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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One) | ||
þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 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 number000-25955
Waste Services, Inc.
(Successor registrant of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)
(Exact name of registrant as defined in its charter)
Delaware | 01-0780204 | |
State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization | Identification No.) | |
1122 International Blvd. | L7L 6Z8 | |
Suite 601, Burlington, Ontario | (Zip Code) | |
(Address of principal executive offices) |
Registrant’s telephone number, including area code:
(905) 319-1237
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in a definitive proxy or information statement incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. o
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” inRule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No þ
The approximate aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2006 was $209.1 million based upon the closing price of the Registrant’s Common Shares as quoted on the Nasdaq National Market as of that date.
The number of Common Shares of the Registrant outstanding as of February 27, 2007 was 45,972,082 (assuming exchange of 6,307,862 exchangeable shares of Waste Services (CA) Inc. not owned by Capital Environmental Holdings Company for 2,102,620 of the registrant’s common stock.)
INDEX TOFORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2006
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PART I
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS
FORWARD-LOOKING STATEMENTS
This annual report onForm 10-K contains certain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. 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 business is capital intensive and may consume cash in excess of cash flow from operations and borrowings; | |
• | our ability to vertically integrate our operations; | |
• | 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, exchange rates and the financial markets and 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 this annual report onForm 10-K under “Item 1A — 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 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.
Item 1. | Business |
Overview
Waste Services, Inc. (“Waste Services”) and its wholly owned subsidiaries (collectively, “we,” “us” or “our”) is a multi-regional, integrated solid waste management company. We provide collection, transfer, disposal and recycling services for non-hazardous solid waste in the United States and Canada. As of December 31, 2006, we served an estimated 76,000 commercial and industrial customers and served an estimated 7,700,000 residential
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addresses. We currently own or operate 9 landfills, 20 transfer stations, 13 recycling facilities, and 36 collection operations.
We are organized geographically by region within the U.S. and Canada. Our Canadian operations are organized in two regions: Eastern Canada (Ontario) and Western Canada (Alberta, Saskatchewan and British Columbia); the U.S. is organized in three regions: Florida, Texas and Arizona. Accordingly, we have five operating segments, three in the United States and two in Canada. Due to a pending sale, our Arizona operations are presented as discontinued operations. We do not have significant (in volume or dollars) inter-segment operation-related transactions. For more information regarding our segments refer to Note 18 accompanying our Consolidated Financial Statements.
Our predecessor company, Capital Environmental Resource Inc. (“Capital Environmental”), was incorporated in Ontario, Canada in May 1997. Initially, Capital Environmental incorporated us as one of its subsidiaries in Delaware in 2003 under the name Omni Waste, Inc. In 2003, we changed our name to Waste Services, Inc. Under a plan of arrangement designed to domicile the corporate parent of our operations in the United States, we became the successor to Capital Environmental. This migration transaction was completed July 31, 2004 and was accomplished primarily by the exchange of shares of Capital Environmental into shares of Waste Services, Inc. As a result of the migration transaction, Capital Environmental became our subsidiary and we became the parent company. Capital Environmental also changed its name to Waste Services (CA) Inc. (“Waste Services (CA)”)
Our corporate offices are located at 1122 International Blvd., Suite 601, Burlington, Ontario, Canada L7L 6Z8. Our telephone number is(905) 319-1237.
We file annual reports onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 8-K and other filings with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Office of Public Reference at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at1-800-SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The internet address ishttp://www.sec.gov.
We make available, at no charge through our website address at http://www.wasteservicesinc.com, our annual reports onForm 10-K, quarterly reports onForm 10-Q, current reports onForm 8-K and amendments to these reports filed or furnished with the SEC as soon as reasonably practicable after we electronically file such material with, or furnish it to the SEC. Information on our website does not form a part of this annual report.
Our Business Strategy
Our goal is to be a highly profitable, multi-regional non-hazardous solid waste services company in North America with leading market positions in each of the markets we serve. In order to achieve this goal, we intend to:
Maximize Density and Vertical Integration of Operations. We believe that achieving a high degree of density and vertical integration of operations leads to higher profitability and returns on invested capital. In each of our local markets, we seek to maximize the density of our collection routes. This allows us to leverage our facilities and vehicle fleet by increasing the number of customers served and revenue generated by each route. In addition, we seek to vertically integrate our operations where possible, using transfer stations to link collection operations with our landfills to increase internalization of waste volume. By securing and controlling the waste stream from collection through disposal, we are able to achieve cost savings for our collection operations, while at the same time providing our landfills with more stable and predictable waste volume and enhancing margins through the internalization of collecting and gathering efforts. In our efforts to maximize vertical integration, we periodically evaluate markets where we are not internalized for possible collection or transfer station acquisitions or asset swap transactions to enhance density or internalization in existing markets where we are vertically integrated.
Provide Consistent, Superior Customer Service. Our long-term growth and profitability will be driven, in large part, by our ability to provide consistent, superior service to our customers. We believe that our local
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and regional operating focus allows us to respond effectively to customer needs on a local basis, as well as maintain strong relationships with our commercial, municipal and residential accounts. In each of our markets, customer retention and new account generation are key areas of focus for our local managers.
Maintain a Decentralized Operating Management Structure with Centralized Controls and Information Systems. The solid waste industry is a local and regional business by nature. We believe that asset investment, customer relationships, pricing and operational productivity are most effectively managed on a local and regional basis. We have structured our operating management team on a geographically decentralized basis, because we believe that talented, experienced and focused local management are in the best position to make effective, profitable decisions regarding local operations, including customer acquisition and retention, and to provide strong customer service. Our senior management team provides significant oversight and guidance for our local management, developing operating goals and standards tailored to each market. Our senior management does not impose corporate directives regarding certain local operating decisions.
While our operating management structure is decentralized, all of our operations adhere to uniform corporate policies and financial controls and use integrated information systems. Our information systems provide both corporate and local management with comprehensive, consistent and timely operating and financial data, enabling them to maintain detailed, ongoing visibility of the performance and trends in each of our local market operations.
Execute a Disciplined, Disposal-Based Growth Strategy. Our growth strategy consists of both making“tuck-in” acquisitions within an existing market, which typically consist of collection operations or transfer stations, and making new geographic market entries by acquiring disposal capacity. In any acquisition, we focus on maximizing long-term cash flow and return on invested capital.
Fortuck-in acquisitions, we only pursue opportunities that:
• | are complementary to our existing infrastructure, allowing us to increase the density of our collection routes or enhance asset utilization; or | |
• | increase the waste volume that can be internalized into our landfills. |
For new market entries, we will only pursue opportunities where we can:
• | benefit from (i) above-average underlying economic or population growth, or (ii) a changing competitive or regulatory environment that could lead to above-average growth for non-hazardous solid waste services; | |
• | over time establish a leading market position; and | |
• | secure a disposal facility and subsequently become vertically integrated throughtuck-in acquisitions (with ultimately the ability to secure significant internalized waste volumes). |
Operations
We provide our services on a geographic basis in three regions in the United States: Florida, Arizona and Texas; and in two regions in Canada: Eastern (Ontario) and Western (Alberta, British Columbia and Saskatchewan). For a discussion on the seasonality of our business, see Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality.”
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A summary of the collection, recycling, transfer station, landfill disposal and other services that we provide as of December 31, 2006 is as follows:
Total | East | West | Total | |||||||||||||||||||||||||||||
Florida | Arizona | Texas | U.S. | Canada | Canada | Canada | Total | |||||||||||||||||||||||||
Collection operations and other specialized services | 11 | 1 | 1 | 13 | 14 | 9 | 23 | 36 | ||||||||||||||||||||||||
Transfer stations | 6 | 2 | 1 | 9 | 9 | 2 | 11 | 20 | ||||||||||||||||||||||||
Recycling facilities | 7 | — | — | 7 | 5 | 1 | 6 | 13 | ||||||||||||||||||||||||
Landfills | 4 | 1 | 1 | 6 | 1 | 2 | 3 | 9 |
Collection Services
We provide collection services to an estimated 76,000 commercial and industrial customers and serve an estimated 7,700,000 residential addresses, as of December 31, 2006. We have a front-line collection fleet size of approximately 1,100 vehicles with an average fleet age of approximately 6 to 7 years.
Commercial and Industrial Collection. We perform commercial and industrial collection services principally under one to five year service agreements, which typically contain provisions for automatic renewal and which prohibit the customer from terminating the agreement prior to its expiration date without incurring a penalty. Roll-off containers are also provided to our customers for temporary services, such as for construction projects, under short-term purchase orders. Stationary compactors are rented to customers, allowing them to compact their waste at their premises prior to its collection. Commercial and industrial collection vehicles normally require one operator. We provide two to eight cubic yard containers to commercial customers and ten to forty cubic yard roll-off containers to industrial customers.
Charges for our commercial and industrial services are determined by 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 price increases is, however, sometimes limited by the terms of our contracts.
Residential Collection. Our residential waste collection services are provided under a variety of contractual arrangements, including contracts with municipalities, owners and operators of large residential complexes and mobile home parks, and homeowners associations. In certain markets, we also provide residential subscription services to individual homeowners.
Our contracts with municipalities are typically for a fixed term of from three to ten years. Charges for residential services to municipalities are determined based upon the number of homes serviced as well as the frequency of service. These contracts often contain a formula, generally based on a predetermined published price index, for adjustments to charges to cover increases in some, but not all, of our operating costs. Certain of our contracts with municipalities also contain renewal provisions or capital commitments.
Charges for residential non-hazardous 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 transfer facility, the cost of disposal or transfer and prices we charge in the market for similar services.
Transfer Station Services
Our transfer stations allow us to internalize our collection volume into the landfills we own. They also receive non-hazardous solid waste from third parties. Waste received at our transfer station is compacted and transferred, generally by third-party subcontractors, for disposal to our own or third-party landfills. We charge third-parties fees to dispose of their waste at our transfer stations. Transfer station fees are generally based on the cost of processing, transportation and disposal. We also may enter into long-term put or pay disposal arrangements whereby third-party
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customers can secure disposal capacity with us at pre-arranged fixed rates or pay a penalty equal to the number of tons below the required tonnage multiplied by that disposal rate.
We believe that the benefits of using our transfer stations include improved utilization of our collection infrastructure and better relationships with municipalities and private operators that deliver waste to our transfer stations, which can lead to additional growth opportunities. We believe that transfer stations will become increasingly important to our operations as new landfills are opening further away from metropolitan areas and waste needs to travel further for disposal in large metropolitan markets.
Commercial and Residential Recycling Services
We offer collection and processing services to our municipal, commercial and industrial customers for a variety of recyclable materials, including cardboard, office paper, plastic containers, glass bottles, fiberboard, and ferrous and aluminum metals. In some markets, we operate material recovery facilities that are used to sort, bale and ship recyclable materials to market. We also deliver recyclable materials that we collect to third parties for processing and resale. 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 commercial customers. We may also manage our exposure to commodity price fluctuations through the use of commodity brokers, which arrange for the sale of recyclable material collected in our operations to third party purchasers. We believe that recycling will continue to be an important component of municipal non-hazardous solid waste management plans due to the public’s environmental awareness and regulations that mandate or encourage recycling.
Landfill Disposal Services
We charge our landfill customers a tipping fee on a per ton or per cubic yard basis for disposing of their non-hazardous solid waste at our landfills. We generally base our landfill tipping fees on market factors and the type and weight or volume of the waste deposited. We may enter into long-term put or pay disposal arrangements whereby third-party customers can secure disposal capacity at our landfills at pre-arranged fixed rates or pay a penalty equal to the number of tons below the required tonnage multiplied by that disposal rate.
We dispose of the non-hazardous solid waste we collect in one of four ways: (i) at our own landfills; (ii) through our own transfer stations; (iii) at municipally-owned landfills; or (iv) at third-party landfills or transfer stations. In markets where we do not have our own landfills, we seek to secure favorable long-term disposal arrangements with municipalities or private owners of landfills or transfer stations. In some markets, we may enter into put or pay disposal arrangements with third party operators of disposal facilities. These types of arrangements allow us to fix our disposal costs, but also expose us to the risk that if our tonnage declines and we are unable to deliver the minimum tonnage, we will be required to pay the penalty.
Other Specialized Services
We offer other specialized services consisting primarily of sales and leasing of compactor equipment and portable toilet services for special events or construction sites.
