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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended March 31, 2006
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-25955
Waste Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 01-0780204 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
1122 International Blvd., Suite 601, Burlington, Ontario, Canada L7L 6Z8
(Address of principal executive offices) (zip code)
(Address of principal executive offices) (zip code)
(905) 319-1237
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act). (Check one):
Large accelerated filero | Accelerated Filerþ | Non-accelerated filero |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at April 24, 2006 was 101,760,484 (net of treasury shares and assuming exchange of 6,326,882 exchangeable shares of Waste Services (CA) Inc. not owned by Capital Environmental Holdings Company).
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Section 302 CEO Certification | ||||||||
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Section 906 CEO and CFO Certification |
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PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
WASTE SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
March 31, | December 31, | |||||||
2006 | 2005 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 2,045 | $ | 8,887 | ||||
Accounts receivable (net of allowance for doubtful accounts of $1,182 and $925 as of March 31, 2006 and December 31, 2005, respectively) | 46,733 | 49,583 | ||||||
Prepaid expenses and other current assets | 10,738 | 11,112 | ||||||
Total current assets | 59,516 | 69,582 | ||||||
Property and equipment, net | 134,160 | 133,263 | ||||||
Landfill sites, net | 174,720 | 172,128 | ||||||
Goodwill and other intangible assets, net | 327,807 | 329,471 | ||||||
Other assets | 24,116 | 23,945 | ||||||
Total assets | $ | 720,319 | $ | 728,389 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 24,912 | $ | 26,152 | ||||
Accrued expenses and other current liabilities | 44,606 | 40,700 | ||||||
Short-term financing and current portion of long-term debt | 1,430 | 1,365 | ||||||
Total current liabilities | 70,948 | 68,217 | ||||||
Long-term debt | 284,491 | 284,850 | ||||||
Accrued closure, post-closure and other obligations | 26,371 | 25,860 | ||||||
Cumulative mandatorily redeemable Preferred Stock (net of discount of $696 and $2,347 as of March 31, 2006 and December 31, 2005, respectively) | 90,400 | 84,971 | ||||||
Total liabilities | 472,210 | 463,898 | ||||||
Shareholders’ equity: | ||||||||
Common stock $0.01 par value; 500,000,000 shares authorized; 94,663,761 and 93,685,889 shares issued and outstanding as of March 31, 2006 and December 31, 2005, respectively | 947 | 937 | ||||||
Additional paid-in capital | 386,726 | 383,618 | ||||||
Treasury stock at cost; 500,000 shares | (1,235 | ) | (1,235 | ) | ||||
Accumulated other comprehensive income | 34,938 | 35,673 | ||||||
Accumulated deficit | (173,267 | ) | (154,502 | ) | ||||
Total shareholders’ equity | 248,109 | 264,491 | ||||||
Total liabilities and shareholders’ equity | $ | 720,319 | $ | 728,389 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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WASTE SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended March 31, | ||||||||
2006 | 2005 | |||||||
Revenue | $ | 95,682 | $ | 88,985 | ||||
Operating and other expenses: | ||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) | 68,295 | 64,839 | ||||||
Selling, general and administrative expense (exclusive of depreciation, depletion and amortization) | 16,561 | 15,118 | ||||||
Impairment of deferred acquisition costs | 5,612 | — | ||||||
Depreciation, depletion and amortization | 10,337 | 9,549 | ||||||
Foreign exchange gain and other | (81 | ) | (238 | ) | ||||
Loss from operations | (5,042 | ) | (283 | ) | ||||
Interest expense | 7,057 | 6,825 | ||||||
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs | 5,697 | 4,842 | ||||||
Loss before income taxes | (17,796 | ) | (11,950 | ) | ||||
Income tax provision | 969 | 2,317 | ||||||
Net loss | $ | (18,765 | ) | $ | (14,267 | ) | ||
Basic and diluted loss per share: | ||||||||
Loss per share — basic and diluted | $ | (0.19 | ) | $ | (0.15 | ) | ||
Weighted average common shares outstanding — basic and diluted | 100,132 | 96,516 | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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WASTE SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the Three Months Ended March 31, 2006
(In thousands)
Accumulated | ||||||||||||||||||||||||||||
Other | ||||||||||||||||||||||||||||
Waste Services, Inc. | Treasury | Comprehensive | Total | |||||||||||||||||||||||||
Common Stock | Additional | Shares | Income | Accumulated | Shareholders’ | |||||||||||||||||||||||
Shares | Amount | Paid-in Capital | at Cost | (Loss) | Deficit | Equity | ||||||||||||||||||||||
Balance, December 31, 2005 | 93,686 | $ | 937 | $ | 383,618 | $ | (1,235 | ) | $ | 35,673 | $ | (154,502 | ) | $ | 264,491 | |||||||||||||
Common shares and warrants issued | 946 | 9 | 2,905 | — | — | 2,914 | ||||||||||||||||||||||
Exercise of options and warrants | 28 | 1 | 84 | — | — | 85 | ||||||||||||||||||||||
Stock-based compensation | — | — | 1,048 | — | — | 1,048 | ||||||||||||||||||||||
Conversion of exchangeable shares | 4 | — | — | — | — | — | ||||||||||||||||||||||
Share reimbursement agreement | — | — | (929 | ) | — | — | (929 | ) | ||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | (735 | ) | — | (735 | ) | |||||||||||||||||||
Net loss | — | — | — | — | — | (18,765 | ) | (18,765 | ) | |||||||||||||||||||
Balance, March 31, 2006 | 94,664 | $ | 947 | $ | 386,726 | $ | (1,235 | ) | $ | 34,938 | $ | (173,267 | ) | $ | 248,109 | |||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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WASTE SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended March 31, | ||||||||
2006 | 2005 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (18,765 | ) | $ | (14,267 | ) | ||
Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||
Depreciation, depletion and amortization | 10,337 | 9,549 | ||||||
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs | 5,697 | 4,842 | ||||||
Amortization of debt issue costs | 388 | 345 | ||||||
Deferred income tax provision | 858 | 2,161 | ||||||
Non-cash stock-based compensation expense | 1,048 | 506 | ||||||
Impairment of deferred acquisition costs | 5,612 | — | ||||||
Other non-cash items | 219 | 143 | ||||||
Changes in operating assets and liabilities (excluding the effects of acquisitions): | ||||||||
Accounts receivable | 2,784 | 1,528 | ||||||
Prepaid expenses and other current assets | (582 | ) | 1,197 | |||||
Accounts payable | (828 | ) | (4,477 | ) | ||||
Accrued expenses and other current liabilities | 4,352 | 2,751 | ||||||
11,120 | 4,278 | |||||||
Cash flows from investing activities: | ||||||||
Cash used in business combinations and significant asset acquisitions, net of cash acquired | — | (639 | ) | |||||
Capital expenditures | (14,383 | ) | (6,804 | ) | ||||
Proceeds from asset sales and business divestitures | 371 | 453 | ||||||
Deposits for business acquisitions and other | (3,555 | ) | (398 | ) | ||||
(17,567 | ) | (7,388 | ) | |||||
Cash flows from financing activities: | ||||||||
Principal repayments of debt and capital lease obligations | (485 | ) | (402 | ) | ||||
Sale of common shares and warrants | — | 7,125 | ||||||
Proceeds from the exercise of options and warrants | 85 | — | ||||||
(400 | ) | 6,723 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 5 | (76 | ) | |||||
Increase (decrease) in cash and cash equivalents | (6,842 | ) | 3,537 | |||||
Cash and cash equivalents, beginning of period | 8,887 | 8,507 | ||||||
Cash and cash equivalents, end of period | $ | 2,045 | $ | 12,044 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization of Business and Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of Waste Services, Inc. (“Waste Services”) and its wholly owned subsidiaries (collectively, “we”, “us”, or “our”). We are a multi-regional, integrated solid waste services company providing collection, transfer, landfill disposal and recycling services for commercial, industrial and residential customers. Our operating strategy is disposal-based, whereby we enter geographic markets with attractive growth or positive competitive characteristics by acquiring and developing landfill disposal capacity, then acquiring and developing waste collection and transfer operations. Our operations are located in the United States and Canada. Our U.S. operations are located in Florida, Texas and Arizona and our Canadian operations are located in Eastern Canada (Ontario) and Western Canada (Alberta, Saskatchewan and British Columbia).
These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. All significant intercompany transactions and accounts have been eliminated. All figures are presented in thousands of U.S. dollars, except share and per share data, or except where expressly stated as being in Canadian dollars (“C$”) or in millions. Certain information related to our organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted. Except for the adoption of FASB Statement No. 123(R), Share-Based Payment (“SFAS 123(R)”), which is more fully described in Note 2, the accounting policies followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed in our annual consolidated financial statements for the year ended December 31, 2005, as filed on Form 10-K. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with our Form 10-K for the year ended December 31, 2005. Income taxes during these interim periods have been provided based upon our anticipated annual effective income tax rate. Certain reclassifications have been made to the prior period financial statement amounts to conform to the current presentation. Due to the seasonal nature of our business, operating results for interim periods are not necessarily indicative of the results for full years.
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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the allowance for doubtful accounts, depletion of landfill development costs, goodwill and other intangible assets, liabilities for landfill capping, closure and post-closure obligations, insurance reserves, liabilities for potential litigation and deferred taxes.
As a portion of our operations is domiciled in Canada, for each reporting period we translate the results of operations and financial condition of our Canadian operations into U.S. dollars. Therefore, the reported results of our operations and financial condition are subject to changes in the exchange relationship between the two currencies. For example, as the relationship of the Canadian dollar strengthens against the U.S. dollar, revenue is favorably affected and conversely expenses are unfavorably affected. Assets and liabilities of Canadian operations are translated from Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet dates, and revenue and expenses of Canadian operations are translated from Canadian dollars into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and losses on translation of the Canadian operations into U.S. dollars are reported as a separate component of shareholders’ equity and are included in comprehensive income. Separately, monetary assets and liabilities denominated in U.S. dollars held by our Canadian operations are re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported currently as a component of net income (loss). Currently, we do not hedge our exposure to changes in foreign exchange rates.
Basic earnings (loss) per share is calculated by dividing income (loss) by the weighted average number of common shares outstanding for the period, and exchangeable shares of Waste Services (CA) not owned by us. Diluted earnings (loss) per share is calculated based on the weighted average shares of common stock outstanding, including the exchangeable shares, during the period plus the dilutive effect of common stock purchase warrants and stock options using the treasury stock method. Contingently issuable shares are included in the computation of basic earnings (loss) per share when issuance of the shares is no longer contingent. Due to the net losses for the three months ended March 31, 2006 and 2005, basic and diluted loss per share were the same, as the effect of potentially dilutive securities would have been anti-dilutive. Potentially dilutive securities not included in the diluted loss per share calculation, due to net losses, are as follows (unaudited) (in thousands):
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three months ended March 31, | ||||||||
2006 | 2005 | |||||||
Options to purchase common shares | 6 | 31 | ||||||
Warrants to purchase common shares | 908 | 1,653 | ||||||
Dilutive securities | 914 | 1,684 | ||||||
For purposes of computing net income (loss) per common share — basic and diluted, for the three months ended March 31, 2006 and 2005, the weighted average number of shares of common stock outstanding includes the effect of 6,326,882 and 6,512,102 exchangeable shares of Waste Services (CA), respectively, as if they were shares of our outstanding common stock from July 31, 2004, the date our migration transaction was completed.
2. Share-Based Payments
We have a 1997 Stock Option Plan and a 1999 Stock Option Plan, which are described in our consolidated financial statements for the year ended December 31, 2005 filed on Form 10-K. Employee stock options are denominated in U.S. and Canadian dollars. Prior to January 1, 2006 we accounted for our stock-based compensation plans under the recognition and measurement provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation (“SFAS 123”). Stock-based employee compensation cost (benefit) is recognized as a component of selling, general and administrative expense in the Statement of Operations. For the years ended December 31, 2005 and 2004, stock-based employee compensation expense was $0.3 million and $(1.4) million, respectively. In the three month period ended March 31, 2005, stock-based compensation expensed for employees was $0.1 million. Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS 123(R), using the modified-prospective transition method. Under that transition method, employee compensation cost recognized in 2006 includes: (i) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (ii) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123(R). Results for prior periods have not been restated.
