 million of cash distributions to
minority interest holders.
16
We made approximately $9.0 million in capital expenditures during the three
months ended March 31, 2002. We expect to make capital expenditures of
approximately $48 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, we are exposed to market risk, including
changes in interest rates and certain commodity prices. We use hedge agreements
to manage a portion of our risks related to interest rates. While we are exposed
to credit risk in the event of non-performance by counterparties to our hedge
agreements, in all cases such counterparties are highly rated financial
institutions and we do not anticipate non-performance. We do not hold or issue
derivative financial instruments for trading purposes. We monitor our hedge
positions by regularly evaluating the positions at market and by performing
sensitivity analyses.
In 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 loan 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%.
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 loan 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 those interest rate swap agreements,
extending their maturity through December 2003 and removing their embedded
option features. 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 loan, 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 $139.9 million remaining floating rate
balance owed under our credit facility and floating rate municipal bond
obligations of approximately $1.8 million associated with the tax-exempt bond
financing for our Madera subsidiary. A one percentage point increase in interest
rates on our variable-rate debt as of March 31, 2002 would decrease our annual
pre-tax income by approximately $1.4 million. 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. If the prices we actually receive for
the processed recycled commodities collected under the contract exceed the
prices specified in the contract, we share the excess with the municipality,
after recovering any previous shortfalls resulting from actual market prices
falling below the prices specified in the contract. To reduce our exposure to
commodity price risk with respect to recycled materials, we have adopted a
pricing strategy of charging collection and processing fees for recycling volume
collected from third parties. Although there can be no assurance of market
recoveries in the event of a decline, because of the provisions within certain
of our contracts that pass commodity risk along to the customers, we believe,
given historical trends and fluctuations in the recycling commodities market,
that a 10% decrease in average recycled commodity prices from the prices that
were in effect at March 31, 2002 would not materially affect our cash flows or
pre-tax income.
18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 2002, the Oklahoma Department of Environmental Quality Land
Protection Division ("the Department") issued an order to Waste Connections
requiring us to cease accepting more than 200 tons per day of out-of-state waste
at our Red Carpet Landfill location in Oklahoma due to our alleged failure to
file an approved disposal plan with the Department. Additionally, the Department
assessed us 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 because we have properly
complied with Oklahoma statutes related to disposal plan submission.
Additionally, we believe that certain Oklahoma statutes provide an exemption
from the disposal plan requirement if the landfill meets certain design,
construction and operating requirements. We believe that our landfill meets such
requirements. Therefore, we believe that any payment resulting from the order
will not materially affect on our cash flows, financial condition or results of
operations. We have continued to accept waste at our Red Carpet Landfill
throughout this period.
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the three months ended March 31, 2002, we issued warrants to purchase
41,500 shares of our common stock to three business development consultants as
part of a compensation plan for services rendered. Each of these consultants is
a sophisticated investor, familiar with our business and industry in which we
operate. Each is also an "accredited investor" as defined in Rule 501(a) under
the Securities Act, received copies of our most recent annual report to
shareholders and the proxy statement accompanying that annual report, and had
access to all of our reports filed with the Securities and Exchange Commission
during our last fiscal year and the current year. Each was able to ask questions
of our management concerning the terms of offering and to obtain additional
information necessary to verify the accuracy of information to which they had
access.. No general solicitation or advertising was used in connection with the
issuance of the warrants. The warrants were issued with legends stating that
they have not been registered under the Securities Act and setting forth
restrictions on transfer. The warrants were issued in reliance on the exemptions
from registration provided by Sections 3(b) and 4(2) of the Securities Act and
Regulation D under that Act.
19
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
WASTE CONNECTIONS, INC.
Date: May 14, 2002 BY: /s/ Ronald J. Mittelstaedt
----------------------------------------
Ron J. Mittelstaedt,
President and Chief Executive Officer
Date: May 14, 2002 BY: /s/ Steven F. Bouck
----------------------------------------
Steven F. Bouck,
Executive Vice President and
Chief Financial Officer
20