Local/ Regional Operating Structure
We manage our business on a local/regional basis. Each of our operating regions also has a number of operating districts where the business is managed on a local basis.
From a management perspective, each region has a regional vice president or manager who reports to our President and Chief Operating Officer. Reporting to the regional vice presidents or managers are district managers who are responsible for theday-to-day operations of their districts, including supervising their sales force, maintaining service quality, implementing our health and safety and environmental programs and overseeing contract administration. District managers work closely with the regional vice presidents or managers to execute business plans and identify business development opportunities. This structure is designed to provide decision-making authority to our district managers who are closest to the needs of the customers they serve in the community.
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This localized approach allows us to quickly identify and address customer needs, manage local operating dynamics and take advantage of market opportunities.
Sales and Marketing
We market our services on a decentralized basis principally through our district managers and direct sales representatives. Our sales representatives visit customers on a regular basis and call upon potential new customers within a specified territory or service area. These sales representatives receive a portion of their compensation based on meeting certain incentive targets.
We have a diverse customer base, with no single contract or customer representing more than 2.5% of consolidated revenue for the year ended December 31, 2006.
Competition
The non-hazardous solid waste services industry is highly competitive and fragmented. We compete with large, national non-hazardous solid waste services companies, as well as smaller regional non-hazardous solid waste services companies of varying sizes and resources. Some of our competitors are better capitalized, have greater name recognition and greater financial, operational and marketing resources than we have. We also compete with operators of alternative disposal facilities, and with municipalities that maintain their own waste collection and disposal operations. Public sector operators may have financial advantages over us because of their access to user fees or tax revenue, as well as their ability to regulate flow of waste streams.
The U.S. non-hazardous solid waste industry currently includes three large national waste companies: Waste Management, Inc., Allied Waste Industries, Inc. and Republic Services, Inc. Waste Management of Canada Corporation, and BFI Canada, Inc. are our significant competitors in Canada.
We compete for collection, transfer and disposal volume based primarily on the price and quality of service. From time to time, competitors may reduce the prices of their services in an effort to expand their market share or service areas or to win competitively bid municipal contracts. These practices may cause us to reduce the prices of our services or, if we elect not to do so, to lose business. Occasionally, we have elected not to renew or rebid for certain contracts due to the relatively low operating margins associated with them.
Competition exists not only for collection, transfer and disposal volume, but also for acquisition candidates. We generally compete for acquisition candidates with publicly owned regional and large national non-hazardous solid waste services companies.
Government Regulation
Our facilities and operations in the United States and Canada are subject to significant and evolving federal, state, provincial and local environmental, health and safety and land use laws and regulations that impose significant compliance burdens and risks upon us and require us to obtain permits or approvals from various government agencies. We incur recurring, annual operating and capital costs in complying with this regulatory regime. Most permits or approvals must be periodically renewed. Renewals of our landfill permits may result in the imposition of additional conditions that could increase cell development and operating costs above currently anticipated levels, or may limit the type, quantity or quality of waste that may be accepted at the site, thereby reducing operating revenue. Approvals and permits may also be modified or revoked by the issuing agency, impacting operating revenue, and civil or criminal fines and penalties may be imposed for our failure to comply with the terms of our permits and approvals and applicable regulations. In addition, in connection with landfill expansions or increases in transfer station capacities, we will incur significant capital costs in order to meet applicable environmental standards that are a condition to the approval of such expansions or increases.
The principal statutes and regulations that affect our operations are summarized below:
The Resource Conservation and Recovery Act of 1976, as amended, or RCRA, regulates the generation, treatment, storage, handling, transportation and disposal of solid waste and requires states to develop programs to ensure the safe disposal of solid waste. The Subtitle D Regulations, which govern solid waste landfills, include
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location restrictions, facility design standards, operating criteria, closure and post-closure requirements, financial assurance requirements, groundwater monitoring requirements, methane gas emission control requirements, groundwater remediation standards and corrective action requirements. The Subtitle D Regulations also require certain landfill sites to meet stringent liner design criteria to keep leachate out of groundwater. All of the states in which we currently operate have adopted regulations or programs as stringent as, or more stringent than, the Subtitle D Regulations.
The Federal Water Pollution Control Act of 1972, as amended, or Clean Water Act, regulates the discharge of pollutants from landfill and other sites into waters of the United States. If run-off from our transfer stations or of collected leachate from our landfills is discharged into surface waters, the Clean Water Act requires us to obtain a discharge permit, conduct sampling and monitoring and, under certain circumstances, reduce the quantity of pollutants in the discharge. Our landfills are also required to comply with the EPA’s storm water regulations issued in November 1990, which are designed to prevent contaminated landfill storm water run-off from flowing into surface waters.
The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, or CERCLA, establishes a program for the investigation and cleanup of facilities from which a release of any hazardous substance into the environment has occurred or is threatened. CERCLA imposes strict joint and several liability for the cleanup of facilities on current owners and operators of the site, owners and operators of the site at the time of the disposal of the hazardous substances, any person who arranges for the transportation, disposal or treatment of the hazardous substances, and transporters of waste containing hazardous substances, who select the disposal and treatment facilities. CERCLA also imposes liability for the cost of evaluation and remediation of any damage to natural resources. The costs of a CERCLA investigation and cleanup can be very substantial and liability is not dependent upon a deliberate discharge of a hazardous substance. If we were found to be a responsible party for a CERCLA cleanup, the enforcing agency could hold us, or any other generator, transporter or the owner or operator of the contaminated facility, responsible for all investigative and remedial costs, even if others were also liable. While CERCLA gives a responsible party the right to bring a contribution action against other responsible parties, the ability to obtain reimbursement from others could be limited by the ability to find other responsible parties, prove the extent of their responsibility and by the financial resources of these other parties.
The Clean Air Act of 1970, as amended or Clean Air Act, regulates emissions of air pollutants. The EPA has developed standards that may apply to our landfills depending on the date of construction, location, the materials disposed of at the landfill and the volume of the landfill emissions. The EPA has also issued standards regulating the disposal of asbestos containing materials under the Clean Air Act. Our disposal and collection operations are required to meet certain permitting requirements under the Clean Air Act. We may be required to install methane gas recovery systems at our landfills to meet emission standards under the Clean Air Act.
All of the federal statutes described above contain provisions authorizing, under certain circumstances, the institution of lawsuits by private citizens to enforce the provisions of the statutes. In addition to a penalty award to the U.S. government, some of these statutes authorize an award of attorneys’ fees to parties successfully advancing such an action.
The Occupational Safety and Health Act of 1970, as amended, (“OSHA”) and provincial occupation health and safety laws in Canada establish employer responsibilities for worker health and safety, including the obligation to maintain a workplace free of recognized injury causing hazards and to implement certain health and safety training programs. Various OSHA standards apply to our operations, including standards concerning notices of hazards, the handling of asbestos and asbestos-containing materials and worker training and emergency response programs.
In addition to these federal regulations which are a applicable to our U.S. operations, each state or province in which we operate has laws and regulations governing the generation, storage, treatment, handling, transportation and disposal of solid waste, occupational health and safety, water and air pollution and, in most cases, the siting, design, operation, maintenance, closure and post-closure care of landfills and transfer stations. Many municipalities also have ordinances, local laws and regulations that affect our operations. These include zoning and health measures which may limit solid waste management activities to specified sites or activities, impose flow control restrictions that direct the delivery of solid wastes to specific facilities or regulate discharges into municipal sewers
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from our solid waste facilities, laws that grant the right to establish franchises for collection services and then put these franchises out for bid, and bans or other restrictions on the movement of solid wastes into a municipality.
Permits or other land use approvals for our landfills, as well as state, provincial or local laws and regulations, may specify the quantity of waste that may be accepted at the landfill during a given time period, specify the types of waste that may be accepted at the landfill or the areas from which waste may be accepted at a landfill. Changes in landfill design standards for landfills may require us to construct or operate future landfill cells and infrastructure to a higher and potentially more costly standard than currently anticipated.
There has been an increasing trend to mandate and encourage waste reduction at the source and waste recycling, and to prohibit or restrict the disposal of certain types of solid wastes, such as yard wastes, leaves and tires, in landfills. The enactment of regulations reducing the volume and types of wastes available for transport to and disposal in landfills could affect the ability of our transfer stations and landfills to operate at full capacity.
Employees
As of December 31, 2006, we employed approximately 2,160 full-time employees, including approximately 100 persons categorized as professionals or managers, approximately 1,800 employees involved in collection, transfer, disposal and recycling operations, and approximately 260 sales, clerical, data processing or other administrative employees. In Canada, non-salaried employees in 13 of our 23 collection operations are governed by collective agreements, three of which are to be renewed in 2007. We are not aware of any current organizing efforts among our non-unionized employees and believe that relations with our employees are good.
Executive Officers
The following table sets forth information regarding our executive officers as of February 27, 2007:
Name | Age | Position | Since | |||||
David Sutherland-Yoest | 50 | Chairman and Chief Executive Officer | September 6, 2001 | |||||
Charles A. Wilcox | 54 | President and Chief Operating Officer | July 14, 2004 | |||||
Ivan R. Cairns | 61 | Executive Vice President, General Counsel and Secretary | January 5, 2004 | |||||
Brian A. Goebel | 39 | Vice President, Corporate Controller and Acting Chief Financial Officer | October 1, 2003 | |||||
Bradford J. Helgeson | 30 | Vice President, Finance and Treasurer | June 1, 2004 |
Certain biographical information regarding each of our executive officers is set forth below:
David Sutherland-Yoesthas been our Chairman and Chief Executive Officer and a director since September 6, 2001. Mr. Sutherland-Yoest also held the position of Chairman and Chief Executive Officer of H2O Technologies Ltd., a water purification company, from March 2000 to October 2003 and served as a director of H2O Technologies Ltd. from March 2000 to January 2004. Mr. Sutherland-Yoest served as the Senior Vice President — Atlantic Area of Waste Management, Inc. from July 1998 to November 1999. From August 1996 to July 1998, he was the Vice Chairman and Vice President — Atlantic Region of USA Waste Services, Inc., or USA Waste and the President of Canadian Waste Services, Inc., which, during such time, was a subsidiary of USA Waste. Prior to joining USA Waste, Mr. Sutherland-Yoest was President, Chief Executive Officer and a director of Envirofil, Inc. Between 1981 and 1992, he served in various capacities at Laidlaw Waste Systems, Inc. and Browning-Ferris Industries, Ltd.
Charles A. Wilcoxwas appointed our President and Chief Operating Officer effective July 14, 2004. Prior to joining us, Mr. Wilcox worked for Waste Management, Inc. from December 1994 where he held the positions of Senior Vice President, Market Planning and Development and prior to that Senior Vice President, Eastern Group.
Ivan R. Cairnswas appointed our Executive Vice President, General Counsel and Corporate Secretary effective January 5, 2004. Prior to joining us, Mr. Cairns served as Senior Vice President and General Counsel at Laidlaw International Inc. and was Senior Vice President and General Counsel at its predecessor, Laidlaw
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Inc., for over 20 years. In June 2001, Laidlaw Inc., and four of its direct and indirect subsidiaries, filed voluntary petitions for bankruptcy under the U.S. Bankruptcy Code and also commenced Canadian insolvency proceedings. In June 2003, these companies emerged from bankruptcy and the Canadian insolvency proceedings.
Brian A. Goebelwas appointed our Vice President, Chief Accounting Officer and Corporate Controller effective October 1, 2003 and named Acting Chief Financial Officer effective September 2006. From December 1999 until joining us, Mr. Goebel, a Certified Public Accountant, held the position of Assistant Controller, ANC Rental Corporation, which owned Alamo and National Car Rental. From January 1997 to December 1999, Mr. Goebel was a Director of Corporate Accounting for AutoNation, Inc. Prior to joining AutoNation, Inc., Mr. Goebel spent eight years in the Business Assurance practice of Coopers & Lybrand, LLP.
Bradford J. Helgesonwas appointed our Vice President, Finance effective June 1, 2004, and was appointed Treasurer effective December 1, 2005. Prior to joining us, Mr. Helgeson was an Associate in Investment Banking at Lehman Brothers, where he focused on working with clients in the industrial sector, including the solid waste industry. Before joining Lehman Brothers in 2000, Mr. Helgeson had three years of investment banking experience at Donaldson, Lufkin & Jenrette.