As a result of adopting SFAS 123(R) on January 1, 2006, our net loss and loss before income taxes for the three months ended March 31, 2006, is approximately $0.9 million higher than if we had continued to account for share-based compensation under APB 25. The adoption of this standard had no impact on our provision for income taxes due to: (i) the valuation allowance for our U.S. deferred tax assets due to our lack of operating history relative to our U.S. operations and (ii) the non-deductibility of options issued to our Canadian employees. Basic and diluted loss per share for the three months ended March 31, 2006 would have been $(0.18) if the company had not adopted SFAS 123(R), compared to reported basic and diluted loss per share of $(0.19).
Prior to the adoption of SFAS 123(R), we presented all tax benefits, if any, of deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. SFAS 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for those options (excess tax benefits) to be classified as financing cash flows. There are no tax benefits, excess or otherwise, for the three months ended March 31, 2006 and 2005, and therefore there is no impact on the accompanying Unaudited Condensed Consolidated Statements of Cash Flows.
The following table illustrates the effect on net loss and loss per share if we had applied the fair value recognition provisions of SFAS 123 to options granted to employees under our stock option plans during the three months ended March 31, 2005 (unaudited):
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Net loss as reported | $ | (14,267 | ) | |
Add: Employee compensation expense for equity awards included in the determination of net loss as reported | 86 | |||
Less: Stock based compensation expense for equity awards determined by the fair value based method prescribed under Statement 123 | (2,449 | ) | ||
Pro forma net loss | $ | (16,630 | ) | |
Basic and diluted loss per share: | ||||
As reported | $ | (0.15 | ) | |
Pro forma | $ | (0.17 | ) | |
Note that the above pro forma disclosures are provided for 2005 because employee stock options were not accounted for using the fair-value method during that period. No pro forma disclosure has been presented for the three months ended March 31, 2006 as share-based payments to employees have been accounted for under SFAS 123(R)’s fair-value method for such period.
During the three months ended March 31, 2006, we granted 165,000 options to certain employees with option exercise prices equal to the market value of our common stock on the date of the grant. The weighted-average grant-date fair value of these option grants was $1.04 per option. No employee options were granted during the three months ended March 31, 2005. The fair value of options granted is estimated using the Black-Scholes option pricing model using the following assumptions:
Three Months Ended March 31, | ||||||||
2006 | 2005 | |||||||
Annual dividend yield | — | — | ||||||
Weighted-average expected life (years) | 3.0 | N/A | ||||||
Risk-free interest rate | 4.83 | % | N/A | |||||
Expected volatility | 38 | % | N/A |
Expected volatility and expected life consider (i) historical trends and (ii) ways in which future volatility and option lives may differ from those historical trends. The risk-free interest rate is based on the U.S. treasury security rate estimated for the expected life of the options at the date of grant.
SFAS 123(R) requires the estimation of forfeitures when recognizing compensation expense and that this estimate of forfeitures be adjusted over the requisite service period should actual forfeitures differ from such estimates. Changes in estimated forfeitures are recognized through a cumulative adjustment, which is recognized in the period of change and which impacts the amount of unamortized compensation expense to be recognized in future periods.
During the three months ended March 31, 2006, no employee options were exercised and 142,000 options expired or were forfeited. As of March 31, 2006, $1.2 million of total unrecognized compensation cost related to employee stock options is expected to be recognized over a weighted average period of approximately 0.5 year. Additional information relative to our employee options outstanding at March 31, 2006 is summarized as follows (unaudited):
Options | Options | |||||||
Outstanding | Exercisable | |||||||
Number of U.S. dollar denominated options | 7,846,500 | 4,735,000 | ||||||
Number of Canadian dollar denominated options | 4,740,000 | 4,556,500 | ||||||
Total number of options | 12,586,500 | 9,291,500 | ||||||
Aggregate intrinsic value of options | $0.1million | $0.1million | ||||||
Weighted average remaining contractual term (years) | 2.4 | 2.0 | ||||||
Weighted average exercise price — U.S. dollar denominated options | $ | 4.43 | $ | 4.55 | ||||
Weighted average exercise price — Canadian dollar denominated options | C$ | 6.37 | C$ | 6.37 |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between our closing stock price on the last trading day of the first quarter of 2006 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on March 31, 2006.
3. Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts based on the expected collectibility of our accounts receivable. We perform credit evaluations of significant customers and establish an allowance for doubtful accounts based on the aging of receivables, payment performance factors, historical trends and other information. In general, we reserve a portion of those receivables outstanding more than 90 days and 100% of those outstanding more than 120 days. We evaluate and revise our reserve on a monthly
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
basis based upon a review of specific accounts outstanding and our history of uncollectible accounts.
The changes to the allowance for doubtful accounts for the three months ended March 31, 2006 and 2005 are as follows (unaudited):
2006 | 2005 | |||||||
Balance, beginning of period | $ | 925 | $ | 1,264 | ||||
Provisions | 623 | 395 | ||||||
Bad debts charged to reserves, net of recoveries | (365 | ) | (609 | ) | ||||
Impact of foreign exchange rate fluctuations | (1 | ) | (1 | ) | ||||
Balance, end of period | $ | 1,182 | $ | 1,049 | ||||
4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
March 31, | December 31, | |||||||
2006 | 2005 | |||||||
(Unaudited) | ||||||||
Prepaid expenses | $ | 3,083 | $ | 2,694 | ||||
Deferred income taxes | 3,749 | 4,763 | ||||||
Parts and supplies | 1,897 | 1,832 | ||||||
Other current assets | 2,009 | 1,823 | ||||||
$ | 10,738 | $ | 11,112 | |||||
5. Property and Equipment
Property and equipment consist of the following:
March 31, | December 31, | |||||||
2006 | 2005 | |||||||
(Unaudited) | ||||||||
Land and buildings | $ | 29,072 | $ | 27,446 | ||||
Vehicles | 104,472 | 103,120 | ||||||
Containers, compactors and landfill and recycling equipment | 73,108 | 71,228 | ||||||
Furniture, fixtures, other office equipment and leasehold improvements | 10,725 | 10,389 | ||||||
Total property and equipment | 217,377 | 212,183 | ||||||
Less: Accumulated depreciation | (83,217 | ) | (78,920 | ) | ||||
Property and equipment, net | $ | 134,160 | $ | 133,263 | ||||
6. Landfill Sites, Accrued Closure, Post-Closure and Other Obligations
Landfill Sites
Landfill sites consist of the following:
March 31, | December 31, | |||||||
2006 | 2005 | |||||||
(Unaudited) | ||||||||
Landfill sites | $ | 211,196 | $ | 205,345 | ||||
Less: Accumulated depletion | (36,476 | ) | (33,217 | ) | ||||
Landfill sites, net | $ | 174,720 | $ | 172,128 | ||||
The changes in landfill sites for the three months ended March 31, 2006 and 2005 are as follows (unaudited):
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2006 | 2005 | |||||||
Balance, beginning of period | $ | 172,128 | $ | 169,616 | ||||
Additional landfill site costs | 5,566 | 2,445 | ||||||
Additional asset retirement obligations | 428 | 229 | ||||||
Depletion | (3,361 | ) | (2,155 | ) | ||||
Effect of foreign exchange rate fluctuations | (41 | ) | (96 | ) | ||||
Balance, end of period | $ | 174,720 | $ | 170,039 | ||||
Accrued Closure, Post-Closure and Other Obligations
Accrued closure, post-closure and other obligations consist of the following:
March 31, | December 31, | |||||||
2006 | 2005 | |||||||
(Unaudited) | ||||||||
Accrued closure and post-closure obligations | $ | 9,693 | $ | 9,106 | ||||
Deferred income tax liability | 16,086 | 16,206 | ||||||
Other obligations | 592 | 548 | ||||||
$ | 26,371 | $ | 25,860 | |||||
Accrued closure and post-closure obligations include costs associated with obligations for closure and post-closure of our landfills. The anticipated timeframe for paying these costs varies based on the remaining useful life of each landfill as well as the duration of the post-closure monitoring period. The changes in accrued closure and post-closure obligations for the three months ended March 31, 2006 and 2005 are as follows (unaudited):
2006 | 2005 | |||||||
Balance, beginning of period | $ | 9,106 | $ | 6,390 | ||||
Accretion | 187 | 121 | ||||||
Additional asset retirement obligations | 428 | 229 | ||||||
Effect of foreign exchange rate fluctuations | (28 | ) | (27 | ) | ||||
Balance, end of period | $ | 9,693 | $ | 6,713 | ||||
7. Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following:
March 31, | December 31, | |||||||
2006 | 2005 | |||||||
(Unaudited) | ||||||||
Other intangible assets subject to amortization: | ||||||||
Customer relationships and contracts | $ | 35,381 | $ | 35,394 | ||||
Non-competition agreements and other | 3,132 | 3,136 | ||||||
38,513 | 38,530 | |||||||
Less: Accumulated amortization: | ||||||||
Customer relationships and contracts | (13,409 | ) | (12,310 | ) | ||||
Non-competition agreements and other | (2,143 | ) | (1,950 | ) | ||||
Other intangible assets subject to amortization, net | 22,961 | 24,270 | ||||||
Goodwill | 304,846 | 305,201 | ||||||
Goodwill and other intangible assets, net | $ | 327,807 | $ | 329,471 | ||||
The changes in goodwill for the three months ended March 31, 2006 and 2005 are as follows (unaudited):
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended March 31, 2006 | ||||||||||||||||
Florida | Canada | All Other | Total | |||||||||||||
Balance, beginning of period | $ | 199,377 | $ | 84,869 | $ | 20,955 | $ | 305,201 | ||||||||
Effect of foreign exchange rate fluctuations | — | (355 | ) | — | (355 | ) | ||||||||||
Balance, end of period | $ | 199,377 | $ | 84,514 | $ | 20,955 | $ | 304,846 | ||||||||
Three Months Ended March 31, 2005 | ||||||||||||||||
Florida | Canada | All Other | Total | |||||||||||||
Balance, beginning of period | $ | 174,629 | $ | 85,255 | $ | 20,946 | $ | 280,830 | ||||||||
Acquisitions | — | — | 9 | 9 | ||||||||||||
Effect of foreign exchange rate fluctuations | — | (535 | ) | — | (535 | ) | ||||||||||
Purchase price allocation adjustments for prior acquisitions | 23,933 | — | — | 23,933 | ||||||||||||
Balance, end of period | $ | 198,562 | $ | 84,720 | $ | 20,955 | $ | 304,237 | ||||||||
During the first three months of 2005, we revised our estimate of the fair value of customer relationships, non-compete arrangements and certain vehicles and containers acquired as part of the acquisition of Florida Recycling Services, Inc.
8. Other Assets
Other assets consist of the following:
March 31, | December 31, | |||||||
2006 | 2005 | |||||||
(Unaudited) | ||||||||
Debt and redeemable Preferred Stock issue costs, net of accumulated amortization of $5,443 and $4,761 as of March 31, 2006 and December 31, 2005, respectively | $ | 8,774 | $ | 9,428 | ||||
Acquisition deposits and deferred acquisition costs | 14,687 | 13,815 | ||||||
Other assets | 655 | 702 | ||||||
$ | 24,116 | $ | 23,945 | |||||
In April 2006, we concluded it is more-likely-than-not that we will not complete an acquisition with Lucien Rémillard, one of our directors, of a solid waste collection and disposal business controlled by Mr. Rémillard in Quebec, Canada for the foreseeable future, and therefore management has recorded an impairment charge of $5.6 million.
9. Debt
Debt consists of the following:
March 31, | December 31, | |||||||
2006 | 2005 | |||||||
(Unaudited) | ||||||||
Senior Secured Credit Facilities: | ||||||||
Term loan facility, floating interest rate at 7.9% as of March 31, 2006 and December 31, 2005, due $313 per quarter to March 2010, $29,500 per quarter thereafter, due March 2011 | $ | 123,000 | $ | 123,250 | ||||
Senior Subordinated Notes, fixed interest rate at 9.5%, due 2014 | 160,000 | 160,000 | ||||||
Other subordinated promissory note payable, interest at 6.67%, due through June 2017 | 2,921 | 2,965 | ||||||
285,921 | 286,215 | |||||||
Less: Current portion | (1,430 | ) | (1,365 | ) | ||||
Long-term portion | $ | 284,491 | $ | 284,850 | ||||
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Senior Secured Credit Facilities
On April 30, 2004, we entered into new Senior Secured Credit Facilities (the “Credit Facilities”) with a syndicate of lenders. The Credit Facilities consist of a five-year revolving credit facility in the amount of $60.0 million, up to $15.0 million of which is available to our Canadian operations, and a seven-year term loan facility in the amount of $100.0 million. The Credit Facilities bear interest based upon a spread over base rate or Eurodollar loans, as defined, at our option. The Credit Facilities are secured by substantially all of the assets of our U.S. restricted subsidiaries. Our Canadian operations guarantee and pledge all of their assets only in support of the portion of the revolving credit facility available to them. Additionally, 65% of the common shares of Waste Services’ first tier foreign subsidiaries including Waste Services (CA), are pledged to secure obligations under the Credit Facilities. As of March 31, 2006, there were no amounts outstanding on the revolving credit facility, while $22.6 million of capacity was used to support outstanding letters of credit.
As of June 30, 2004, we failed to meet certain of the financial covenants contained in the Credit Facilities. On October 4, 2004, we entered into an amendment to the credit agreement with the administrative agent for the lenders. The amendment included changes to certain of the financial and other covenants contained in the credit facilities and increased the interest rates payable on amounts outstanding by 125 basis points to 450 basis points over Eurodollar loans. Until we met certain target leverage ratios, as defined, availability under the amended revolving credit facility was reduced to $50.0 million, up to $12.5 million of which was available for our Canadian operations. In connection with the amendment, we paid a fee of approximately $0.4 million to our lenders. The amendment also required us to receive an equity investment of at least $7.5 million prior to March 28, 2005. On March 28, 2005 we issued 2,640,845 shares of common stock and 264,085 common stock purchase warrants for net proceeds of approximately $6.8 million in satisfaction of this covenant.
On October 26, 2005, we entered into an amendment to the Credit Facilities with the administrative agent for the lenders. The amendment, among other items, decreases the current interest rate on our term loan by 125 basis points to 325 basis points over Eurodollar loans. In addition, the amendment restored access under the revolving credit facility to $60.0 million, up to $15.0 million of which is available to our Canadian operations.
On December 28, 2005, we entered into another amendment to the Credit Facilities, which provided for the incurrence of up to $50.0 million of additional term loans under a new term loan tranche, as provided for under the terms of our existing Credit Facilities. We drew $25.0 million of this facility at closing to refinance amounts then outstanding under our existing revolving credit facility. The remaining portion of the new term loan tranche is available on a delayed draw basis until May 31, 2006 and is to be used for the financing of acquisitions that are otherwise permitted under the terms of the Credit Facilities and that do not materially increase total leverage on a pro forma basis.
Our Credit Facilities, as amended, contain certain financial and other covenants that restrict our ability to, among other things, make capital expenditures, incur indebtedness, incur liens, dispose of property, repay debt, pay dividends, repurchase shares and make certain acquisitions. Our financial covenants include: (i) minimum consolidated interest coverage, (ii) maximum total leverage and (iii) maximum senior secured leverage. The covenants and restrictions limit the manner in which we conduct our operations and could adversely affect our ability to raise additional capital. As of March 31, 2006, we are in compliance with the financial covenants, as amended, and we expect to continue to be in compliance in future periods.
Senior Subordinated Notes
On April 30, 2004, we completed a private offering of 91/2% Senior Subordinated Notes (“Subordinated Notes”) due 2014 for gross proceeds of $160.0 million. The Subordinated Notes mature on April 15, 2014. Interest on the Subordinated Notes is payable semi-annually on October 15 and April 15. The Subordinated Notes are redeemable, in whole or in part, at our option, on or after April 15, 2009, at a redemption price of 104.75% of the principal amount, declining ratably in annual increments to par on or after April 15, 2012, together with accrued interest to the redemption date. In addition, prior to April 15, 2007, we may redeem up to 35.0% of the aggregate principal amount of the Subordinated Notes with the proceeds of certain equity offerings, at a redemption price equal to 109.5% of the principal amount. Upon a change of control, as such term is defined in the Indenture, we are required to offer to repurchase all the Subordinated Notes at 101.0% of the principal amount, together with accrued interest and liquidated damages, if any, and obtain the consent of our senior lenders to such payment or repay our indebtedness of our Credit Facilities.
The Subordinated Notes are unsecured and are subordinate to our existing and future senior secured indebtedness, including our Credit Facilities, structurally subordinated to existing and future indebtedness of our non-guarantor subsidiaries, rank equally with any unsecured senior subordinated indebtedness and senior to our existing and future subordinated indebtedness. Our obligations with
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
respect to the Subordinated Notes, including principal, interest, premium, if any, and liquidated damages, if any, are fully and unconditionally guaranteed on an unsecured, senior subordinated basis by all of our existing and future domestic restricted subsidiaries. Our Canadian operations are not guarantors under the Subordinated Notes.
The Subordinated Notes contain certain covenants that, in certain circumstances and subject to certain limitations and qualifications, restrict, among other things: (i) the incurrence of additional debt; (ii) the payment of dividends and repurchases of stock; (iii) the issuance of preferred stock and the issuance of stock of our subsidiaries; (iv) certain investments; (v) the repurchase of our Preferred Stock; (vi) transactions with affiliates; and (vii) certain sales of assets.
10. Cumulative Mandatorily Redeemable Preferred Stock
In May 2003, we issued 55,000 shares of redeemable Preferred Stock (the “Preferred Stock”) to Kelso Investment Associates VI, L.P. and KEP VI, LLC (collectively “Kelso”), pursuant to the terms of an agreement dated as of May 6, 2003, as amended in February 2004, (the “Subscription Agreement”), at a price of $1,000 per share. We also issued to Kelso 7,150,000 warrants to purchase shares of our common stock (on a one-for-one basis) for $3.00 per share. The warrants are exercisable at any time until May 6, 2010. The issuance of the Preferred Stock resulted in proceeds of approximately $49.5 million, net of fees of approximately $5.5 million. The shares of Preferred Stock are non-voting. The Preferred Stock entitles the holders to cash dividends of 173/4% per annum compounding and accruing quarterly in arrears. The liquidation preference approximated $91.1 million as of March 31, 2006. The Preferred Stock entitles the holders to a liquidation preference of $1,000 per share, adjusted for any stock dividend, stock split, reclassification, recapitalization, consolidation or similar event affecting the Preferred Stock, plus the amount of any accrued but unpaid dividends on such share as of any date of determination.
As we are not permitted to declare and pay cash dividends pursuant to the terms of our Credit Facilities, the dividend payments accrue. The Preferred Stock, including all accrued and unpaid dividends, must be redeemed in full by no later than May 6, 2015. Until May 6, 2006, we may redeem all or any part of the Preferred Stock on payment of the sum of $1,000 per share plus accrued and unpaid dividends calculated as if the Preferred Stock were redeemed on May 6, 2006, or approximately $92.7 million subject to the restrictions in our Credit Facilities and our Senior Subordinated Notes. If we do not exercise our option to redeem all of the Preferred Stock by May 6, 2009, Kelso may require us to initiate a sale of our assets to redeem approximately $156.1 million of principal and accrued dividends, on terms acceptable to our board consistent with the exercise of their fiduciary duties. Pursuant to an amendment to the Certificate of Designations of Waste Services dated April 30, 2004, if we determine, after conducting a sale process, that any such sale would not yield sufficient proceeds to repay in full the indebtedness then outstanding under our Credit Facilities and the redemption amount of our Senior Subordinated Notes issued on April 30, 2004, then we may elect to delay such sale. The sale date may be delayed until the earliest to occur of (i) the final maturity date of the Senior Subordinated Notes (April 15, 2014); (ii) the date on which our Credit Facilities and the Senior Subordinated Notes are fully repaid or otherwise satisfied; or (iii) a sale of our assets to a third party. We refer to this date as the delayed sale date. If we do not initiate and complete a sale of our assets within 20 months of initiation of the sale process by the holders of the Preferred Stock, then on notice from the holders of the Preferred Stock, all outstanding Preferred Stock will become due and payable on the first anniversary of the date on which the holders of Preferred Stock gave notice requiring the initiation of a sale process, for a liquidation amount of 1.20 times the liquidation preference of $1,000 per share. If the sale day has been delayed, then we are not required to pay this increased liquidation amount until the delayed sale date.
Also pursuant to the Amended Certificate of Designations, if we become subject to a liquidation or insolvency event (as such terms are defined in our Amended and Restated Credit Agreement dated April 30, 2004) or in the event of a change of control (as such term is defined in the Amended Certificate of Designations), all payments and other distributions to holders of Preferred Stock will be subordinate to the repayment in full of our Credit Facilities. This provision does not prohibit any accrual or increase in the dividend rate or in the liquidation preference of the Preferred Stock as provided for in the Amended Certificate of Designations, or the distribution of additional shares or other equity securities to the holders of Preferred Stock, so long as such additional shares or other equity securities are subject to at least equivalent subordination provisions. In addition, the Amended Certificate of Designations prohibits us from making any payment or distribution to the holders of Preferred Stock in the event of a sale of our assets, or the exercise by the holders of the Preferred Stock of their right to require payment of the liquidation amount of their shares as a result of the failure to consummate a sale of our assets as described in the preceding paragraph, unless such payment or distribution is expressly permitted pursuant to the terms of the agreement then governing our Credit Facilities.
11. Commitments and Contingencies
Environmental Risks
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We are subject to liability for environmental damage that our solid waste facilities may cause, including damage to neighboring landowners or residents, particularly as a result of the contamination of soil, groundwater or surface water, including damage resulting from conditions existing prior to our acquisition of such facilities. Pollutants or hazardous substances whose transportation, treatment, or disposal was arranged by us or our predecessors, may also subject us to liability for any off-site environmental contamination caused by these pollutants or hazardous substances.
Any substantial liability for environmental damage incurred by us could have a material adverse effect on our financial condition, results of operations or cash flows. As of the date of these condensed consolidated financial statements, we estimate the range of reasonably possible losses related to environmental matters to be insignificant and we are not aware of any such environmental liabilities that would be material to our operations or financial condition.
Legal Proceedings
In the normal course of our business and as a result of the extensive governmental regulation of the solid waste industry, we may periodically become subject to various judicial and administrative proceedings involving federal, state, provincial or local agencies. In these proceedings, an agency may seek to impose fines on us or revoke or deny renewal of an operating permit or license held by us. From time to time, we may also be subject to actions brought by citizens’ groups, adjacent landowners or residents in connection with the permitting and licensing of transfer stations and landfills or allegations related to environmental damage or violations of the permits and licenses pursuant to which we operate. In addition, we may become party to various claims and suits 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 a waste management business.
Our President and Chief Operating Officer, Charles A. Wilcox, is a defendant in a breach of contract suit filed by Waste Management, Inc. (“Waste Management”), which is more fully described in our annual report for the year ended December 31, 2005 as filed on Form 10-K. Mr. Wilcox is subject to a temporary order restraining him from engaging in certain activities adverse to the interests of Waste Management. In April 2005, Waste Management filed an amended petition and application for injunction naming us as a defendant to the suit, claiming, among other things, tortious interference with contractual relations and seeking compensatory damages from us. We intend to vigorously defend this claim both with respect to liability and damages.