Item 1A. | Risk Factors |
Our indebtedness may make us more vulnerable to unfavorable economic conditions and competitive pressures, limit our ability to borrow additional funds, require us to dedicate or reserve a large portion of cash flow from operations to service debt, and limit our ability to take actions that would increase our revenue and execute our growth strategy
As of December 31, 2006, we had total outstanding debt and capital lease obligations of $410.4 million. Our debt is primarily comprised of a $60.0 million revolving credit facility due in April 2009 (which is part of our senior secured credit facilities), against which there were no amounts outstanding at December 31, 2006, and $22.1 million of which was used to support outstanding letters of credit; a $245.3 million term loan maturing in March 2011 and $160.0 million 91/2% senior subordinated notes due 2014. Our senior secured credit facilities are secured by substantially all of the assets of our U.S. restricted subsidiaries, as well as by a pledge of 65% of the common shares of our first tier foreign subsidiaries, including Waste Services (CA). Our Canadian operations guarantee and pledge all of their assets only in support of the $15.0 million portion of the revolving credit facility available to them.
The amount of our indebtedness owed under the senior secured credit facilities and senior subordinated notes may have adverse consequences for us, including making us more vulnerable to unfavorable economic conditions and competitive pressures, limiting our ability to borrow additional funds, requiring us to dedicate or reserve a large portion of cash flow from operations to service debt, limiting our ability to plan for or react to changes in our business and industry and placing us at a disadvantage compared to competitors with less debt in relation to cash flow.
The credit facilities contain covenants and restrictions that could limit the manner in which we conduct our operations and could adversely affect our ability to raise additional capital. Any failure by us to comply with these covenants and restrictions will, unless waived by the lenders, result in an immediate obligation to repay indebtedness. If such events occurred, we would be required to refinance or obtain capital from other sources, including sales of additional debt or equity or the sale of assets, in order to meet our repayment obligations. We may not be successful in obtaining alternative sources of funding to repay these obligations should events of default occur.
Our business is capital intensive and may consume cash in excess of cash flow from our operations and borrowings
Our ability to remain competitive, sustain our growth and maintain our operations largely depends on our cash flow from operations and our access to capital. We intend to fund our cash needs through our operating cash flow and borrowings under our senior credit facilities. We may require additional equity or debt financing to fund our growth and debt repayment obligations.
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Additionally, we have provided for our liabilities related to our closure and post-closure obligations. As we undertake acquisitions, expand our operations, and deplete our landfills, our cash expenditures will increase. As a result, working capital levels may decrease and require financing. If we must close a landfill sooner than we currently anticipate, or if we reduce our estimate of a landfill’s remaining available air space, we may be required to incur such cash expenditures earlier than originally anticipated. Expenditures for closure and post-closure obligations may increase as a result of any federal, state or local government regulatory action taken to accelerate such expenditures. These factors could substantially increase our cash expenditures and therefore impair our ability to invest in our existing or new facilities.
We may need to refinance our existing debt obligations to pay the principal amounts due at maturity. In addition, we may need additional capital to fund future acquisitions and the integration of the businesses that we acquire. Our business may not generate sufficient cash flow, we may not be able to obtain sufficient funds to enable us to pay our debt obligations and capital expenditures or we may not be able to refinance on commercially reasonable terms, if at all.
We may be unable to obtain or maintain the environmental and other permits, licenses and approvals we need to operate our business, which could adversely affect our earnings and cash flow
We are subject to significant environmental and land use laws and regulations. To own and operate solid waste facilities, including landfills and transfer stations, we must obtain and maintain licenses or permits, as well as zoning, environmental and other land use approvals. It has become increasingly difficult, costly and time-consuming to obtain required permits and approvals to build, operate and expand solid waste management facilities. The process often takes several years, requires numerous hearings and compliance with zoning, environmental and other requirements and is resisted by citizen, public interest and other groups. The cost of obtaining permits could be prohibitive. We may not be able to obtain and maintain the permits and approvals needed to own, operate or expand our solid waste facilities. Moreover, the enactment of additional laws and regulations or the more stringent enforcement of existing laws and regulations could increase the costs associated with our operations. Any of these occurrences could reduce our expected earnings and cash flow.
In some markets in which we operate, permitting requirements may be prohibitive and may differ between those required of us and those required of our competitors. Our inability to obtain and maintain permits for solid waste facilities may adversely affect our ability to service our customers and compete in these markets, thereby resulting in reduced operating revenue.
In addition, stringent controls on the design, operation, closure and post-closure care of solid waste facilities could require us to undertake investigative or remedial activities, curtail operations, close a facility temporarily or permanently, or modify, supplement or replace equipment or facilities at substantial costs resulting in reduced profitability and cash flow.
Any failure to maintain the required financial assurance or insurance to support existing or future service contracts may prevent us from meeting our contractual obligations, and we may be unable to bid on new contracts or retain existing contracts resulting in reduced operating revenue and earnings.
Municipal solid waste services contracts and permits to operate transfer stations, landfills and recycling facilities typically require us to obtain performance bonds, letters of credit or other means of financial assurance to secure our contractual performance. Such contracts and permits also typically require us to maintain adequate insurance coverage. We carry a broad range of insurance coverage and retain certain insurance exposure that we believe is customary for a company of our size. If our obligations were to exceed our estimates, there could be a material adverse effect on our results of operations. We satisfy these financial assurance requirements by providing performance bonds or letters of credit. Our ability to obtain performance bonds or letters of credit is generally dependent on our creditworthiness. Also, the issuance of letters of credit reduces the availability of our revolving credit facilities for other purposes. Our bonding arrangements are generally renewed annually. If we are unable to renew our bonding arrangements on favorable terms or at all or enter into arrangements with new surety providers, we would be unable to meet our existing contractual obligations that require the posting of performance bonds, and we would be unable to bid on new contracts. This would reduce our operating revenue and our earnings.
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Our acquisition strategy may be unsuccessful if we are unable to identify and complete future acquisitions and integrate acquired assets or businesses and this subjects us to risks that may have a material adverse effect on our results of operations
Part of our strategy to expand our business and increase our revenue and profitability is to pursue the acquisition of disposal-based and collection assets and businesses. We have identified a number of acquisition candidates, both in the United States and Canada. However, we may not be able to acquire these candidates at prices or on terms and conditions that are favorable to us. Furthermore, we expect to finance future acquisitions through a combination of seller financing, cash from operations, borrowings under our financing facilities or issuing additional equity or debt securities. Our ability to execute our acquisition strategy also depends upon other factors, including our ability to obtain financing on favorable terms, the successful integration of acquired businesses and our ability to effectively compete in the new markets we enter.
If we are unable to identify suitable acquisition candidates or successfully complete and integrate acquisitions, we may not realize the expected benefits from our acquisition growth strategy, including any expected benefits from the proposed vertical integration of acquired operations and our existing disposal facilities.
Our business strategy depends in part upon vertically integrating our operations. If we are unable to permit, expand or renew permits for our existing landfill sites or enter into agreements that provide us with access to landfill sites and acquire, lease or otherwise secure access to transfer stations, this may reduce our profitability and cash flow
Our ability to execute our business strategy depends in part on our ability to permit, expand or renew permits for our existing landfills, develop new landfill sites in proximity to our operations, enter into agreements that will give us long-term access to landfill sites in our markets and to acquire, lease or otherwise secure access to transfer stations that permit us to internalize our collection volume to our own landfill sites. Permits to expand landfills are often not approved until the remaining permitted disposal capacity of a landfill is very low. We may not be able to purchase additional landfill sites, renew the permits for or expand existing landfill sites, negotiate or renegotiate agreements to obtain a long-term advantage for landfill costs or permit or renew permits for transfer stations that allow us to internalize the waste we collect. If we were to exhaust our permitted capacity at our landfills, our ability to expand internally could be limited, and we could be required to cap and close our landfills and dispose of collected waste at more distant landfills or at landfills operated by our competitors or other third parties. In Alberta, Canada, regulations require landfills to be re-approved every 10 years, thereby providing the regulator an opportunity to add potentially more stringent or costly design or operating conditions to the permit or prevent the renewal of the permit. Our landfill located in Alberta, Canada was re-approved on January 31, 2007. Our inability to secure favorable arrangements (through ownership of landfills or otherwise) for the disposal of collected waste would increase our disposal costs and could result in the loss of business to competitors with more favorable disposal options thereby reducing our profitability and cash flow.
Changes in legislative or regulatory requirements may cause changes in the landfill site permitting process. These changes could make it more difficult or costly for us to obtain or renew landfill permits. Technical design requirements, as approved, may need modification at some future point in time, which could result in higher development and construction costs than projected. Our current estimates of future disposal capacity may change as a result of changes in design requirements prescribed by legislation, construction requirements and changes in the expected waste density over the life of a landfill site. The density of waste used to convert the available airspace at a landfill into tons may be different than estimated because of variations in operating conditions, including waste compaction practices, site design, climate and the nature of the waste.
Any exposure to environmental liabilities, to the extent not adequately covered by insurance, could result in significant expenses, which would reduce the funds we have available for other purposes, including debt service and reduction and acquisitions
We could be held liable for environmental damage at solid waste facilities that we own or operate, including damage to neighboring landowners and residents for contamination of the air, soil, groundwater, surface water and drinking water. Our liability could extend to damage resulting from pre-existing conditions and off-site
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contamination caused by pollutants or hazardous substances that we or our predecessors arranged to transport, treat or dispose of at other locations. We are also exposed to liability risks from businesses that we acquire because these businesses may have liabilities that we fail or are unable to discover, including noncompliance with environmental laws. Our insurance program may not cover all liabilities associated with environmental cleanup or remediation or compensatory damages, punitive damages, fines, or penalties imposed on us as a result of environmental damage caused by our operations or those of any predecessor. The incurring of liabilities for environmental damages that are not fully covered by insurance could adversely affect our liquidity and could result in significant expenses, which would reduce the funds we have available for other purposes, including debt service and reduction and acquisitions.
Although we operate landfills for non-hazardous commercial, industrial and municipal solid waste, it is possible that third parties may dispose of hazardous waste at our landfills or that we may unknowingly dispose of hazardous waste at our landfills. If this were to happen, we could become liable for remediation costs under applicable regulations and, although we would have a cause of action against any third party responsible for disposing of the hazardous waste, we may be unable to identify or recover against that person. The presence of hazardous waste at our landfills could also negatively affect future permitting processes with governmental authorities. If we become responsible for remediation costs for hazardous waste or if governmental authorities deny or restrict the scope of our future permits, our profitability and operations may be adversely impacted.
We face competition from large and small solid waste services companies and may be unable to successfully compete with other solid waste companies reducing our operating margins
The markets in which we operate are highly competitive and require substantial labor and capital resources. We compete with large, national solid waste services companies as well as smaller regional solid waste services companies. Some of our competitors are better capitalized, have greater name recognition and greater financial, operational and marketing resources than us, or may otherwise be able to provide services at a lower price.
We also compete with operators of alternative disposal facilities and municipalities that maintain their own waste collection and disposal operations. Public sector operators may have financial advantages over us because of their access to user fees and similar charges as well as to tax revenue. Responding to this competition may result in reduced operating margins. Further, competitive pressures may make our internal growth strategy of improving service and increasing sales penetration difficult or impossible to execute.
The termination or non-renewal of existing customer contracts, or the failure to obtain new customer contracts, could result in declining revenue
We derive a portion of our revenue from municipal contracts that require competitive bidding by potential service providers. Although we intend to continue to bid on municipal contracts and to re-bid some of our existing municipal contracts, such contracts may not be maintained or won in the future. We may be unable to meet bonding requirements for municipal contracts at a reasonable cost to us or at all. These requirements may limit our ability to bid for some municipal contracts and may favor some of our competitors. If we are unable to compete successfully for municipal contracts because of bonding or other requirements, we may lose important sources of revenue.
We also derive a portion of our revenue from non-municipal contracts, which generally have a term of one to five years. Some of these contracts permit our customers to terminate them before the end of the contractual term. Any failure by us to replace revenue from contracts lost through competitive bidding, termination or non-renewal within a reasonable time period could result in a decrease in our operating revenue and our earnings.
We depend on third parties for disposal of solid waste and if we cannot maintain disposal arrangements with them we could incur significant costs that would result in reduced operating margins and revenue.