In March 2005, we filed a Complaint against Waste Management in the U.S. District Court in the Middle District of Florida (Orlando). The Complaint alleges that Waste Management sought to prevent us from establishing ourselves as an effective competitor to Waste Management in the State of Florida, by tortiously interfering with our business relationships and committing antitrust violations under both federal and Florida law. We are seeking in excess of $25.0 million in damages against Waste Management. If we are successful in our suit under antitrust laws, Waste Management could be liable for treble damages, or in excess of $75.0 million.
No provision has been made in these financial statements for the above matters. We do not currently believe that the possible losses in respect of all or any of these matters would have a material adverse impact on our business, financial condition, results of operations or cash flows.
Surety Bonds, Letters of Credit and Insurance
Municipal solid waste service contracts and permits and licenses to operate transfer stations, landfills and recycling facilities may require performance or surety bonds, letters of credit or other means of financial assurance to secure contractual performance. As of March 31, 2006 and December 31, 2005, we had provided customers and various regulatory authorities with such bonds and letters of credit amounting to approximately $67.1 million and $65.5 million, respectively, to collateralize our obligations.
Our U.S. based automobile, general liability and workers’ compensation insurance coverage is subject to certain deductible limits. We retain up to $0.5 million and $0.25 million of risk per claim, plus claims handling expense under our workers’ compensation and our auto and general liability insurance programs, respectively. Claims in excess of such deductible levels are fully insured subject to our policy limits. However, we have a limited claims history for our U.S. operations and it is reasonably possible that recorded reserves may not be adequate to cover future payments of claims. Adjustments, if any, to our reserves will be reflected in the period in which the adjustments are known. As of March 31, 2006, and included in the $67.1 million of bonds and letters of credit previously discussed, we have posted a letter of credit with our U.S. insurer of approximately $9.3 million to secure the liability for losses within the deductible limit.
The changes in insurance reserves for our U.S. operations for the three months ended March 31, 2006 and 2005 are as follows (unaudited):
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended March 31, | ||||||||
2006 | 2005 | |||||||
Balance, beginning of period | $ | 4,356 | $ | 2,426 | ||||
Provisions | 974 | 637 | ||||||
Payments | (460 | ) | (106 | ) | ||||
Favorable claim development | (315 | ) | (279 | ) | ||||
Balance, end of period | $ | 4,555 | $ | 2,678 | ||||
Disposal Agreement
We have entered into a put or pay disposal agreement with RCI Environment Inc., Centres de Transbordement et de Valorisation Nord Sud Inc., RCM Environnement Inc. (collectively the “RCI Companies”) and Intersan Inc. pursuant to which we have posted a letter of credit for C$4.0 million to secure our obligations and those of the RCI Companies to Intersan Inc. Concurrently with the put or pay disposal agreement with the RCI Companies, we entered into a three year agreement with Waste Management of Canada Corporation (formerly Canadian Waste Services Inc.) to allow us to deliver non-hazardous solid waste to their landfill in Michigan, which has now expired. On January 17, 2006, Waste Management drew C$0.3 million against the letter of credit posted by us to secure RCI’s obligations, as such we have provided for the draw as of December 31, 2005. The companies within the RCI group are controlled by a director of ours and/or individuals related to that director. Details of these agreements are further described in our annual financial statements for the year ended December 31, 2005, as filed on Form 10-K.
Other Contractual Arrangements
During December 2003, we issued 600,000 common shares as part of the purchase price of an acquisition. In connection with this acquisition, we entered into a reimbursement agreement whereby for a period of one year after the second anniversary of the closing date, we will reimburse the seller for the loss on sale of shares below $4.75 per share. During the first quarter of 2006, we received a claim for reimbursement under the agreement of $0.9 million, as such the claim was accrued as of March 31, 2006 with a corresponding charge to equity.
From time to time and in the ordinary course of business we may enter into certain acquisitions whereby we will also enter into a royalty agreement. These agreements are usually based upon the amount of waste deposited at our landfill sites or in certain instances our transfer stations. Royalties are expensed as incurred and recognized as a cost of operations.
12. Authorized Capital Stock and Migration Transaction
Total Shares
We are authorized to issue a total of 505,000,000 shares of capital stock consisting of:
• | 500,000,000 shares of common stock, par value 0.01 per share; and | ||
• | 5,000,000 shares of preferred stock, par value 0.01 per share, of which 100,000 shares have been designated as Series A Preferred Stock and one share has been designated as Special Voting Preferred Stock. |
Common Stock
During the first three months of 2006, we issued 946,372 common shares valued at approximately $2.9 million as a deposit for our previously announced acquisition of Liberty Waste, LLC.
Preferred Stock
The Series A Preferred Stock with a par value of $0.01 per share and a liquidation preference of $1,000.00 per share, have the powers, preferences and other special rights and the qualifications, limitations and restrictions that are set forth in the Certificate of Designations of Series A Preferred Stock as amended. 55,000 shares of Series A Preferred Stock are currently outstanding. The Special Voting Preferred Stock has the rights, preference, and limitations set forth in the Certificate of Designation of Special Voting Preferred Stock. One share of Special Voting Preferred Stock is presently outstanding.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Migration Transaction
Effective July 31, 2004, we entered into a migration transaction by which our corporate structure was reorganized so that Waste Services became the ultimate parent company of our corporate group. Prior to the migration transaction, we were a subsidiary of Waste Services (CA). After the migration transaction, Waste Services (CA) became our subsidiary.
The migration transaction occurred by way of a plan of arrangement under the Business Corporations Act (Ontario) and consisted primarily of: (i) the exchange of 87,657,035 common shares of Waste Services (CA) for 87,657,035 shares of our common stock; and (ii) the conversion of the remaining 9,229,676 common shares of Waste Services (CA) held by non-U.S. residents who elected to receive exchangeable shares into 9,229,676 exchangeable shares of Waste Services (CA). The transaction was approved by the Ontario Superior Court of Justice on July 30, 2004 and by our shareholders at a special meeting held on July 27, 2004.
The terms of the exchangeable shares of Waste Services (CA) are the economic and functional equivalent of our common stock. Holders of exchangeable shares: (i) will receive the same dividends as holders of shares of our common stock, and (ii) will be entitled to vote on the same matters as holders of shares of our common stock. Such voting is accomplished through the one share of Special Voting Preferred Stock held by Computershare Trust Company of Canada as trustee, who will vote on the instructions of the holders of the exchangeable shares (one vote for each exchangeable share). As such, the exchangeable shares are classified as part of our equity.
Upon the occurrence of certain events, such as the liquidation of Waste Services (CA), or after the redemption date, our Canadian holding company, Capital Environmental Holdings Company will have the right to purchase each exchangeable share for a share of our common stock, plus all declared and unpaid dividends on the exchangeable share. Unless certain events occur, such redemption date will not be earlier than December 31, 2016. Holders of exchangeable shares also have the right at anytime at their option, to exchange their exchangeable shares for shares of our common stock.
13. Comprehensive Loss
Comprehensive loss includes the effects of foreign currency translation. Comprehensive loss for the three months ended March 31, 2006 and 2005 is as follows (unaudited):
2006 | 2005 | |||||||
Net loss | $ | (18,765 | ) | $ | (14,267 | ) | ||
Foreign currency translation adjustment | (735 | ) | (1,226 | ) | ||||
Comprehensive loss | $ | (19,500 | ) | $ | (15,493 | ) | ||
14. Segment Information
We have determined our operating and reporting segments pursuant to the requirements of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS 131”). In making this determination, we considered our organization/reporting structure and the information used by our chief operating decision makers to make decisions about resource allocation and performance assessment. We are organized along geographic locations or regions within the U.S. and Canada. Our Canadian operations are organized between two regions, Eastern and Western Canada while the U.S. is organized into Florida, Texas and Arizona. We believe our Canadian geographic segments meet the “Aggregation Criteria” set forth in SFAS 131 for the following reasons: (i) these segments are economically similar, (ii) the nature of the service, waste collection and disposal, is the same and transferable across locations; (iii) the type and class of customer is consistent among regions/districts; (iv) the methods used to deliver services are essentially the same (e.g. containers collect waste at market locations and trucks collect and transfer waste to landfills); and (v) the regulatory environment is consistent within Canada. We do not have significant (in volume or dollars) inter-segment related transactions. We have reflected our domestic corporate and Canadian corporate offices as “Corporate.”