We currently deliver a portion of the solid waste we collect to municipally owned disposal facilities and to privately owned or operated disposal facilities. If municipalities increase their disposal rates or if we cannot obtain and maintain disposal arrangements with private owners or operators, we could incur significant additional costs and, if we are not able to pass these cost increases on to our customers because of competitive pressures, this could result in reduced operating margins and revenue.
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Labor unions may attempt to organize our non-unionized employees, which may result in increased operating expenses
Some of our employees in Canada have chosen to be represented by unions, and we have negotiated collective bargaining agreements with them. Labor unions may make attempts to organize our non-unionized employees. The negotiation of any collective bargaining agreement could divert management’s attention away from other business matters. If we are unable to negotiate acceptable collective bargaining agreements, we may have to wait through “cooling-off” periods, which are often followed by union-initiated work stoppages, including strikes. Unfavorable collective bargaining agreements, work stoppages or other labor disputes may result in increased operating expenses and reduced operating revenue.
Our operating margins and profitability may be negatively impacted by increased fuel and energy costs
Although fuel and energy costs account for a relatively small portion of our total operating costs, sustained increases in such costs, which we are unable to pass on to our customers because of competitive pressures or contractual limitations, could lower our operating margins and negatively impact our profitability.
The industry in which we operate is seasonal and decreases in revenue during winter months may have an adverse effect on our results of operations, particularly for our Canadian operations
Our operating revenue tends to be somewhat lower in the fall and winter months for our Canadian operations, reflecting the lower volume of solid waste generated during those periods. Our first and fourth quarter results typically reflect this seasonality. In addition, particularly harsh weather conditions may result in temporary slowdowns or suspension of certain of our operations or higher labor and operational costs, any of which could have a material adverse effect on our results of operations.
Our Canadian operations subject us to currency translation risk, which could cause our results to fluctuate significantly from period to period
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, our reported results of 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 have been 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 have been 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.
Changes to patterns regarding disposal of waste could adversely affect our results of operations by reducing the volume of waste available for collection and disposal and thus reducing our earnings
Waste reduction programs may reduce the volume of waste available for collection and disposal in some areas where we operate. Some areas in which we operate offer alternatives to landfill disposal, such as recycling and composting. In addition, state, local, and provincial authorities increasingly mandate recycling and waste reduction at the source and prohibit the disposal of certain types of waste, such as yard waste, at landfills. Any significant adverse change in regulation or patterns regarding disposal of waste could have a material adverse effect on our earnings by reducing the level of demand for our services, resulting in decreased revenue and the earnings we are able to generate.
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Limits on export of waste and any disruptions to the cross-border flow of waste may adversely affect our results of operations by increasing our costs of disposal
There is limited disposal capacity available in Ontario, Canada, a market in which we have significant operations. As a result, a significant portion of the solid waste collected in Ontario is transported to sites in the United States for disposal. Disruptions in the cross-border flow of waste, or periodic closures of the border to solid waste would cause us to incur more costs due to the increased time our trucks may be required to spend at border check-points or increased processing or sorting requirements. Additionally, our trucks might be required to travel further to dispose of their waste in other areas of Ontario. Disruptions in the cross-border flow of waste could also result in a lack of disposal capacity available to our Ontario market at a reasonable price or at all. These disruptions could have a material adverse effect on our operating results by increasing our costs of disposal in the Ontario market and thereby decreasing our operating margins and could result in the loss of business to competitors with more favorable disposal options.
Item 1B. | Unresolved Staff Comments |
None
Item 2. | Properties |
Our principal executive offices are in leased premises in Burlington, Ontario and in Boca Raton, Florida. We also have leased administrative offices in Florida, Arizona, Alberta and Ontario. Our principal property and equipment consist of land, buildings, vehicles and equipment, substantially all of which are encumbered by liens in favor of our lenders under our revolving and term loan credit facilities.
The following table summarizes the real properties used in our operations as of December 31, 2006:
Collection | Transfer | Recycling | ||||||||||||||||||
Administrative | Operations | Stations | Facilities | Landfills | ||||||||||||||||
Owned | — | 15 | 6 | 6 | 9 | |||||||||||||||
Leased | 4 | 21 | 14 | 7 | — | |||||||||||||||
Total | 4 | 36 | 20 | 13 | 9 | |||||||||||||||
We use approximately 1,100 front-line waste collection vehicles in our operations. We believe that our vehicles, equipment and operating properties are adequate for our current operations. However, we expect to continue to make investments in additional equipment and property for expansion, replacement of assets and in connection with future acquisitions.
Item 3. | 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 that is required for our operations. From time to time, we may also be subject to actions brought by citizens’ groups or adjacent landowners or residents in connection with the permitting and licensing of transfer stations and landfills or alleging environmental damage or violations of the permits and licenses pursuant to which we operate. We may become party to various lawsuits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of a solid waste management business.
In December 2002, Waste Management of Canada Corporation (formerly Canadian Waste Services Inc.), or Canadian Waste, one of our competitors, commenced an action in the Court of Queen’s Bench of Alberta against us and one of our former employees in Western Canada who had previously been employed by Canadian Waste. The action alleges breach of the employment contract between the former employee and Canadian Waste, and breach of fiduciary duties. The action also alleges that we participated in those alleged breaches. The action seeks damages in the amount of approximately C$14.5 million, and an injunction enjoining the employee from acting contrary to his alleged employment contract and fiduciary duties.
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We intend to vigorously defend this action both with respect to liability and damages, and no provisions have been made in these financial statements for the above matter.
As of the date of this report, we do not believe that the reasonably 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.
In March 2005, we filed a Complaint against Waste Management, Inc. in the United States 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 would be liable for treble damages or in excess of $75.0 million. On February 9, 2007, the Court granted summary judgment dismissing all of our claims. We intend to appeal this judgment.
Item 4. | Submission of Matters to a Vote of Security Holders |
On December 12, 2006, we held a special meeting of our shareholders to consider and approve the issuance of 9,894,738 shares of our common stock in a private placement to accredited investors and to affiliates of Kelso and Company, L.P. at a price of $9.50 per share in exchange for expected proceeds payable to the Company of up to $66.5 million and up to $27.5 million aggregate amount of our Series A Preferred Stock. The number of votes cast for, against or withheld including the number of abstentions and broker non-votes for the resolution to approve the issuance of common shares described above were as follows:
For | Against | Abstain | ||||||
24,770,898 | 215,463 | 11,596 |
PART II
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
On June 30, 2006, we effected a reverse one for three split of our common stock. As a result of the reverse split, each holder of three outstanding shares of common stock received one share of common stock. No fractional shares of common stock were issuable in connection with the reverse stock split. In lieu of such fractional shares, stockholders received a cash payment equal to the product obtained by multiplying the fraction of common stock by $9.15. Corresponding amendments have been made to the exchangeable shares of Waste Services (CA) Inc., so that each one exchangeable share will entitle the holder to one-third of one share of our common stock, without regard to any fractional shares. The reverse split has been retroactively applied to all applicable information to the earliest period presented, unless otherwise noted as being “pre-reverse split”.
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Our common shares are traded on the Nasdaq National Market. The following table provides high and low common share price information for each quarter within our last two fiscal years:
High | Low | |||||||
Year ended December 31, 2006 | ||||||||
First Quarter | $ | 10.53 | $ | 8.70 | ||||
Second Quarter | 9.93 | 8.25 | ||||||
Third Quarter | 10.05 | 8.61 | ||||||
Fourth Quarter | 10.81 | 8.90 | ||||||
Year ended December 31, 2005 | ||||||||
First Quarter | $ | 11.46 | $ | 9.39 | ||||
Second Quarter | 12.99 | 9.96 | ||||||
Third Quarter | 12.12 | 9.75 | ||||||
Fourth Quarter | 11.28 | 9.81 |
Holders
As of February 23, 2007, there were 101 holders of record of our common shares (including holders of record of exchangeable shares of Waste Services (CA)).
Dividends
We have not paid cash dividends on our common shares to date. The terms of our Senior Secured Credit Facilities and Senior Subordinated Notes prohibit us from paying cash dividends without the consent of our lenders. See Item 7 — “Management Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Senior Secured Credit Facilities and Senior Subordinated Notes”.
We currently intend to retain our future earnings, if any, to finance the growth, development and expansion of our business and repayment of indebtedness. Accordingly, we do not intend to declare or pay any cash dividends on our common shares in the immediate future. The declaration, payment and amount of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors. These factors include our financial condition, results of operations, cash flows from operations, current and anticipated capital requirements and expansion plans, the income tax laws then in effect and the requirements of applicable laws.
Repurchases of Securities
None.
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Item 6. | Selected Financial Data |
The following tables set forth our selected consolidated financial data for the periods indicated and are qualified by reference to, and should be read in conjunction with our Consolidated Financial Statements and the Notes thereto, which are included elsewhere in this annual report, especially Note 4 as it relates to our business combinations, significant asset acquisitions and dispositions, and Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operation.” The financial data as of December 31, 2006, 2005, 2004, 2003 and 2002 and for each of the years then ended have been derived from our audited Consolidated Financial Statements. The selected consolidated financial data as of December 31, 2006, 2005, 2004, 2003 and 2002 and for each of the years then ended have been prepared in accordance with accounting principles generally accepted in the United States.
For Each of the Years Ended December 31, | ||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
(In thousands, except per share amounts) | ||||||||||||||||||||
Statement of Operations and Cash Flow Data: | ||||||||||||||||||||
Revenue | $ | 396,123 | $ | 356,056 | $ | 287,105 | $ | 124,985 | $ | 98,846 | ||||||||||
Income (loss) from operations | 16,310 | 10,892 | 8,140 | (4,888 | ) | 9,567 | ||||||||||||||
Net income (loss) from continuing operations | (47,068 | ) | (50,424 | ) | (47,761 | ) | (22,740 | ) | 2,127 | |||||||||||
Net income (loss) from discontinued operations | (1,463 | ) | 134 | (618 | ) | (158 | ) | — | ||||||||||||
Income (loss) before cumulative effect of change in accounting principle | (48,531 | ) | (50,290 | ) | (48,379 | ) | (22,898 | ) | 2,127 | |||||||||||
Cumulative effect of change in accounting principle | — | — | 225 | 518 | — | |||||||||||||||
Net income (loss) | (48,531 | ) | (50,290 | ) | (48,154 | ) | (22,380 | ) | 2,127 | |||||||||||
Net loss attributable to common shareholders | (48,531 | ) | (50,290 | ) | (48,154 | ) | (76,952 | ) | (12,590 | ) | ||||||||||
Loss per share, basic and diluted — continuing operations | (1.33 | ) | (1.53 | ) | (1.62 | ) | (5.97 | ) | (1.17 | ) | ||||||||||
Loss per share, basic and diluted | ||||||||||||||||||||
— discontinued operations | (0.04 | ) | — | (0.02 | ) | (0.02 | ) | — | ||||||||||||
Basic and diluted loss per share before cumulative effect of change in accounting principle | (1.37 | ) | (1.53 | ) | (1.64 | ) | (5.99 | ) | (1.17 | ) | ||||||||||
Cumulative effect of change in accounting principle | — | — | 0.01 | 0.04 | — | |||||||||||||||
Loss per share — basic and diluted | (1.37 | ) | (1.53 | ) | (1.63 | ) | (5.95 | ) | (1.17 | ) | ||||||||||
Weighted average common shares outstanding — basic and diluted | 35,354 | 32,880 | 29,410 | 12,927 | 10,804 | |||||||||||||||
Cash flows provided by operating activities of continuing operations | 35,470 | 21,822 | 26,741 | 10,024 | 13,654 | |||||||||||||||
Capital expenditures used in continuing operations | 47,285 | 28,893 | 37,823 | 22,106 | 12,157 |
As of December 31, | ||||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
Balance Sheet Data: | ||||||||||||||||||||
Cash and cash equivalents | $ | 8,532 | $ | 8,886 | $ | 8,476 | $ | 21,048 | $ | 1,775 | ||||||||||
Property, equipment and landfill sites, net | 382,656 | 275,983 | 277,767 | 178,148 | 58,994 | |||||||||||||||
Goodwill and other intangible assets, net | 350,035 | 307,869 | 305,994 | 160,296 | 66,596 | |||||||||||||||
Total assets | 865,063 | 728,389 | 720,583 | 470,998 | 149,022 | |||||||||||||||
Total debt and capital lease obligations (exclusive of cumulative mandatorily redeemable Preferred Stock) | 410,353 | 286,669 | 278,363 | 177,449 | 53,645 | |||||||||||||||
Cumulative mandatorily redeemable Preferred Stock | — | 84,971 | 64,971 | 48,205 | — | |||||||||||||||
Total shareholders’ equity | 339,357 | 264,491 | 298,776 | 201,117 | 77,817 |
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Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following discussion is based on, and should be read in conjunction with Item 6. “Selected Financial Data” and our Consolidated Financial Statements and Notes thereto contained elsewhere in this annual report.