Summarized financial information concerning our reportable segments for the three months ended March 31, 2006 and 2005 is as follows:
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended March 31, 2006 | ||||||||||||||||||||
All Other | ||||||||||||||||||||
Florida | Canada | Operations | Corporate | Total | ||||||||||||||||
Revenue | $ | 48,393 | $ | 39,207 | $ | 8,082 | $ | — | $ | 95,682 | ||||||||||
Depreciation, depletion and amortization | 5,273 | 3,688 | 991 | 385 | 10,337 | |||||||||||||||
Income (loss) from operations | 5,504 | 4,624 | (870 | ) | (14,300 | ) | (5,042 | ) | ||||||||||||
Capital expenditures | 7,342 | 3,523 | 2,996 | 522 | 14,383 |
Three Months Ended March 31, 2005 | ||||||||||||||||||||
All Other | ||||||||||||||||||||
Florida | Canada | Operations | Corporate | Total | ||||||||||||||||
Revenue | $ | 46,505 | $ | 36,144 | $ | 6,336 | $ | — | $ | 88,985 | ||||||||||
Depreciation, depletion and amortization | 4,709 | 3,895 | 681 | 264 | 9,549 | |||||||||||||||
Income (loss) from operations | 3,500 | 3,999 | (235 | ) | (7,547 | ) | (283 | ) | ||||||||||||
Capital expenditures | 3,446 | 1,035 | 1,804 | 519 | 6,804 |
15. Condensed Consolidating Financial Statements
Waste Services is the primary obligor under the Subordinated Notes, however Waste Services has no independent assets or operations, and the guarantees of our domestic restricted subsidiaries are full and unconditional and joint and several with respect to the Subordinated Notes, including principal, interest, premium, if any, and liquidated damages, if any. Presented below are our Condensed Consolidating Balance Sheets as of March 31, 2006 (unaudited) and December 31, 2005 and the related Unaudited Condensed Consolidating Statements of Operations for the three months ended March 31, 2006 and 2005 and the Unaudited Condensed Consolidating Statements of Cash Flows for the three months ended March 31, 2006 and 2005 of Waste Services and the guarantor subsidiaries (“Guarantors”), our domestic operations, and the subsidiaries that are not guarantors (“Non-guarantors”), our Canadian operations:
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 2006 | ||||||||||||||||
Non- | ||||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 699 | $ | 1,346 | $ | — | $ | 2,045 | ||||||||
Accounts receivable, net | 25,735 | 20,998 | — | 46,733 | ||||||||||||
Prepaid expenses and other current assets | 3,432 | 7,306 | — | 10,738 | ||||||||||||
Total current assets | 29,866 | 29,650 | — | 59,516 | ||||||||||||
Property and equipment, net | 68,935 | 65,225 | — | 134,160 | ||||||||||||
Landfill sites, net | 164,790 | 9,930 | — | 174,720 | ||||||||||||
Goodwill and other intangible assets, net | 242,155 | 85,652 | — | 327,807 | ||||||||||||
Other assets | 15,736 | 8,380 | — | 24,116 | ||||||||||||
Due from affiliates | — | 6,153 | (6,153 | ) | — | |||||||||||
Investment in subsidiary | 174,349 | — | (174,349 | ) | — | |||||||||||
Total assets | $ | 695,831 | $ | 204,990 | $ | (180,502 | ) | $ | 720,319 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 16,018 | $ | 8,894 | $ | — | $ | 24,912 | ||||||||
Accrued expenses and other current liabilities | 34,901 | 9,705 | — | 44,606 | ||||||||||||
Short-term financing and current portion of long-term debt | 1,430 | — | — | 1,430 | ||||||||||||
Total current liabilities | 52,349 | 18,599 | — | 70,948 | ||||||||||||
Long—term debt | 284,491 | — | — | 284,491 | ||||||||||||
Accrued closure, post-closure and other obligations | 14,329 | 12,042 | — | 26,371 | ||||||||||||
Cumulative mandatorily redeemable Preferred Stock | 90,400 | — | — | 90,400 | ||||||||||||
Due to affiliates | 6,153 | — | (6,153 | ) | — | |||||||||||
Total liabilities | 447,722 | 30,641 | (6,153 | ) | 472,210 | |||||||||||
Shareholders’ equity: | ||||||||||||||||
Common stock of Waste Services, Inc | 947 | — | — | 947 | ||||||||||||
Other equity | 247,162 | 174,349 | (174,349 | ) | 247,162 | |||||||||||
Total shareholders’ equity | 248,109 | 174,349 | (174,349 | ) | 248,109 | |||||||||||
Total liabilities and shareholders’ equity | $ | 695,831 | $ | 204,990 | $ | (180,502 | ) | $ | 720,319 | |||||||
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31, 2005 | ||||||||||||||||
Non- | ||||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 3,681 | $ | 5,206 | $ | — | $ | 8,887 | ||||||||
Accounts receivable, net | 25,438 | 24,145 | — | 49,583 | ||||||||||||
Prepaid expenses and other current assets | 3,018 | 8,094 | — | 11,112 | ||||||||||||
Total current assets | 32,137 | 37,445 | — | 69,582 | ||||||||||||
Property and equipment, net | 67,354 | 65,909 | — | 133,263 | ||||||||||||
Landfill sites, net | 162,028 | 10,100 | — | 172,128 | ||||||||||||
Goodwill and other intangible assets, net | 243,276 | 86,195 | — | 329,471 | ||||||||||||
Other assets | 10,391 | 13,554 | — | 23,945 | ||||||||||||
Due from affiliates | — | 2,295 | (2,295 | ) | — | |||||||||||
Investment in subsidiary | 177,883 | — | (177,883 | ) | — | |||||||||||
Total assets | $ | 693,069 | $ | 215,498 | $ | (180,178 | ) | $ | 728,389 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 14,665 | $ | 11,487 | $ | — | $ | 26,152 | ||||||||
Accrued expenses and other current liabilities | 27,911 | 12,789 | — | 40,700 | ||||||||||||
Short-term financing and current portion of long-term debt | 1,365 | — | — | 1,365 | ||||||||||||
Total current liabilities | 43,941 | 24,276 | — | 68,217 | ||||||||||||
Long—term debt | 284,850 | — | — | 284,850 | ||||||||||||
Accrued closure, post-closure and other obligations | 12,521 | 13,339 | — | 25,860 | ||||||||||||
Cumulative mandatorily redeemable Preferred Stock | 84,971 | — | — | 84,971 | ||||||||||||
Due to affiliates | 2,295 | — | (2,295 | ) | — | |||||||||||
Total liabilities | 428,578 | 37,615 | (2,295 | ) | 463,898 | |||||||||||
Shareholders’ equity: | ||||||||||||||||
Common stock of Waste Services, Inc | 937 | — | — | 937 | ||||||||||||
Other equity | 263,554 | 177,883 | (177,883 | ) | 263,554 | |||||||||||
Total shareholders’ equity | 264,491 | 177,883 | (177,883 | ) | 264,491 | |||||||||||
Total liabilities and shareholders’ equity | $ | 693,069 | $ | 215,498 | $ | (180,178 | ) | $ | 728,389 | |||||||
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended March 31, 2006 | ||||||||||||||||
Non- | ||||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Revenue | $ | 56,475 | $ | 39,207 | $ | — | $ | 95,682 | ||||||||
Operating and other expenses: | ||||||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) | 40,955 | 27,340 | — | 68,295 | ||||||||||||
Selling, general and administrative expense (exclusive of depreciation, depletion and amortization) | 10,489 | 6,072 | — | 16,561 | ||||||||||||
Impairment of deferred acquisition costs | 438 | 5,174 | — | 5,612 | ||||||||||||
Depreciation, depletion and amortization | 6,273 | 4,064 | — | 10,337 | ||||||||||||
Foreign exchange gain and other | 56 | (137 | ) | — | (81 | ) | ||||||||||
Equity loss in investees | 3,008 | — | (3,008 | ) | — | |||||||||||
Loss from operations | (4,744 | ) | (3,306 | ) | 3,008 | (5,042 | ) | |||||||||
Interest expense | 6,961 | 96 | — | 7,057 | ||||||||||||
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs | 5,697 | — | — | 5,697 | ||||||||||||
Loss before income taxes | (17,402 | ) | (3,402 | ) | 3,008 | (17,796 | ) | |||||||||
Income tax provision | 1,363 | (394 | ) | — | 969 | |||||||||||
Net loss attributable to Common Shareholders | $ | (18,765 | ) | $ | (3,008 | ) | $ | 3,008 | $ | (18,765 | ) | |||||
Three Months Ended March 31, 2005 | ||||||||||||||||
Non- | ||||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Revenue | $ | 52,841 | $ | 36,144 | $ | — | $ | 88,985 | ||||||||
Operating and other expenses: | ||||||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) | 39,861 | 24,978 | — | 64,839 | ||||||||||||
Selling, general and administrative expense (exclusive of depreciation, depletion and amortization) | 9,275 | 5,843 | — | 15,118 | ||||||||||||
Depreciation, depletion and amortization | 5,410 | 4,139 | — | 9,549 | ||||||||||||
Foreign exchange gain and other | (82 | ) | (156 | ) | — | (238 | ) | |||||||||
Equity earnings in investees | (279 | ) | — | 279 | — | |||||||||||
Income (loss) from operations | (1,344 | ) | 1,340 | (279 | ) | (283 | ) | |||||||||
Interest expense | 6,718 | 107 | — | 6,825 | ||||||||||||
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs | 4,842 | — | — | 4,842 | ||||||||||||
Loss before income taxes | (12,904 | ) | 1,233 | (279 | ) | (11,950 | ) | |||||||||
Income tax provision | 1,363 | 954 | — | 2,317 | ||||||||||||
Net loss attributable to Common Shareholders | $ | (14,267 | ) | $ | 279 | $ | (279 | ) | $ | (14,267 | ) | |||||
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Three Months Ended March 31, 2006 | ||||||||||||||||
Non- | ||||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Cash flows from operating activities: | $ | 6,814 | $ | 4,306 | $ | — | $ | 11,120 | ||||||||
Cash flows from investing activities: | ||||||||||||||||
Capital expenditures | (10,522 | ) | (3,861 | ) | — | (14,383 | ) | |||||||||
Proceeds from asset sales and business divestitures | 94 | 277 | — | 371 | ||||||||||||
Deposits for business acquisitions and other | (3,557 | ) | 2 | — | (3,555 | ) | ||||||||||
Intercompany | — | (4,398 | ) | 4,398 | — | |||||||||||
(13,985 | ) | (7,980 | ) | 4,398 | (17,567 | ) | ||||||||||
Cash flows from financing activities: | ||||||||||||||||
Principal repayments of debt and capital lease obligations | (293 | ) | (191 | ) | — | (484 | ) | |||||||||
Proceeds from the exercise of options and warrants | 84 | — | — | 84 | ||||||||||||
Intercompany | 4,398 | — | (4,398 | ) | — | |||||||||||
4,189 | (191 | ) | (4,398 | ) | (400 | ) | ||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | 5 | — | 5 | ||||||||||||
Increase in cash and cash equivalents | (2,982 | ) | (3,860 | ) | — | (6,842 | ) | |||||||||
Cash and cash equivalents, beginning of period | 3,681 | 5,206 | — | 8,887 | ||||||||||||
Cash and cash equivalents, end of period | $ | 699 | $ | 1,346 | $ | — | $ | 2,045 | ||||||||
Three Months Ended March 31, 2005 | ||||||||||||||||
Non- | ||||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Cash flows from operating activities: | $ | (777 | ) | $ | 5,055 | $ | — | $ | 4,278 | |||||||
Cash flows from investing activities: | ||||||||||||||||
Cash used in business combinations and significant asset acquisitions, net of cash acquired | (639 | ) | — | — | (639 | ) | ||||||||||
Capital expenditures | (5,253 | ) | (1,551 | ) | — | (6,804 | ) | |||||||||
Proceeds from asset sales and business divestitures | 130 | 323 | — | 453 | ||||||||||||
Deposits for business acquisitions and other | 11 | (409 | ) | — | (398 | ) | ||||||||||
Intercompany | — | (3,641 | ) | 3,641 | — | |||||||||||
(5,751 | ) | (5,278 | ) | 3,641 | (7,388 | ) | ||||||||||
Cash flows from financing activities: | ||||||||||||||||
Principal repayments of debt and capital lease obligations | (290 | ) | (112 | ) | — | (402 | ) | |||||||||
Sale of common shares and warrants | 7,125 | — | — | 7,125 | ||||||||||||
Intercompany | 3,641 | — | (3,641 | ) | — | |||||||||||
10,476 | (112 | ) | (3,641 | ) | 6,723 | |||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | (76 | ) | — | (76 | ) | ||||||||||
Increase in cash and cash equivalents | 3,948 | (411 | ) | — | 3,537 | |||||||||||
Cash and cash equivalents, beginning of period | 6,223 | 2,284 | — | 8,507 | ||||||||||||
Cash and cash equivalents, end of period | $ | 10,171 | $ | 1,873 | $ | — | $ | 12,044 | ||||||||
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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 Condensed Consolidated Financial Statements and Notes thereto included elsewhere herein as well as our annual report on Form 10-K for the year ended December 31, 2005, as filed with the Securities and Exchange Commission, including the factors set forth in the section titled “Disclosure Regarding Forward-Looking Statements” and factors affecting future results as well as our other filings made with the Securities and Exchange Commission.
Overview
We are a multi-regional, integrated solid waste services company, providing collection, transfer, landfill disposal and recycling services for commercial, industrial and residential customers. Our operating strategy is disposal-based, whereby we enter geographic markets with attractive growth or positive competitive characteristics by acquiring and developing landfill disposal capacity, then acquiring and developing waste collection and transfer operations. Our operations are located in the United States and Canada. Our U.S. operations are located in Florida, Texas and Arizona and our Canadian operations are located in Eastern Canada (Ontario) and Western Canada (Alberta, Saskatchewan and British Columbia).
Sources of Revenue
Our revenue consists primarily of fees charged to customers for solid waste collection, landfill disposal, transfer and recycling services.
We derive our collection revenue from services provided to commercial, industrial and residential customers. Collection services are generally performed under service agreements or pursuant to contracts with municipalities. We recognize revenue when services are rendered. Amounts billed to customers prior to providing the related services are reflected as deferred revenue and reported as revenue in the periods in which the services are rendered.
We provide collection services for commercial and industrial customers generally under one to five year service agreements. We determine the fees we charge our customers based on a variety of factors, including collection frequency, level of service, route density, the type, volume and weight of the 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. Our contracts with commercial and industrial customers typically allow us to pass on increased costs resulting from variable items such as disposal and fuel costs and surcharges. Our ability to pass on cost increases is however, sometimes limited by the terms of our contracts.
We provide residential waste collection services through a variety of contractual arrangements, including contracts with municipalities, owners and operators of large residential complexes, mobile home parks and homeowners associations or through subscription arrangements with individual homeowners. Our contracts with municipalities are typically for a term of three to ten years and contain a formula, generally based on a predetermined published price index, for adjustments to fees to cover increases in some, but not all, of our operating costs. Certain of our contracts with municipalities contain renewal provisions. The fees we charge for residential solid waste collection services provided on a subscription basis are based primarily on route density, the frequency and level of service, the distance to the disposal or processing facility, the cost of disposal or processing and prices we charge in the market for similar services.
We charge our landfill and transfer station customers a tipping fee on a per ton or per cubic yard basis for disposing of their solid waste at our transfer stations and landfills. We generally base our landfill tipping fees on market factors and the type and weight of, or volume of the waste deposited. We generally base our transfer station tipping fees on market factors and the cost of processing the waste deposited at the transfer station, the cost of transporting the waste to a disposal facility and the cost of disposal.
Material recovery facilities generate revenue from the sale of recyclable commodities. In an effort to reduce our exposure to commodity price fluctuations on recycled materials, where competitive pressures permit, we charge collection or processing fees for recycling volume collected from our customers. We may also manage our exposure to commodity price fluctuations through the use of commodity brokers who will arrange for the sale of recyclable materials from our collection operations to third party purchasers.
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Expense Structure
Our cost of operations primarily includes tipping fees and related disposal costs, labor and related benefit costs, equipment maintenance, fuel, vehicle, liability and workers’ compensation insurance and landfill capping, closure and post-closure costs. Our strategy is to create vertically integrated operations where possible, using transfer stations to link collection operations with our landfills to increase internalization of our waste volume. Internalization lowers our disposal costs by allowing us to eliminate tipping fees otherwise paid to third party landfill or transfer station operators. We believe that internalization provides us with a competitive advantage by allowing us to be a low cost provider in our markets. We expect that our internalization will gradually increase over time as we develop our network of transfer stations and maximize delivery of collection volumes to our landfill sites.
In markets where we do not have our own landfills, we seek to secure disposal arrangements with municipalities or private owners of landfills or transfer stations. In these markets, our ability to maintain competitive prices for our collection services is generally dependent upon our ability to secure competitive disposal pricing. If owners of third party disposal sites discontinue our arrangements, we would have to seek alternative disposal sites which could impact our profitability and cash flow. In addition, if third party disposal sites increase their tipping fees and we are unable to pass these increases on to our collection customers, our profitability and cash flow would be negatively impacted.
We believe that the age and condition of our vehicle fleet has a significant impact on operating costs, including, but not limited to, repairs and maintenance, insurance and driver training and retention costs. Through capital investment, we seek to maintain an average fleet age of approximately six years. We believe that this enables us to best control our repair and maintenance costs, safety and insurance costs and employee turnover related costs.
Selling, general and administrative expenses include managerial costs, information systems, sales force, administrative expenses and professional fees.
Depreciation, depletion and amortization includes depreciation of fixed assets over their estimated useful lives using the straight-line method, depletion of landfill costs, including capping, closure and post-closure obligations using the units-of-consumption method, and amortization of intangible assets including customer relationships and contracts and covenants not-to-compete, which are amortized over the expected life of the benefit to be received from such intangibles.
We capitalize certain third party costs related to pending acquisitions or development projects. These costs remain deferred until we cease to be engaged on a regular and ongoing basis with completion of the proposed acquisition, at which point they are charged to current earnings. In the event that the target is acquired, these costs are incorporated in the cost of the acquired business. We expense indirect and internal costs including executive salaries, overhead and travel costs related to acquisitions as they are incurred.
Recent Developments
During the first quarter of 2006 we announced the signing of definitive agreements to acquire Liberty Waste, LLC (“Liberty Waste”) and Sun Country Materials, LLC (“Sun Country Materials”) to expand our operations in the Tampa, Florida market. Liberty Waste is a collection operation based in Tampa with two transfer stations located in Tampa and Clearwater. The transfer stations are both permitted to accept construction and demolition and Class III waste volumes. Sun Country Materials owns a construction and demolition landfill located in Hillsborough County, Florida that is currently seeking an expansion permit. These acquisitions will compliment our existing operations in the Tampa market. In addition, we will be able to internalize our existing construction and demolition waste volumes and those of Liberty Waste into the acquired landfill. The transactions are both subject to certain customary closing conditions, with the landfill acquisition also subject to the receipt of the expansion permit. The purchase price for the two businesses is $38.0 million, consisting of $13.0 million in cash, $18.5 million in shares of our common stock and $6.5 million of previous cash deposits. As additional deposits, we paid a cash deposit of $3.0 million and 946,372 shares of our common stock. The number of shares of common stock to be issued for the balance of the purchase price is determined by dividing the consideration amount by the average closing price of a share of our common stock for the ten trading days preceding the date of issuance.
On April 17, 2006 we announced the completion of the acquisition of a materials recovery facility and solid waste transfer station in Taft, Florida. The purchase price for the facility consisted of $11.0 million in cash and $4.0 million by the issuance of 1,269,841 shares of common stock of Waste Services, Inc. The $3.15 price per common share was negotiated at the time of execution of the agreement. An additional $1.5 million in cash and $4.0 million by the issuance of 1,269,842 shares of common stock will be paid at the time the final Orange County Solid Waste Management Permit is issued.
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Results of Operations for the Three Months Ended March 31, 2006 and 2005
A portion of our operations is domiciled in Canada; as such, for each reporting period we translate the results of operations and financial condition of our Canadian operations into U.S. dollars. Therefore, the reported results of our operations and financial condition are subject to changes in the exchange relationship between the two currencies. For example, as the relationship of the Canadian dollar strengthens against the U.S. dollar, revenue is favorably affected and conversely expenses are unfavorably affected. Assets and liabilities of Canadian operations are translated from Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet dates, and revenue and expenses of Canadian operations are translated from Canadian dollars into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and losses on translation of the Canadian operations into U.S. dollars are reported as a separate component of shareholders’ equity and are included in comprehensive income (loss). Separately, monetary assets and liabilities denominated in U.S. dollars held by our Canadian operations are re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported currently as a component of net income (loss). Currently, we do not hedge our exposure to changes in foreign exchange rates.
Our consolidated results of operations for the three months ended March 31, 2006 and 2005 are as follows (in thousands):
Three Months Ended March 31, 2006 | ||||||||||||||||||||||||
US | Canada | Total | ||||||||||||||||||||||
Revenue | $ | 56,475 | 100.0 | % | $ | 39,207 | 100.0 | % | $ | 95,682 | 100.0 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of operations | 40,955 | 72.5 | % | 27,340 | 69.7 | % | 68,295 | 71.4 | % | |||||||||||||||
Selling, general and administrative expense | 10,489 | 18.6 | % | 6,072 | 15.5 | % | 16,561 | 17.3 | % | |||||||||||||||
Impairment of deferred acquisition costs | 438 | 0.8 | % | 5,174 | 13.2 | % | 5,612 | 5.9 | % | |||||||||||||||
Depreciation, depletion and amortization | 6,273 | 11.1 | % | 4,064 | 10.4 | % | 10,337 | 10.8 | % | |||||||||||||||
Foreign exchange loss (gain) and other | 56 | 0.1 | % | (137 | ) | -0.4 | % | (81 | ) | -0.1 | % | |||||||||||||
Loss from operations | $ | (1,736 | ) | -3.1 | % | $ | (3,306 | ) | -8.4 | % | $ | (5,042 | ) | -5.3 | % | |||||||||
Three Months Ended March 31, 2005 | ||||||||||||||||||||||||
US | Canada | Total | ||||||||||||||||||||||
Revenue | $ | 52,841 | 100.0 | % | $ | 36,144 | 100.0 | % | $ | 88,985 | 100.0 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of operations | 39,861 | 75.4 | % | 24,978 | 69.1 | % | 64,839 | 72.9 | % | |||||||||||||||
Selling, general and administrative expense | 9,275 | 17.6 | % | 5,843 | 16.2 | % | 15,118 | 17.0 | % | |||||||||||||||
Depreciation, depletion and amortization | 5,410 | 10.2 | % | 4,139 | 11.5 | % | 9,549 | 10.7 | % | |||||||||||||||
Foreign exchange gain and other | (82 | ) | -0.1 | % | (156 | ) | -0.5 | % | (238 | ) | -0.3 | % | ||||||||||||
Income (loss) from operations | $ | (1,623 | ) | -3.1 | % | $ | 1,340 | 3.7 | % | $ | (283 | ) | -0.3 | % | ||||||||||
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Revenue
A summary of our revenue is as follows (in thousands):
Three Months Ended March 31, | ||||||||||||||||
2006 | 2005 | |||||||||||||||
Collection | $ | 79,193 | 76.1 | % | $ | 75,340 | 79.0 | % | ||||||||
Landfill disposal | 12,632 | 12.1 | % | 7,723 | 8.1 | % | ||||||||||
Transfer station | 9,266 | 8.9 | % | 8,728 | 9.1 | % | ||||||||||
Material recovery facilities | 2,368 | 2.3 | % | 2,802 | 2.9 | % | ||||||||||
Other specialized services | 598 | 0.6 | % | 844 | 0.9 | % | ||||||||||
104,057 | 100.0 | % | 95,437 | 100.0 | % | |||||||||||
Intercompany elimination | (8,375 | ) | (6,452 | ) | ||||||||||||
$ | 95,682 | $ | 88,985 | |||||||||||||
Three Months Ended | All Other | Total | ||||||||||||||
March 31, | Florida | Canada | Operations | Revenue | ||||||||||||
2006 | $ | 48,393 | $ | 39,207 | $ | 8,082 | $ | 95,682 | ||||||||
2005 | 46,505 | 36,144 | 6,336 | 88,985 |
Revenue was $95.7 million and $89.0 million for the three months ended March 31, 2006 and 2005, respectively, an increase of $6.7 million or 7.5%. The increase in revenue for our Florida operations for the three months ended March 31, 2006 of $1.9 million or 4.1% was driven by price increases of $3.1 million, of which $1.0 million related to fuel surcharges, increased volume at our landfill sites of $3.1 million, other organic volume growth of $0.7 million and other increases of $0.4 million. Offsetting these increases were net decreases of $5.4 million, primarily related to the expiration or assignment of certain lower margin residential collection contracts and divestitures of previously acquired operations.
The increase in revenue for our Canadian operations for the three months ended March 31, 2006 of $3.1 million or 8.5% was due to price increases of $2.4 million, of which $0.6 million related to fuel surcharges, other organic volume growth of $1.1 million and the favorable effects of foreign exchange movements of $2.3 million. Offsetting these increases were decreases at our landfill sites, primarily due to special waste projects in 2005 that did not recur in 2006 of $1.2 million and decreases related to the expiration of certain contracts of $1.5 million.
The increase in revenue for our other operating segments for the three months ended March 31, 2006 of $1.7 million or 27.6% was due to price increases of $0.4 million, of which $0.3 million related to fuel surcharges, increased volume at our landfill sites of $0.4 million, other organic volume growth of $1.5 million, offset by other decreases of $0.6 million.
Cost of Operations
Cost of operations was $68.3 million and $64.8 million for the three months ended March 31, 2006 and 2005, respectively, an increase of $3.5 million or 5.3%. As a percentage of revenue, cost of operations was 71.4% and 72.9% for three months ended March 31, 2006 and 2005, respectively.
The increase in cost of operations for our U.S. operations, primarily in Florida, for the three months ended March 31, 2006, of $1.1 million or 2.7% was driven by higher landfill operating costs related to increased host and royalty fees from increased disposal volumes of $1.0 million, maintenance and repairs increases of $0.6 million and increased fuel costs of $0.5 million. Offsetting these cost increases were lower labor costs, primarily due to our Florida operations exiting certain lower margin residential collection contracts, of $0.6 million and lower costs for third party disposal, due to increased internalization, of $0.4 million. As a percentage of revenue, cost of operations for our domestic operations was 72.5% and 75.4% for the three months ended March 31, 2006 and 2005, respectively. This improvement in our domestic gross margin is primarily due to increased volumes at our domestic landfill sites.