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 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). Due to a pending sale, we have presented our Arizona operations as discontinued.
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.
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,
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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 operator. 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 theunits-of-consumption method, and amortization of intangible assets including customer relationships and contracts and covenantsnot-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.
Acquisitions and Recent Developments
We have executed definitive agreements with Allied Waste Industries, Inc. (“Allied Waste”) whereby we will (i) purchase Allied Waste’s hauling, transfer station and recycling operations in Miami, Florida for $63.0 million in cash, and (ii) sell our Arizona hauling, transfer station and landfill operations to Allied Waste for $53.0 million in cash. We anticipate closing on this transaction during the first quarter of 2007. Accordingly, we have presented the net assets and operations of our Arizona operations as discontinued operations for all periods presented. Revenue from discontinued operations was $28.0 million, $26.4 million and $23.7 million and for the years ended December 31, 2006, 2005 and 2004, respectively. Pre-tax net income (loss) from discontinued operations was $(1.5) million, $0.1 million and $(0.6) million for the years ended December 31, 2006, 2005 and 2004, respectively. The decrease in pre-tax net income (loss) from discontinued operations for 2006 compared to 2005 is in part attributable to retention bonuses granted to employees at our Arizona operations during 2006. Previously, our Arizona operations were reported as part of our “Other Operations” segment.
In January 2007, we entered into definitive agreements to indirectly acquire a roll-off collection and transfer operation, a transfer station development project and a landfill development project, all in south-west Florida, for an aggregate purchase price of $51.2 million in cash. Of the total $51.2 million purchase price, $10.0 million is contingent upon the receipt of certain operating permits and $19.5 million is due and payable at the earlier of the receipt of all operating permits for the landfill site or July 29, 2008. The existing transfer station is permitted to
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accept construction and demolition waste volume. We expect to complete these acquisitions in the second quarter of 2007.
In December 2006, we acquired (i) a construction and demolition waste landfill in Charlotte County, Florida (the “SLD Landfill”), and (ii) Pro Disposal, Inc. (“Pro Disposal”), which operates a roll-off collection and transfer business. The aggregate purchase price for the SLD Landfill and Pro Disposal was $75.0 million in cash. The SLD Landfill, which has a permitted capacity of 15.8 million cubic yards, commenced operations in December 2006. Pro Disposal has collection operations in Lee County, Florida and Collier County, Florida with two transfer stations, one located in Fort Myers and the other in Naples. The transfer stations are both permitted to accept construction and demolition waste volumes. We expect to internalize our Pro Disposal waste volumes into the SLD Landfill.
In December 2006, we issued 7,000,001 shares of our common stock to Westbury (Bermuda) Limited (“Westbury”) and Prides Capital, LLC (“Prides”) for a purchase price of $66.5 million. We also issued 2,894,737 shares of our common stock to Kelso Investment Associates VI, L.P. and KEP VI, LLC (collectively “Kelso”) in exchange for shares of our previously outstanding redeemable Preferred Stock (“Preferred Stock”) in an amount equal to $27.5 million, all of which were owned by Kelso. On December 15, 2006, we used all of the net proceeds received in the private placement from Westbury and Prides, as well as debt and our available cash, to redeem the remaining outstanding shares of our Series A Preferred Stock from Kelso.
In June 2006, we acquired Sun Country Materials, LLC (“Sun Country Materials”) in Hillsborough County, Florida. The purchase price for Sun Country Materials consisted of $5.0 million in cash and the issuance of 4,013,378 (pre-reverse split) shares of our common stock valued at approximately $12.4 million. Sun Country Materials owns a construction and demolition landfill located in Hillsborough County, Florida, which has recently been issued an expansion permit.
In May 2006, we acquired Liberty Waste, LLC (“Liberty Waste”) in Tampa, Florida. The purchase price for Liberty Waste consisted of $8.0 million in cash and the issuance of 1,155,116 (pre-reverse split) shares of our common stock valued at approximately $3.6 million. We had previously paid a deposit of $6.0 million in cash and issued 946,372 (pre-reverse split) shares of our common stock valued at approximately $2.9 million. Liberty Waste is a collection operation based in Tampa with two transfer stations, one located in Tampa and the other in Clearwater. The transfer stations are both permitted to accept construction and demolition and Class III waste volumes.
The Liberty Waste and Sun Country Materials acquisitions will compliment our existing operations in the Tampa market. In addition with the acquisition of Sun County, we will be able to internalize our existing construction and demolition waste volumes and those of Liberty Waste into the acquired landfill.
In April 2006, we acquired a materials recovery facility and solid waste transfer station in Taft, Florida (“Taft Recycling”). The purchase price for the facility consisted of $11.3 million in cash and the issuance of 1,269,841 (pre-reverse split) shares of our common stock valued at approximately $3.9 million. In addition, upon the issuance of the final operating permit on June 15, 2006, we paid $1.5 million in cash and delivered an additional 1,269,842 (pre-reverse split) shares of our common stock valued at approximately $3.7 million, of which 769,842 (pre-reverse split) shares were newly issued and 500,000 (pre-reverse split) shares were transferred from treasury. The acquisition of Taft Recycling will allow us greater access to third party waste volumes that can be disposed of at our JED Landfill in Osceola County, Florida.
Critical Accounting Estimates
General
Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosure of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, including those related to areas that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. These areas include allowances for doubtful accounts, landfill airspace, intangible and long-lived assets, closure and post-
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closure liabilities, revenue recognition, income taxes and commitments and contingencies. We base our estimates on historical experience, our observance of trends in particular areas, information or valuations and various other assumptions that we believe to be reasonable under the circumstances and which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent from other sources. Actual amounts could differ significantly from amounts previously estimated.
We believe that of our significant accounting policies (refer to the Notes to Consolidated Financial Statements contained elsewhere in this annual report), the following may involve a higher degree of judgment and complexity:
Revenue Recognition
We recognize revenue when services, such as providing collection services or accepting waste at our disposal facilities, are rendered. Amounts billed to customers prior to providing the related services are reflected as deferred revenue and reported as revenue in the period in which the services are rendered.
Accounts Receivable and Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts based on their expected collectibility. We perform credit evaluations of our significant customers and establish an allowance for doubtful accounts based on the aging of our 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 over 120 days. We evaluate and revise our reserve on a monthly basis based upon a review of specific accounts outstanding and our history of uncollectible accounts.
Business Acquisitions and Goodwill
We account for business acquisitions using the purchase method of accounting. The total cost of an acquisition is allocated to the underlying net assets based on their respective estimated fair values. As part of this allocation process, management must identify and attribute values and estimated lives to the intangible assets acquired. Such determinations involve considerable judgment, and often involve the use of significant estimates and assumptions, including those with respect to future cash inflows and outflows, discount rates and asset lives. These determinations will affect the amount of amortization expense recognized in future periods. Assets acquired in a business combination that will be re-sold are valued at fair value less cost to sell. Results of operating these assets are recognized currently in the period in which those operations occur.
We account for goodwill in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” and test goodwill for impairment using the two-step process. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. We have defined our reporting units to be consistent with our operating segments: Eastern Canada, Western Canada, Florida, Texas and Arizona. In determining the fair value, we may utilize: (i) discounted future cash flows; (ii) operating results based upon a comparative multiple of earnings or revenues; (iii) offers from interested investors, if any; or (iv) appraisals. Significant estimates used in the fair value calculation utilizing discounted future cash flows include, but are not limited to: (i) estimates of future revenue and expense growth by reporting unit; (ii) future estimated effective tax rates, which we estimate to range between 37% and 40%; (iii) future estimated rate of capital expenditures as well as future required investments in working capital; (iv) estimated average cost of capital, which we estimate to range between 9.0% and 10.0%; and (v) the future terminal value of our reporting unit, which is based upon its ability to exist into perpetuity. Significant estimates used in the fair value calculation utilizing market value multiples include but are not limited to: (i) estimated future growth potential of the reporting unit; (ii) estimated multiples of revenue or earnings a willing buyer is likely to pay; and (iii) estimated control premium a willing buyer is likely to pay.
Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of the acquired businesses. Future events could cause us to conclude that impairment indicators exist and that goodwill associated with the acquired businesses is impaired. Additionally, as the valuation of identifiable goodwill requires significant estimates and judgment about future performance, cash flows and fair
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value, our future results could be affected if these current estimates of future performance and fair value change. Any resulting impairment loss could have a material adverse impact on our financial condition and results of operations.
Acquisition deposits and deferred acquisition costs include capitalized incremental direct costs associated with proposed business combinations that are currently being negotiated. 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 earnings. In the event that the target is acquired, these costs are incorporated in the cost of the acquired business. Indirect and internal costs, including executive salaries, overhead and travel costs related to acquisitions, are expensed as incurred.
Long-Lived Assets
We periodically evaluate whether events and circumstances have occurred that may warrant revision of the estimated useful life of property and equipment or whether the remaining balance of property and equipment, or other long-lived assets including amortizing intangible assets, should be evaluated for possible impairment. Instances that may lead to an impairment include: (i) a significant decrease in the market price of a long-lived asset group; (ii) a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition; (iii) a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or asset group, including an adverse action or assessment by a regulator; (iv) an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset or asset group; (v) a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; or (vi) a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
Upon recognition of an event, as previously described, we use an estimate of the related undiscounted cash flows, excluding interest, over the remaining life of the property and equipment and long-lived assets in assessing their recoverability. We measure impairment loss as the amount by which the carrying amount of the asset(s) exceeds the fair value of the asset(s). We primarily employ two methodologies for determining the fair value of a long-lived asset: (i) the amount at which the asset could be bought or sold in a current transaction between willing parties; or (ii) the present value of estimated expected future cash flows grouped at the lowest level for which there are identifiable independent cash flows.
Costs associated with arranging financing are deferred and expensed over the related financing arrangement using the effective interest method. Should we repay an obligation earlier than its contractual maturity, any remaining deferred financing costs are charged to earnings. Fees paid to lenders for amendments are deferred and expensed over the remaining life of the facility; ancillary professional fees relating to an amendment are expensed as incurred.
Landfill Sites
Landfill sites are recorded at cost. Capitalized landfill costs include expenditures for land, permitting costs, cell construction costs and environmental structures. Capitalized permitting and cell construction costs are limited to direct costs relating to these activities, including legal, engineering and construction costs associated with excavation, liners and site berms, leachate management facilities and other costs associated with environmental management equipment and structures.
Costs related to acquiring land, excluding the estimated residual value of un-permitted, non-buffer land, and costs related to permitting and cell construction are depleted as airspace is consumed using theunits-of-consumption method. Environmental structures, which include leachate collection systems, methane collection systems and groundwater monitoring wells, are charged to expense over the shorter of their useful life or the life of the landfill.
Capitalized landfill costs may also include an allocation of the purchase price paid for the landfills. For landfills purchased as part of a group of several assets, the purchase price assigned to the landfill is determined
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based upon the discounted expected future cash flows of the landfill relative to the other assets within the acquired group. If the landfill meets our expansion criteria, the purchase price is further allocated between permitted airspace and expansion airspace based upon the ratio of permitted versus probable expansion airspace to total available airspace. Landfill sites are amortized using theunits-of-consumption method over the total available airspace including probable expansion airspace where appropriate.
We assess the carrying value of our landfill sites in accordance with the provisions of SFAS No. 144. These provisions, as well as possible instances that may lead to impairment, are addressed in “Long-Lived Assets”. There are certain indicators previously discussed that require significant judgment and understanding of the waste industry when applied to landfill development or expansion.
We identified three sequential steps that landfills generally follow to obtain expansion permits. These steps are as follows: (i) obtaining approval from local authorities; (ii) submitting a permit application to state or provincial authorities; and (iii) obtaining permit approval from state or provincial authorities.