The increase in cost of operations for our Canadian operations for the three months ended March 31, 2006 of $2.3 million or 9.5% was due to increased disposal volumes and sub-contractor costs of $0.6 million, increased fuel costs of $0.2 million and the
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unfavorable effects of foreign exchange movements of $1.6 million, offset by decreased insurance and other costs of $0.1 million. Cost of operations as a percentage of revenue remained relatively flat at 69.7% and 69.1% for the three months ended March 31, 2006 and 2005, respectively.
Selling, General and Administrative Expense
Selling, general and administrative expense was $16.6 million and $15.1 million for the three months ended March 31, 2006 and 2005, respectively, an increase of $1.5 million or 9.5%. As a percentage of revenue, selling, general and administrative expense was 17.3% and 17.0% for the three months ended March 31, 2006 and 2005, respectively. The overall increase in selling, general and administrative expense is primarily due to provisions for severance and relocation costs due to our corporate office relocation to Florida of $0.7 million, increased salaries and wages of $0.6 million and increased provisions for doubtful accounts, primarily in our Arizona operations of $0.2 million. Offsetting these increases were decreases in our insurance costs of $0.4 million and decreased legal and professional fees and other net decreases of $0.5 million. As of January 1, 2006 we adopted the fair value recognition provisions of FASB Statement No. 123(R), Share-Based Payment, using the modified-prospective transition method. Our stock-based compensation expense, inclusive of employees and consultants, increased by $0.5 million to $1.0 million for the three months ended March 31, 2006 from $0.5 million for the same period in the previous year. The unfavorable effects of exchange movements were $0.4 million.
Impairment of Deferred Acquisition Costs
In April 2006, we concluded it is more-likely-than-not that we will not complete an acquisition with Lucien Rémillard, one of our directors, of a solid waste collection and disposal business controlled by Mr. Rémillard in Quebec, Canada for the foreseeable future, and therefore management has recorded an impairment charge of $5.6 million.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization was $10.3 million and $9.5 million for the three months ended March 31, 2006 and 2005, respectively, an increase of $0.8 million or 8.3%. As a percentage of revenue, depreciation, depletion and amortization remained relatively flat at 10.8% and 10.7% for the three months ended March 31, 2006 and 2005, respectively. The overall increase in depreciation, depletion and amortization is primarily attributable to increases in landfill disposal volumes at our domestic and Canadian landfill sites. The unfavorable effects of foreign exchange movements increased depreciation, depletion and amortization by $0.2 million. Landfill depletion rates for our U.S. landfills ranged from $1.07 to $8.10 per ton during the three months ended March 31, 2006 and 2005. Landfill depletion rates for our Canadian landfills ranged from C$2.57 to C$17.80 per tonne during the three months ended March 31, 2006 and 2005.
Foreign Exchange Gain and Other
Foreign exchange gain and other was $0.1 million and $0.2 million for the three months ended March 31, 2006 and 2005, respectively. The foreign exchange gain relates to the re-measuring of U.S. dollar denominated monetary accounts into Canadian dollars. Other items primarily relate to gains on sales of equipment.
Interest Expense
The components of interest expense, including cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs, for the three months ended March 31, 2006 and 2005 are as follows:
Three Months Ended March 31, | ||||||||
2006 | 2005 | |||||||
Preferred Stock dividends and amortization of issue costs | $ | 5,697 | $ | 4,842 | ||||
Credit Facilities and Subordinated Note interest | 6,620 | 6,428 | ||||||
Amortization of debt issue costs | 388 | 345 | ||||||
Other interest expense | 49 | 52 | ||||||
$ | 12,754 | $ | 11,667 | |||||
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Interest expense was $12.8 million and $11.7 million for the three months ended March 31, 2006 and 2005, respectively, an increase of $1.1 million or 9.3%. Cash interest expense increased $0.2 million for the three months ended March 31, 2006 due to higher prevailing short-term interest rates, higher balances outstanding under our Credit Facilities and commitment fees paid on the new term loan tranche available under our Credit Facilities, offset by the elimination of penalty interest payable on our Subordinated Notes and lower amended rates on our Credit Facilities. The increase in Preferred Stock dividends and amortization of issue costs is primarily due to higher average amounts outstanding. The weighted average interest rate on Credit Facilities borrowings was 7.8% and 7.2% for the three months ended March 31, 2006 and 2005, respectively.
Income Tax Provision
The provision for income taxes was $1.0 million and $2.3 million for the three months ended March 31, 2006 and 2005, respectively. We recognize a provision for income taxes despite our pre-tax loss due to the tax effect of the non-deductible dividends on our cumulative mandatorily redeemable preferred stock and provisions for foreign taxes. Additionally, due to the lack of operating history relative to our U.S. operations, we have provided a valuation allowance for our net operating loss carry-forwards generated in the U.S.
Liquidity and Capital Resources
Our principal capital requirements are to fund capital expenditures, and to fund debt service and asset acquisitions. Significant sources of liquidity are cash on hand, working capital, borrowings from our Credit Facilities and proceeds from debt and/or equity issuances. The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto included elsewhere herein.
Senior Secured Credit Facilities
On April 30, 2004, we entered into new Senior Secured Credit Facilities (the “Credit Facilities”) with a syndicate of lenders. The Credit Facilities consist of a five-year revolving credit facility in the amount of $60.0 million, up to $15.0 million of which is available to our Canadian operations, and a seven-year term loan facility in the amount of $100.0 million. The Credit Facilities bear interest based upon a spread over base rate or Eurodollar loans, as defined, at our option. The Credit Facilities are secured by substantially all of the assets of our U.S. restricted subsidiaries. Our Canadian operations guarantee and pledge all of their assets only in support of the portion of the revolving credit facility available to them. Separately, 65% of the common shares of Waste Services’ first tier foreign subsidiaries including Waste Services (CA), are pledged to secure obligations under the Credit Facilities. As of March 31, 2006, there were no amounts outstanding on the revolving credit facility, while $22.6 million of capacity was used to support outstanding letters of credit. As of April 24, 2006, there was $10.0 million outstanding on the revolving credit facility, while $19.6 million of capacity was used to support outstanding letters of credit.
As of June 30, 2004, we failed to meet certain of the financial covenants contained in the Credit Facilities. On October 4, 2004, we entered into an amendment to the credit agreement with the administrative agent for the lenders. The amendment included changes to certain of the financial and other covenants contained in the credit facilities and increased the interest rates payable on amounts outstanding by 125 basis points to 450 basis points over Eurodollar loans. Until we met certain target leverage ratios, as defined, availability under the amended revolving credit facility was reduced to $50.0 million, up to $12.5 million of which was available for our Canadian operations. In connection with the amendment, we paid a fee of approximately $0.4 million to our lenders. The amendment also required us to receive an equity investment of at least $7.5 million prior to March 28, 2005. On March 28, 2005 we issued 2,640,845 shares of common stock and 264,085 common stock purchase warrants for net proceeds of approximately $6.8 million in satisfaction of this covenant.
On October 26, 2005, we entered into an amendment to the Credit Facilities with the administrative agent for the lenders. The amendment, among other items, decreases the current interest rate on our term loan by 125 basis points to 325 basis points over Eurodollar loans. In addition, the amendment restored access under the revolving credit facility to $60.0 million, up to $15.0 million of which is available to our Canadian operations.
On December 28, 2005, we entered into another amendment to the Credit Facilities, which provided for the incurrence of up to $50.0 million of additional term loans under a new term loan tranche, as provided for under the terms of our existing Credit Facilities. We drew $25.0 million of this facility at closing to refinance amounts then outstanding under our existing revolving credit facility. The remaining portion of the new term loan tranche is available on a delayed draw basis until May 31, 2006
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and is to be used for the financing of acquisitions that are otherwise permitted under the terms of the Credit Facilities and that do not materially increase total leverage on a pro forma basis. As of April 24, 2006, $13.0 million of the un-drawn $25.0 million was funded.
The following table sets forth our financial covenant levels for the current and each of the next four quarters:
Maximum Consolidated | ||||||||||||
Maximum Consolidated | Senior Secured Leverage | Minimum Consolidated | ||||||||||
Fiscal Quarter | Leverage Ratio | Ratio | Interest Coverage Ratio | |||||||||
FQ1 2006 | 5.25:1.00 | 2.25:1.00 | 2.00:1.00 | |||||||||
FQ2 2006 | 5.25:1.00 | 2.25:1.00 | 2.00:1.00 | |||||||||
FQ3 2006 | 5.00:1.00 | 2.25:1.00 | 2.00:1.00 | |||||||||
FQ4 2006 | 4.75:1.00 | 2.25:1.00 | 2.25:1.00 | |||||||||
FQ1 2007 | 4.75:1.00 | 2.25:1.00 | 2.25:1.00 |
Senior Subordinated Notes
On April 30, 2004, we completed a private offering of 91/2% Senior Subordinated Notes (“Subordinated Notes”) due 2014 for gross proceeds of $160.0 million. The Subordinated Notes mature on April 15, 2014. Interest on the Subordinated Notes is payable semi-annually on October 15 and April 15.
In April 2004, we entered into a Registration Rights Agreement with the initial purchaser of the Senior Subordinated Notes in which we agreed to file a registration statement for the exchange of the Senior Subordinated Notes for registered notes with identical terms and have such registration statement declared effective within specified time frames. Prior to the third quarter of 2005 we were required to pay liquidated damages to the holders of the notes, as we had not yet complied with these registration requirements. These liquidated damages were expensed as incurred and were payable in cash at the same time as interest payments were due under the notes. During the third quarter of 2005, the registration statement was filed and declared effective, and the exchange offer was commenced and consummated. As of September 28, 2005, we were no longer required to pay liquidated damages.
Equity Placement
During the first three months of 2006, we issued 946,372 common shares as a deposit for an acquisition. During the first three months of 2005, we issued 2,640,845 shares of our common stock and 264,085 common stock purchase warrants for net proceeds of approximately $6.8 million.
Cumulative Mandatory Redeemable Preferred Stock
In May 2003, we issued 55,000 shares of cumulative mandatorily redeemable Preferred Stock (the “Preferred Stock”) to Kelso Investment Associates VI, L.P. and KEP VI, LLC (collectively “Kelso”), pursuant to the terms of an agreement dated as of May 6, 2003, as amended in February and June 2004, at a price of $1,000 per share. We also issued to Kelso warrants to purchase 7,150,000 shares of our common stock for $3.00 per share. The warrants are exercisable at any time until May 6, 2010. The issuance of the Preferred Stock resulted in proceeds of approximately $49.5 million, net of fees of approximately $5.5 million. The shares of Preferred Stock are non-voting.
The Preferred Stock entitles the holders to cash dividends of 17.75% per annum compounding and accruing quarterly in arrears, and to a liquidation preference of $1,000 per share, adjusted for any stock dividend, stock split, reclassification, recapitalization, consolidation or similar event affecting the Preferred Stock, plus the amount of any accrued but unpaid dividends on such shares as of any date of determination. The liquidation preference approximated $91.1 million as of March 31, 2006.
Migration Transaction
As part of our business strategy to expand into the United States, we entered into a migration transaction that became effective July 31, 2004. Under the migration transaction, our corporate structure was reorganized so that Waste Services, Inc., a Delaware company, became the ultimate parent company of our corporate group. Prior to the migration transaction, we were a subsidiary of Waste Services (CA). After
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the migration transaction, Waste Services (CA) became our subsidiary.
The migration transaction occurred by way of a plan of arrangement under the Business Corporations Act (Ontario) and consisted primarily of: (i) the exchange of 87,657,035 common shares of Capital for 87,657,035 shares our of common stock and (ii) the conversion of the remaining 9,229,676 common shares of Capital held by non-US residents who elected to receive exchangeable shares into 9,229,676 exchangeable shares of Waste Services (CA). The transaction was approved by the Ontario Superior Court of Justice on July 30, 2004 and by our shareholders at a special meeting held on July 27, 2004.