Before expansion airspace is included in our calculation of total available disposal capacity, the following criteria must be met: (i) the land associated with the expansion airspace is either owned by us or is controlled by us pursuant to an option agreement; (ii) we are committed to supporting the expansion project financially and with appropriate resources; (iii) there are no identified fatal flaws or impediments associated with the project, including political impediments; (iv) progress is being made on the project; (v) the expansion is attainable within a reasonable time frame; and (vi) based upon senior management’s review of the status of the permit process to date we believe it is more likely than not the expansion permit will be received within the next five years. Upon meeting our expansion criteria, the rates used at each applicable landfill to expense costs to acquire, construct, close and maintain a site during the post-closure period are adjusted to include probable expansion airspace and all additional costs to be capitalized or accrued associated with the expansion airspace.
Once expansion airspace meets the criteria for inclusion in our calculation of total available disposal capacity, management continuously monitors each site’s progress in obtaining the expansion permit. If at any point it is determined that an expansion area no longer meets the required criteria, the probable expansion airspace is removed from the landfill’s total available capacity and the rates used at the landfill to expense costs to acquire, construct, close and maintain a site during the post-closure period are adjusted accordingly. Changes in engineering estimates are primarily driven by landfill design, compaction and density. These changes primarily affect our depletion rates per ton or tonne, as applicable.
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The following table reflects landfill capacity activity for permitted landfills owned by us for each of the three years ended December 31, 2006, 2005 and 2004 (in thousands of cubic yards):
December 31, 2006 | ||||||||||||||||||||||||||||
Balance, | Changes in | Balance, | ||||||||||||||||||||||||||
Beginning | Landfills | Landfills | Landfills | Engineering | Airspace | End | ||||||||||||||||||||||
of Year | Acquired | Expanded | Divested | Estimates | Consumed | of Year | ||||||||||||||||||||||
United States | ||||||||||||||||||||||||||||
Permitted capacity | 70,840 | 32,635 | — | — | (359 | ) | (2,154 | ) | 100,962 | |||||||||||||||||||
Probable expansion capacity | 18,300 | — | — | — | — | — | 18,300 | |||||||||||||||||||||
Total available airspace | 89,140 | 32,635 | — | — | (359 | ) | (2,154 | ) | 119,262 | |||||||||||||||||||
Number of sites | 3 | 2 | — | — | — | — | 5 | |||||||||||||||||||||
Canada | ||||||||||||||||||||||||||||
Permitted capacity | 11,878 | — | — | — | 73 | (307 | ) | 11,644 | ||||||||||||||||||||
Probable expansion capacity | — | — | 4,970 | — | — | — | 4,970 | |||||||||||||||||||||
Total available airspace | 11,878 | — | 4,970 | — | 73 | (307 | ) | 16,614 | ||||||||||||||||||||
Number of sites | 3 | — | — | — | — | — | 3 | |||||||||||||||||||||
Total | ||||||||||||||||||||||||||||
Permitted capacity | 82,718 | 32,635 | — | — | (286 | ) | (2,461 | ) | 112,606 | |||||||||||||||||||
Probable expansion capacity | 18,300 | — | 4,970 | — | — | — | 23,270 | |||||||||||||||||||||
Total available airspace | 101,018 | 32,635 | 4,970 | — | (286 | ) | (2,461 | ) | 135,876 | |||||||||||||||||||
Number of sites | 6 | 2 | — | — | — | — | 8 |
December 31, 2005 | ||||||||||||||||||||||||||||
Balance, | Changes in | Balance, | ||||||||||||||||||||||||||
Beginning | Landfills | Landfills | Landfills | Engineering | Airspace | End | ||||||||||||||||||||||
of Year | Acquired | Expanded | Divested | Estimates | Consumed | of Year | ||||||||||||||||||||||
United States | ||||||||||||||||||||||||||||
Permitted capacity | 73,038 | — | — | — | (414 | ) | (1,784 | ) | 70,840 | |||||||||||||||||||
Probable expansion capacity | 18,300 | — | — | — | — | — | 18,300 | |||||||||||||||||||||
Total available airspace | 91,338 | — | — | — | (414 | ) | (1,784 | ) | 89,140 | |||||||||||||||||||
Number of sites | 3 | — | 3 | |||||||||||||||||||||||||
Canada | ||||||||||||||||||||||||||||
Permitted capacity | 11,642 | — | — | — | 1,115 | (879 | ) | 11,878 | ||||||||||||||||||||
Probable expansion capacity | — | — | — | — | — | — | — | |||||||||||||||||||||
Total available airspace | 11,642 | — | — | — | 1,115 | (879 | ) | 11,878 | ||||||||||||||||||||
Number of sites | 3 | — | 3 | |||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||
Permitted capacity | 84,680 | — | — | — | 701 | (2,663 | ) | 82,718 | ||||||||||||||||||||
Probable expansion capacity | 18,300 | — | — | — | — | — | 18,300 | |||||||||||||||||||||
Total available airspace | 102,980 | — | — | — | 701 | (2,663 | ) | 101,018 | ||||||||||||||||||||
Number of sites | 6 | — | — | — | — | — | 6 |
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December 31, 2004 | ||||||||||||||||||||||||||||
Balance, | Changes in | Balance, | ||||||||||||||||||||||||||
Beginning | Landfills | Landfills | Landfills | Engineering | Airspace | End | ||||||||||||||||||||||
of Year | Acquired | Expanded | Divested | Estimates | Consumed | of Year | ||||||||||||||||||||||
United States | ||||||||||||||||||||||||||||
Permitted capacity | 26,084 | 48,000 | — | (94 | ) | — | (952 | ) | 73,038 | |||||||||||||||||||
Probable expansion capacity | 18,300 | — | — | — | — | — | 18,300 | |||||||||||||||||||||
Total available airspace | 44,384 | 48,000 | — | (94 | ) | — | (952 | ) | 91,338 | |||||||||||||||||||
Number of sites | 3 | 1 | — | (1 | ) | 3 | ||||||||||||||||||||||
Canada | ||||||||||||||||||||||||||||
Permitted capacity | 10,871 | 1,430 | — | — | — | (659 | ) | 11,642 | ||||||||||||||||||||
Probable expansion capacity | — | — | — | — | — | — | — | |||||||||||||||||||||
Total available airspace | 10,871 | 1,430 | — | — | — | (659 | ) | 11,642 | ||||||||||||||||||||
Number of sites | 2 | 1 | — | 3 | ||||||||||||||||||||||||
Total | ||||||||||||||||||||||||||||
Permitted capacity | 36,955 | 49,430 | — | (94 | ) | — | (1,611 | ) | 84,680 | |||||||||||||||||||
Probable expansion capacity | 18,300 | — | — | — | — | — | 18,300 | |||||||||||||||||||||
Total available airspace | 55,255 | 49,430 | — | (94 | ) | — | (1,611 | ) | 102,980 | |||||||||||||||||||
Number of sites | 5 | 2 | — | (1 | ) | — | — | 6 |
Accrued Closure and Post-Closure Obligations
We recognize as an asset, an amount equal to the fair value of the liability for an asset retirement obligation. The asset is then depleted consistent with other capitalized landfill costs, over the remaining useful life of the site based upon units of consumption as airspace in the landfill is consumed. Additionally, we recognize a liability for the present value of the estimated future asset retirement obligation. The liability will be adjusted for: (i) additional liabilities incurred or settled; (ii) accretion of the liability to its future value; and (iii) revisions in the estimated cash flows relative to closure and post-closure costs.
Accrued closure and post-closure obligations represent an estimate of the future obligation associated with closure and post-closure monitoring of the solid waste landfills owned by us. Site-specific closure and post-closure engineering cost estimates are prepared for the landfills we own. The impact of changes in estimates, based on an annual update, is accounted for on a prospective basis. We calculate closure and post-closure liabilities by estimating the total future obligation in current dollars, increasing the obligations based upon the expected date of the expenditure using an inflation rate of 2.5% and discounting the resultant total to its present value using an 8.0% credit-adjusted risk-free discount rate. We expect our 2007 inflation and discount rates to approximate those of 2006. Accretion of discounted cash flows associated with the closure and post-closure obligations is accrued over the estimated life of the landfill.
Accounting for Income Taxes
We use the asset and liability method to account for income taxes. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. In preparing the Consolidated Financial Statements, we are required to estimate the income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, depreciation on property, plant and equipment and losses for tax and accounting purposes. These differences result in deferred tax assets, which include tax loss carry-forwards, and liabilities, which are included within the consolidated balance sheet. We then assess the likelihood that deferred tax assets will be recovered from future taxable income, and to the extent that recovery is not likely or there is
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insufficient operating history, a valuation allowance is established. To the extent a valuation allowance is established or increased in a period, we include an expense within the tax provision of the consolidated statement of operations.
In July 2006, the FASB issued SFAS Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretation of SFAS Statement No. 109” (“FIN 48”). FIN 48 applies to all “tax positions” accounted for under SFAS 109. FIN 48 refers to “tax positions” as positions taken in a previously filed tax return or positions expected to be taken in a future tax return which are reflected in measuring current or deferred income tax assets and liabilities reported in the financial statements. FIN 48 further clarifies a tax position to include, but not limited to, the following:
• | an allocation or a shift of income between taxing jurisdictions, | |
• | the characterization of income or a decision to exclude reporting taxable income in a tax return, or | |
• | a decision to classify a transaction, entity, or other position in a tax return as tax exempt. |
FIN 48 clarifies that a tax benefit may be reflected in the financial statements only if it is “more likely than not” that a company will be able to sustain the tax return position, based on its technical merits. If a tax benefit meets this criterion, it should be measured and recognized based on the largest amount of benefit that is cumulatively greater than 50% likely to be realized. This is a change from currently occurring practice, whereby companies may recognize a tax benefit only if it is probable a tax position will be sustained.
FIN 48 also requires that we make qualitative and quantitative disclosures, including a discussion of reasonably possible changes that might occur in unrecognized tax benefits over the next 12 months; a description of open tax years by major jurisdictions; and a roll-forward of all unrecognized tax benefits, presented as a reconciliation of the beginning and ending balances of the unrecognized tax benefits on an aggregated basis.
This statement became effective for us on January 1, 2007 and, based on our analysis, we do not expect FIN 48 to have a material effect on our consolidated results of operations, cash flows or financial position.
Risk Management
OurU.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. We have collateral requirements that are set by the insurance companies, which underwrite our insurance programs. Collateral requirements may change from time to time, based on, among other factors, the size of our business, our claims experience, financial performance or credit quality and retention levels. As of December 31, 2006 we had posted letters of credit with our U.S. insurer of $9.3 million to cover the liability for losses within the deductible limit. Provisions for retained claims are made by charges to expense based upon periodic evaluations by management of the estimated ultimate liabilities on reported and unreported claims. Adjustments, if any, to the estimated reserves resulting from ultimate claim payments will be reflected in operations in the periods in which such adjustments become known.
Stock-Based Compensation
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), using the modified prospective transition method. Under that transition method, employee stock-based compensation cost recognized in 2006 includes: (i) compensation cost for allshare-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 No. 123, “Accounting for Stock-Based Compensation” (“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
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prior periods have not been restated. Stock-based employee compensation cost (benefit) is recognized as a component of selling, general and administrative expense in the Statement of Operations.
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 SFAS 123. For the years ended December 31, 2005 and 2004, stock-based employee compensation expense (benefit) was $0.3 million and $(1.4) million, respectively. For 2005 and 2004, compensation expense (benefit) recognized for employee stock options subject to variable accounting is based on the intrinsic value (the difference between the exercise price and quoted market price) of the options at the end of each reporting period. Changes in the intrinsic value are recognized until such options are exercised, expire or are forfeited.
As a result of adopting SFAS 123(R) on January 1, 2006, our net loss and loss before income taxes for the year ended December 31, 2006, is approximately $1.9 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 because: of (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. Prior to the adoption of SFAS 123(R), we presented all tax benefits, if any, of tax deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. As a result of adopting SFAS 123(R), tax benefits resulting from tax deductions in excess of the compensation cost recognized for options (excess tax benefits) are classified as financing cash flows. We estimate the fair value of option grants made to employees using a Black-Scholes pricing model. Within that model we make the following assumptions: (i) the annual dividend yield is zero as we do not pay dividends, (ii) the weighted average expected life of an option is approximated to equal the length of it’s vesting period, (iii) the risk free interest rate is taken to equal the prevailing rate on the US Treasury Yield Rate Curve for a period equal to the weighted average expected life, and (iv) the volatility is based on the level of fluctuations in our historical share price for a period equal to the weighted average expected life.
We account for the issuance of options or warrants for services from non-employee consultants in accordance with Emerging Issues Task Force Issue96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”(“EITF 96-18”), by estimating the fair value of options or warrants issued using a Black-Scholes pricing model. Variables used in the calculation of fair value include the option or warrant exercise price, the market price of our shares on the grant date, the risk-free interest rate, the life of the option or warrant, expected volatility of our stock and expected dividends.
Translation and Re-Measurement of Foreign Currency
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, in accordance with SFAS No. 52, “Foreign Currency Translation”, (“SFAS 52”). 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, as well as intercompany receivables, 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.
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Operating Results
Results of Operations for each of the Three Years Ended December 31, 2006, 2005 and 2004
The following tables set forth our consolidated results of operations for each of the three years ended December 31, 2006, 2005 and 2004 (in thousands):
2006 | ||||||||||||||||||||||||
US | Canada | Total | ||||||||||||||||||||||
Revenue | $ | 208,095 | 100.0 | % | $ | 188,028 | 100.0 | % | $ | 396,123 | 100.0 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of operations | 142,278 | 68.4 | % | 128,176 | 68.2 | % | 270,454 | 68.3 | % | |||||||||||||||
Selling, general and administrative expense | 35,525 | 17.1 | % | 23,416 | 12.5 | % | 58,941 | 14.9 | % | |||||||||||||||
Deferred acquisition costs | 439 | 0.2 | % | 5,173 | 2.8 | % | 5,612 | 1.4 | % | |||||||||||||||
Depreciation, depletion and amortization | 25,431 | 12.2 | % | 17,382 | 9.1 | % | 42,813 | 10.8 | % | |||||||||||||||
Foreign exchange loss and other | 494 | 0.2 | % | 1,499 | 0.8 | % | 1,993 | 0.5 | % | |||||||||||||||
Income from operations | $ | 3,928 | 1.9 | % | $ | 12,382 | 6.6 | % | $ | 16,310 | 4.1 | % | ||||||||||||
2005 | ||||||||||||||||||||||||
US | Canada | Total | ||||||||||||||||||||||
Revenue | $ | 189,725 | 100.0 | % | $ | 166,331 | 100.0 | % | $ | 356,056 | 100.0 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of operations | 144,662 | 76.2 | % | 111,013 | 66.8 | % | 255,675 | 71.8 | % | |||||||||||||||
Selling, general and administrative expense | 29,926 | 15.8 | % | 23,197 | 14.0 | % | 53,123 | 14.9 | % | |||||||||||||||
Settlement with sellers of Florida Recycling | (4,120 | ) | (2.2 | )% | — | 0.0 | % | (4,120 | ) | (1.2 | )% | |||||||||||||
Depreciation, depletion and amortization | 21,305 | 11.2 | % | 19,356 | 11.6 | % | 40,661 | 11.4 | % | |||||||||||||||
Foreign exchange loss and other | (746 | ) | (0.3 | )% | 571 | 0.3 | % | (175 | ) | 0.0 | % | |||||||||||||
Income (loss) from operations | $ | (1,302 | ) | (0.7 | )% | $ | 12,194 | 7.3 | % | $ | 10,892 | 3.1 | % | |||||||||||
2004 | ||||||||||||||||||||||||
US | Canada | Total | ||||||||||||||||||||||
Revenue | $ | 144,387 | 100.0 | % | $ | 142,718 | 100.0 | % | $ | 287,105 | 100.0 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of operations | 108,521 | 75.2 | % | 96,991 | 68.0 | % | 205,512 | 71.6 | % | |||||||||||||||
Selling, general and administrative expense | 28,535 | 19.8 | % | 21,796 | 15.3 | % | 50,331 | 17.5 | % | |||||||||||||||
Settlement with sellers of Florida Recycling | (8,635 | ) | (6.0 | )% | — | 0.0 | % | (8,635 | ) | (3.0 | )% | |||||||||||||
Depreciation, depletion and amortization | 15,841 | 10.9 | % | 16,316 | 11.4 | % | 32,157 | 11.2 | % | |||||||||||||||
Foreign exchange loss and other | (23 | ) | 0.0 | % | (377 | ) | (0.3 | )% | (400 | ) | (0.1 | )% | ||||||||||||
Income from operations | $ | 148 | 0.1 | % | $ | 7,992 | 5.6 | % | $ | 8,140 | 2.8 | % | ||||||||||||
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Revenue
A summary of our revenue, by service line, for each of the three years ended December 31, 2006, 2005 and 2004 is as follows (in thousands):
2006 | 2005 | 2004 | ||||||||||||||||||||||
Collection | $ | 321,760 | 75.0 | % | $ | 295,183 | 78.0 | % | $ | 240,504 | 78.9 | % | ||||||||||||
Landfill disposal | 52,857 | 12.3 | % | 40,748 | 10.8 | % | 25,801 | 8.5 | % | |||||||||||||||
Transfer station | 42,279 | 9.9 | % | 30,081 | 8.0 | % | 25,413 | 8.3 | % | |||||||||||||||
Material recovery facilities | 10,931 | 2.5 | % | 10,306 | 2.7 | % | 10,531 | 3.5 | % | |||||||||||||||
Other specialized services | 1,108 | 0.3 | % | 1,966 | 0.5 | % | 2,426 | 0.8 | % | |||||||||||||||
428,935 | 100.0 | % | 378,284 | 100.0 | % | 304,675 | 100.0 | % | ||||||||||||||||
Intercompany elimination | (32,812 | ) | (22,228 | ) | (17,570 | ) | ||||||||||||||||||
$ | 396,123 | $ | 356,056 | $ | 287,105 | |||||||||||||||||||
A summary of our revenue for each of the three years ended December 31, 2006, 2005 and 2004, by reportable segment, is as follows (in thousands):
All Other | Total | |||||||||||||||
Florida | Canada | Operations | Revenue | |||||||||||||
2006 | $ | 203,381 | $ | 188,028 | $ | 4,714 | $ | 396,123 | ||||||||
2005 | 187,041 | 166,331 | 2,684 | 356,056 | ||||||||||||
2004 | 144,089 | 142,718 | 298 | 287,105 |
Revenue was $396.1 million and $356.1 million for the years ended December 31, 2006 and 2005, respectively, an increase of $40.0 million or 11.3%. The increase in revenue in 2006 for our Florida operations of $16.3 million or 8.7% was driven by price increases of $12.6 million, of which $4.1 million related to fuel surcharges, increased volume at our landfill sites of $9.7 million, other organic volume growth of $0.5 million and acquisitions net of dispositions of $3.8 million. Offsetting these increases were net decreases of $10.3 million, primarily related to the expiration or assignment of certain lower margin residential contracts.
The increase in revenue in 2006 for our Canadian operations of $21.7 million or 13.0% was due to price increases of $10.9 million, of which $2.1 million related to fuel surcharges, other organic volume growth of $5.9 million, acquisitions of $1.5 million and the favorable effects of foreign exchange movements of $12.0 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 $5.5 million and decreases related to the expiration of certain contracts of $3.1 million.
The increase in revenue in 2006 for our other operating segments of $2.0 million or 75.6%, was due to price increases of $0.3 million, other organic volume growth of $0.9 million and increased volume at our landfill sites of $0.8 million.
Revenue was $356.1 million and $287.1 million for the years ended December 31, 2005 and 2004, respectively, an increase of $69.0 million or 24.0%. The increase in revenue in 2005 for our Florida operations of $42.9 million or 29.8% was driven by price increases of $10.1 million, of which $3.5 million related to fuel surcharges, increased volume at our landfill sites of $5.2 million, other organic volume growth of $5.8 million and acquisitions of $33.3 million. Offsetting these increases were decreases of $6.5 million related to 2004 hurricane volumes and other decreases of $5.0 million, primarily related to our exiting of certain lower margin residential collection contracts. These contracts, which expired or were divested at, or around, the end of the third quarter of 2005, had annualized revenue of approximately $20.0 million.
The increase in revenue in 2005 for our Canadian operations of $23.6 million or 16.5% was due to price increases of $7.7 million, of which $3.1 million related to fuel surcharges, increased volume at our landfill sites, primarily due to special waste projects, of $3.7 million, other organic volume growth of $1.4 million and the favorable effects of foreign exchange movements of $11.2 million, offset by other decreases of $0.4 million.
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The increase in revenue in 2005 for our other operating segments of $2.4 million or in excess of 100.0% was due to increased volume at our landfill sites of $1.0 million and other organic volume growth of $1.4 million.
Cost of Operations
Cost of operations was $270.5 million and $255.7 million for the years ended December 31, 2006 and 2005, respectively, an increase of $14.8 million or 5.8%. As a percentage of revenue, cost of operations was 68.3% and 71.8% for the years ended December 31, 2006 and 2005, respectively.
The decrease in cost of operations in 2006 for our U.S. operations of $2.4 million or 1.6% was driven by lower costs for third party disposal due to increased internalization of $4.8 million, lower labor costs, primarily due to our Florida operations exiting certain lower margin residential collection contracts, of $1.2 million and lower other operating costs of $0.5 million. Dispositions in our Florida operations, net of acquisitions completed in 2006, decreased cost of operations by $1.4 million. Offsetting these cost decreases were higher landfill operating costs related to increased host and royalty fees due to increased disposal volumes of $2.3 million in our Florida operations, fleet and facility repair and maintenance increases of $2.0 million, increased fuel costs of $0.8 million and higher insurance costs of $0.4 million. As a percentage of revenue, cost of operations for our domestic operations was 68.4% and 76.2% for the years ended December 31, 2006 and 2005, respectively. The improvement in our domestic gross margin is primarily due to increased volumes at our domestic landfill sites, increased internalization and the expiration of certain lower margin residential collection contracts in Florida.
The increase in cost of operations in 2006 for our Canadian operations of $17.2 million or 15.5% was due to increased disposal volumes, rates andsub-contractor costs of $4.5 million, increased labor costs of $3.5 million, increased fuel costs of $0.7 million, fleet and facility repair and maintenance increases of $0.6 million and the unfavorable effects of foreign exchange movements of $8.2 million, offset by other decreases of $0.3 million. As a percentage of revenue, cost of operations for our Canadian operations was 68.2% and 66.8% for the years ended December 31, 2006 and 2005, respectively. The decline in our Canadian gross margin is primarily due to lower special waste landfill volumes coupled with higher operating costs.
Cost of operations was $255.7 million and $205.5 million for the years ended December 31, 2005 and 2004, respectively, an increase of $50.2 million or 24.4%. As a percentage of revenue, cost of operations was 71.8% and 71.6% for the years ended December 31, 2005 and 2004, respectively.
The increase in cost of operations in 2005 for our U.S. operations of $36.2 million or 33.4% was primarily driven by a full period of cost related to acquisitions made in Florida during the second quarter of 2004, higher overall operating and labor costs in our Florida operations, the opening of our landfill operations in Texas and increased fuel costs. As a percentage of revenue, cost of operations for our domestic operations was 76.2% and 75.2% for the year ended December 31, 2005 and 2004, respectively. The decline in our domestic gross margin is primarily due to the acquisition of lower margin collection operations in Florida. As compared to Canada, our lower margins in the United States are primarily driven by lower-margin residential collection business and higher operating costs in the United States.
The increase in cost of operations in 2005 for our Canadian operations of $14.0 million or 14.5% was due to increased fuel costs of $1.8 million or 1.9%, increased equipment and building repair and maintenance costs of $1.7 million or 1.8%, increased disposal volumes andsub-contractor costs of $1.2 million or 1.2%, increased labor, insurance and other costs of $1.8 million or 1.9% and the unfavorable effects of foreign exchange movements of $7.5 million or 7.7%. As a percentage of revenue, cost of operations for our Canadian operations was 66.8% from 68.0% for the years ended December 31, 2005 and 2004, respectively. The improvement in our Canadian gross margin is due to an increased percentage of higher margin landfill business, offset by increased operating costs.