Surety Bonds, Letters of Credit and Insurance
Municipal solid waste services contracts and permits and licenses to operate transfer stations, landfills and recycling facilities may require performance or surety bonds, letters of credit or other means of financial assurance to secure contractual performance. As of March 31, 2006, we had provided customers and various regulatory authorities with such bonds and letters of credit amounting to approximately $67.1 million to collateralize our obligations. The majority of these obligations are renewed on an annual basis.
Our U.S.-based automobile, general liability and workers’ compensation insurance coverage is subject to certain deductible limits. We retain up to $0.5 million and $0.25 million of risk per claim, plus claims handling expense under our workers’ compensation and our auto and general liability insurance programs, respectively. Claims in excess of such deductible levels are fully insured subject to our policy limits. However, we have a limited claims history for our U.S. operations and it is reasonably possible that recorded reserves may not be adequate to cover future payments of claims. Adjustments, if any, to our reserves will be reflected in the period in which the adjustments are known. As of March 31, 2006 and included in the $67.1 million of bonds and letters of credit discussed previously, we have posted a letter of credit with our U.S. insurer of approximately $9.3 million to secure the liability for losses within the deductible limit.
Cash Flows
The following discussion relates to the major components of the changes in cash flows for the three months ended March 31, 2006 and 2005.
Cash Flows from Operating Activities
Cash provided by operating activities was $11.1 million and $4.3 million for the three months ended March 31, 2006 and 2005, respectively. The increase in cash provided by operating activities is primarily due to cash generated from our domestic operations and improvements in working capital.
Cash Flows from Investing Activities
Cash used in investing activities was $17.6 million and $7.4 million for the three months ended March 31, 2006 and 2005, respectively. The increase in cash used in investing activities is primarily due to increased capital expenditures and deposits made for business acquisitions. Capital expenditures were $14.4 million and $6.8 million for the three months ended March 31, 2006 and 2005, respectively. The increase in capital expenditures was primarily driven by landfill development costs. We expect our capital expenditures to range from $45.0 million to $50.0 million for all of 2006.
Cash used in deposits for business acquisitions of $3.6 million primarily relates to the acquisition of a recyclery and transfer station in Taft, Florida for $3.0 million as well as ongoing negotiations during the quarter with Lucien Rémillard, one of our directors, concerning the potential acquisition of the solid waste collection and disposal business assets controlled by Mr. Rémillard in Quebec, Canada. In connection with these negotiations, we have reimbursed Mr. Rémillard’s company for services provided by third parties in connection with preparing audited financial statements of the businesses to be acquired, with ongoing efforts to expand the capacity of a solid waste landfill, and in March 2006 we advanced $0.4 million directly to Mr. Rémillard. In April 2006, we concluded it is more-likely-than-not that we will not complete this acquisition for the foreseeable future and therefore management has recorded an impairment charge of $5.6 million.
Cash Flows from Financing Activities
Cash provided by (used in) financing activities was $(0.4) million and $6.7 million for the three months ended March 31, 2006 and 2005, respectively. The decrease in cash flows from financing activities is due to the equity private placement that occurred during the first quarter of 2005.
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Off-Balance Sheet Financing
We have no off-balance sheet debt or similar obligations, other than our letters of credit and performance and surety bonds discussed previously, which are not debt. We have no transactions or obligations with related parties that are not disclosed, consolidated into or reflected in our reported results of operations or financial position. We do not guarantee any third party debt. We have entered into a put or pay disposal agreement with RCI Environment Inc., Centres de Transbordement et de Valorisation Nord Sud Inc., RCM Environnement Inc. (collectively the “RCI Companies”) and Intersan Inc. pursuant to which we have posted a letter of credit for C$4.0 million to secure our obligations and those of the RCI Companies to Intersan Inc. Concurrently with the put or pay disposal agreement with the RCI Companies, we entered into a three year agreement with Waste Management of Canada Corporation (formerly Canadian Waste Services Inc.) to allow us to deliver non-hazardous solid waste to their landfill in Michigan, which has now expired. On January 17, 2006, Waste Management drew C$0.3 million against the letter of credit posted by us to secure RCI’s obligations, as such we have provided for the draw as of December 31, 2005. The companies within the RCI group are controlled by a director of ours and/or individuals related to that director. Details of these agreements are further described in our annual financial statements for the year ended December 31, 2005, as filed on Form 10-K.
Landfill Sites
The following table summarizes the changes in our operating landfill capacity for the three months ended March 31, 2006 (in thousands of cubic yards):
March 31, 2006 | ||||||||||||
Balance, | ||||||||||||
Beginning of | Airspace | Balance, End of | ||||||||||
Period | Consumed | Period | ||||||||||
United States | ||||||||||||
Permitted Capacity | 266,088 | (703 | ) | 265,385 | ||||||||
Probable expansion capacity | 18,300 | — | 18,300 | |||||||||
Total available airspace | 284,388 | (703 | ) | 283,685 | ||||||||
Number of landfill sites | 4 | — | 4 | |||||||||
Canada | ||||||||||||
Permitted Capacity | 11,878 | (84 | ) | 11,794 | ||||||||
Probable expansion capacity | — | — | — | |||||||||
Total available airspace | 11,878 | (84 | ) | 11,794 | ||||||||
Number of landfill sites | 3 | — | 3 | |||||||||
Total | ||||||||||||
Permitted Capacity | 277,966 | (787 | ) | 277,179 | ||||||||
Probable expansion capacity | 18,300 | — | 18,300 | |||||||||
Total available airspace | 296,266 | (787 | ) | 295,479 | ||||||||
Number of landfill sites | 7 | — | 7 |
Trend Information
Seasonality
We expect the results of our Canadian operations to vary seasonally, with revenue typically lowest in the first quarter of the year, higher in the second and third quarters, and lower in the fourth quarter than in the third quarter. The seasonality is attributable to a number of factors. First, less solid waste is generated during the late fall, winter and early spring because of decreased construction and demolition activity. Second, certain operating costs are higher in the winter months because winter weather conditions slow waste collection activities, resulting in higher labor costs, and rain and snow increase the weight of collected waste, resulting in higher disposal costs, which are calculated on a per ton basis. Also, during the summer months, there are more tourists and part-time
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residents in some of our service areas, resulting in more residential and commercial collection. Consequently, we expect operating income to be generally lower during the winter. The effect of seasonality on our results of operations from our U.S. operations, which are located in warmer climates than our Canadian operations, is less significant than that of our Canadian operations.
New Accounting Pronouncements
Refer to the Notes to the Unaudited Condensed Consolidated Financial Statements for a discussion of newly adopted accounting pronouncements.
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Disclosure Regarding Forward-Looking Statements and Factors Affecting Future Results
This Form 10-Q contains certain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. Some of these forward-looking statements include forward-looking phrases such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “foresees,” “intends,” “may,” “should” or “will continue,” or similar expressions or the negatives thereof or other variations on these expressions, or similar terminology, or discussions of strategy, plans or intentions.
Such statements reflect our current views regarding future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause the actual results, performance or achievements to be materially different from any future results, performance or achievements that forward-looking statements may express or imply, including, among others:
• | our substantial indebtedness and the significant restrictive covenants in our various credit facilities and our ability to finance acquisitions with cash on hand, debt or equity offerings; | ||
• | our ability to implement a refinancing plan for our mandatorily redeemable preferred stock and to achieve the expected benefits; | ||
• | our ability to maintain and perform our financial assurance obligations; | ||
• | changes in regulations affecting our business and costs of compliance; | ||
• | revocation of existing permits and licenses or the refusal to renew or grant new permits and licenses, which are required to enable us to operate our business or implement our growth strategy; | ||
• | our ability to successfully implement our corporate strategy and integrate any acquisitions we undertake; | ||
• | our ability to negotiate renewals of existing service agreements at favorable rates; | ||
• | our ability to enhance profitability of certain aspects of our operations in markets where we are not internalized through either divestiture or asset swaps; | ||
• | costs and risks associated with litigation; | ||
• | changes in general business and economic conditions, changes in exchange rates and in the financial markets; | ||
• | changes in accounting standards or pronouncements; and | ||
• | construction, equipment delivery or permitting delays for our transfer stations or landfills. |
Some of these factors are discussed in more detail in our annual report on Form 10-K, as filed with the Securities and Exchange Commission for the year ended December 31, 2005, included under Item 1A. of the annual report, “Risk Factors”. If one or more of these risks or uncertainties affects future events and circumstances, or if underlying assumptions do not materialize, actual results may vary materially from those described in this Form 10-Q and our annual report as anticipated, believed, estimated or expected, and this could have a material adverse effect on our business, financial condition and the results of our operations. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.
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Item 3.Quantitative and Qualitative Disclosures About Market Risk
A portion of our operations are domiciled in Canada; as such, we translate the results of our operations and financial condition of our Canadian operations into U.S. dollars. Therefore, the reported results of our operations and financial condition are subject to changes in the exchange relationship between the two currencies. For example, as the relationship of the Canadian dollar strengthens against the U.S. dollar our revenue is favorably affected and conversely our expenses are unfavorably affected. Assets and liabilities of Canadian operations are translated from Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet date, and revenue and expenses of Canadian operations are translated from Canadian dollars into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and losses on translation of the Canadian operations into U.S. dollars are reported as a separate component of shareholders’ equity and are included in comprehensive income (loss). Separately, monetary assets and liabilities denominated in U.S. dollars held by our Canadian operation are re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported currently as a component of net income (loss). Currently, we do not hedge our exposure to changes in foreign exchange rates. For the three months ended March 31, 2006, we estimate that a 5.0% increase or decrease in the relationship of the Canadian dollar to the U.S. dollar would increase or decrease operating profit from our Canadian operations by approximately $0.2 million.
As of March 31, 2006, we were exposed to variable interest rates under our Credit Facilities, as amended. The interest rates payable on our revolving and term facilities are based on a spread over base rate or Eurodollar loans as defined. A 25 basis point increase in base interest rates would increase cash interest expense by approximately $0.1 million for the three months ended March 31, 2006.
Item 4.Controls and Procedures
Disclosure Controls and Procedures/Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported accurately within the time periods specified in the Securities and Exchange Commission’s rules and forms. As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (pursuant to Exchange Act Rule 13a-15). Based upon this evaluation, the CEO and CFO concluded that our disclosure controls and procedures are effective. The conclusions of the CEO and CFO from this evaluation were communicated to the Audit Committee.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that would have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
Information regarding our legal proceedings may be found under the “Legal Proceedings” section of Note 11, “Commitments and Contingencies” to our Unaudited Condensed Consolidated Financial Statements contained herein.
Item 1A.Risk Factors
There are no material changes to the risk factors previously disclosed in our annual report on Form 10-K for the year ended December 31, 2005.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3.Defaults upon Senior Securities
None
Item 4.Submission of Matters to a Vote of Security Holders
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None
Item 5.Other Information
None
Item 6.Exhibits
Exhibit 31.1 — | Section 302 Certification of David Sutherland-Yoest, Chief Executive Officer |
Exhibit 31.2 — | Section 302 Certification of Mark A. Pytosh, Chief Financial Officer |
Exhibit 32.1 — | Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: April 28, 2006 | Waste Services, Inc. | |||
By: | /s/ DAVID SUTHERLAND-YOEST | |||
David Sutherland-Yoest | ||||
Chairman of the Board, Chief Executive Officer, and Director | ||||
By: | /s/ MARK A. PYTOSH | |||
Mark A. Pytosh | ||||
Executive Vice President and Chief Financial Officer | ||||
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EXHIBIT INDEX
Exhibit No. | Description | |||
Exhibit 31.1 | — | Section 302 Certification of David Sutherland-Yoest, Chief Executive Officer | ||
Exhibit 31.2 | — | Section 302 Certification of Mark A. Pytosh, Chief Financial Officer | ||
Exhibit 32.1 | — | Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer |
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