Selling, General and Administrative Expense
Selling, general and administrative expense was $58.9 million and $53.1 million for the years ended December 31, 2006 and 2005, respectively, an increase of $5.8 million or 11.0%. As a percentage of revenue, selling, general and administrative expense was 14.9% for the years ended December 31, 2006 and 2005. The overall increase in selling, general and administrative expense is due to increased legal fees of $4.7 million,
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primarily related to litigation with Waste Management, which is more fully described in the notes to the consolidated financial statements included elsewhere in this report, increased stock-based compensation expense, inclusive of employees and consultants of $2.0 million, relocation and transition costs of $0.4 million relative to our U.S. corporate office move from Scottsdale, Arizona to Boca Raton, Florida, the unfavorable effects of foreign exchange movements of $1.5 million and other net increases of $1.0 million, primarily related to increased wages and incentive pay. Offsetting these increases were decreases in accounting and other professional fees of $2.6 million, primarily related to the re-audit of the Florida Recycling financial statements in 2005, and decreased insurance costs of $1.2 million.
Selling, general and administrative expense was $53.1 million and $50.3 million for the years ended December 31, 2005 and 2004, respectively, an increase of $2.8 million or 5.6%. As a percentage of revenue, selling, general and administrative expense was 14.9% and 17.5% for the years ended December 31, 2005 and 2004, respectively. The overall increase in selling, general and administrative expense is primarily due to increases in legal and professional fees, labor and other related overhead costs, in part due to acquisitions in 2004 of $1.5 million and the adverse effect of foreign exchange movements of $1.5 million. Offsetting these increases were lower provisions for corporate severance related costs of $0.9 million and lower overall insurance costs of $0.6 million. Separately, due to fourth quarter 2005 results not meeting management expectations we reversed $0.3 million of accrued bonus. Our stock based compensation expense (benefit) was $1.1 million and $(0.1) million for the years ended December 31, 2005 and 2004, respectively.
Deferred Acquisition Costs
In April 2006, we ceased being actively engaged in negotiations with Lucien Rémillard, one of our directors, concerning the potential acquisition of the solid waste collection and disposal business assets owned by a company controlled by Mr. Rémillard in Quebec, Canada. During the first quarter of 2006, we recognized an expense related to these previously deferred acquisition costs of approximately $5.6 million.
Settlement with sellers of Florida Recycling
In April 2004, we completed the acquisition of the issued and outstanding shares of Florida Recycling Services, Inc. (“Florida Recycling”). Shortly after its acquisition, the performance of the operations of Florida Recycling was below our expectations and we engaged an independent third party to conduct a review of Florida Recycling’s business. Based on the results of this review, the 2003 financial statements of Florida Recycling provided by the sellers contained misstatements and could not be relied upon. During the first half of 2005, these financial statements were re-audited by our independent auditors. On September 24, 2004, we reached an agreement with the selling shareholders of Florida Recycling to adjust the purchase price paid for the shares of Florida Recycling whereby, in October 2004, the selling shareholders paid us $7.5 million in cash and returned 500,000 (pre-reverse split) shares of our common stock. The cash and the shares received (valued at the closing market price as of September 24, 2004) with a total value of approximately $8.6 million, are recorded as income. In the third quarter of 2005 and as part of the September 2004 settlement, we received title to the Sanford Recycling and Transfer Station in Sanford, Florida. The facility is valued at the cost incurred to acquire the property and construct the facility to its percentage of completion at such date. We believe such cost approximates fair value at such date. The gain recognized on the settlement approximated $4.1 million for 2005.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization was $42.8 million and $40.7 million for the years ended December 31, 2006 and 2005, respectively, an increase of $2.1 million or 5.3%. As a percentage of revenue, depreciation, depletion and amortization was 10.8% and 11.4% for the years ended December 31, 2006 and 2005, respectively. The overall increase in depreciation, depletion and amortization is primarily attributable to increased disposal volumes at our domestic landfills, offset by lower volumes at our Canadian landfills coupled with a decrease in the overall weighted average depletion rates. The unfavorable effects of foreign exchange movements increased depreciation, depletion and amortization by $1.1 million. Landfill depletion rates for our U.S. landfills ranged from $4.00 to $7.68 per ton and from $3.84 to $8.10 per ton during the years ended December 31, 2006 and
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2005, respectively. Landfill depletion rates for our Canadian landfills ranged from C$2.70 to C$11.82 per tonne and C$2.57 to C$17.80 per tonne during the years ended December 31, 2006 and 2005, respectively.
Depreciation, depletion and amortization was $40.7 million and $32.2 million for the years ended December 31, 2005 and 2004, respectively, an increase of $8.5 million or 26.4%. As a percentage of revenue, depreciation, depletion and amortization remained relatively flat at 11.4% and 11.2% for the years ended December 31, 2005 and 2004, respectively. The overall increase in depreciation, depletion and amortization for the year ended December 31, 2005, as compared to the prior year, is primarily attributable to increases in landfill disposal volumes at our domestic and Canadian landfill sites, coupled with overall higher average depletion rates per ton. The unfavorable effects of foreign exchange movements increased depreciation, depletion and amortization by $1.3 million. Landfill depletion rates ranged from $3.84 to $8.10 and $4.01 to $7.73 per ton for our operating U.S. landfills during the year ended December 31, 2005 and 2004, respectively. The change in the depletion rate per ton was primarily due to changes in engineering estimates as well as the opening of our Texas landfill. Landfill depletion rates ranged from C$2.57 to C$17.80 and C$3.31 to C$15.88 per tonne for our Canadian landfills during the years ended December 31, 2005 and 2004, respectively. The change in the depletion rate per tonne was primarily due to changes in engineering estimates.
Foreign Exchange Loss (Gain) and Other
Foreign exchange loss (gain) and other was $2.0 million, $(0.2) million and $(0.4) million for the years ended December 31, 2006, 2005 and 2004, respectively. The foreign exchange loss and other relates to the re-measuring of U.S. dollar denominated monetary accounts into Canadian dollars. Other components primarily relate to sales of equipment or properties. The increase in loss in 2006 is primarily due to an increase in a U.S. monetary note receivable due from our U.S. parent to our Canadian subsidiary.
Interest Expense
The components of interest expense, including cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs, for the years ended December 31, 2006, 2005 and 2004 are as follows:
2006 | 2005 | 2004 | ||||||||||
Preferred Stock dividends and amortization of issue costs | $ | 18,466 | $ | 20,984 | $ | 17,582 | ||||||
Loss on exchange of cumulative mandatorily redeemable Preferred Stock | 1,187 | — | — | |||||||||
Credit Facility and Senior Subordinated Note interest | 27,704 | 25,374 | 19,858 | |||||||||
Amortization of debt issue costs | 1,569 | 1,408 | 10,294 | |||||||||
Capitalized interest | — | — | (178 | ) | ||||||||
Other interest expense | 1,632 | 1,414 | 869 | |||||||||
$ | 50,558 | $ | 49,180 | $ | 48,425 | |||||||
Interest expense was $50.6 million and $49.2 million for the years ended December 31, 2006 and 2005, respectively, an increase of $1.4 million or 2.8%. Interest expense for the Credit Facility and the Senior Subordinate Notes increased $2.5 million for the year ended December 31, 2006 due to higher prevailing short-term interest rates on the Credit Facilities and higher balances outstanding under our term loan facility, offset by the elimination of penalty interest payable on our Senior Subordinated Notes and lower amended rates on our Credit Facilities. The decrease in Preferred Stock dividends and amortization of issue costs was due to issue costs becoming fully amortized during the second quarter of 2006, offset by higher principal amounts outstanding. The weighted average interest rate on Credit Facility borrowings was 8.4% and 7.7% for the years ended December 31, 2006 and 2005, respectively.
In December 2006, we redeemed the outstanding shares of Preferred Stock through the proceeds of a private placement of our common shares. The liquidation preference equaled the carrying value on the date of redemption and approximated $103.1 million. A portion of the redemption was funded by an exchange and redemption agreement with Kelso pursuant to which we agreed, through a private placement, to issue 2,894,737 shares of
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common stock to Kelso, at a price of $9.50 per share, in exchange for shares of our Preferred Stock in an amount equal to $27.5 million. We recognized a non-cash charge of approximately $1.2 million for the exchange of common stock for the Preferred Stock, representing the difference between the issue price of the common stock to Kelso and the fair market value of our common shares on the date of redemption, which is included in cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs on the Statement of Operations and Comprehensive Loss.
Interest expense was $49.2 million and $48.4 million for the years ended December 31, 2005 and 2004, respectively, an increase of $0.8 million or 1.7%. The increase in interest expense for the year is due to overall higher amended rates on our Credit Facilities coupled with penalty interest on our Senior Subordinated Notes. Amortization of debt issue costs decreased for the year due to the full amortization in 2004 of the bridge financing fees of $9.9 million offset by amortization on our Credit Facilities and our Senior Subordinated Notes. The increase in the Preferred Stock dividends is primarily due to compounding and accretion. The weighted average interest rate on Credit Facility borrowings was 7.8% and 7.1% for the years ended December 31, 2005 and 2004, respectively. As is discussed further in Liquidity and Capital Resources, through the first three quarters of 2005 we incurred liquidated damages (penalty interest) due to the delay of the registration of our Senior Subordinated Notes. During the third quarter of 2005, the registration statement was filed and declared effective and the exchange offer was commenced and consummated. The liquidated damages were $1.1 million and $0.2 million for the years ended December 31, 2005 and 2004, respectively. As of September 28, 2005, we were no longer subject to liquidated damages.
Changes in fair value of warrants pending registration
Due to the nature of certain financial penalties within the registration rights agreement in our April 2004 equity private placement, the common shares, warrants and related proceeds from the offering were classified outside of shareholders’ equity until the registration was declared effective during August of 2004. Such amounts were reclassified to permanent equity during the third quarter of 2004. There were no penalties associated with this registration.
Income Tax Provision
The income tax provision was $12.8 million, $12.1 million and $7.6 million and for the years ended December 31, 2006, 2005 and 2004, respectively. The income tax provision is in excess of amounts at the combined federal and state/provincial statutory rates due to the non-deductible nature of dividends accrued on our Preferred Stock, coupled with valuation allowances on our net operating losses in the United States.
As of December 31, 2006, we have approximately $109.2 million of domestic gross net operating loss carry-forwards, which expire from 2023 to 2026. As of December 31, 2006, we have domestic foreign tax credit carry-forwards of approximately $1.2 million, which expire during 2016. Due to thestart-up nature of our U.S. operations, we have provided a 100% valuation allowance for our net operating loss carry-forwards generated in the United States. Since our domestic net operating loss carry-forwards are not available to offset Canadian taxable income, we expect our effective tax rate in future periods will be higher. Separately, changes in our ownership structure in the future could result in limitations on the utilization of loss carry-forwards, as imposed by Section 382 of the U.S. Internal Revenue Code.
Liquidity and Capital Resources
Our principal capital requirements are to fund capital expenditures, debt service and business and asset acquisitions. Significant sources of liquidity are cash on hand, working capital, borrowings from our Credit Facilities and proceeds from debt and equity issuances.
Senior Secured Credit Facilities
Our Senior Secured Credit Facilities (the “Credit Facilities”) are governed by our Second Amended and Restated Credit Agreement, entered into on December 28, 2006, with Lehman Brothers Inc. as Arranger and the other lenders named therein. The Credit Facilities consist of a revolving credit facility in the amount of
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$60.0 million, up to $15.0 million of which is available to our Canadian operations, and a term loan facility in the amount of $245.3 million. The revolver commitments terminate on April 30, 2009 and the term loans mature in specified quarterly installments through March 31, 2011. 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 December 31, 2006, there were no amounts outstanding on the revolving credit facility, while $22.1 million of capacity was used to support outstanding letters of credit. As of February 28, 2007, there was $10.0 million outstanding on the revolving credit facility, while $23.4 million of capacity was used to support outstanding letters of credit.
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. The following table sets forth our financial covenant levels for each of the next four quarters:
Maximum | Minimum | |||||||||||
Maximum | Consolidated | Consolidated | ||||||||||
Consolidated | Senior Secured | Interest Coverage | ||||||||||
Fiscal Quarter | Leverage Ratio | Leverage Ratio | Ratio | |||||||||
FQ1 2007 | 4.75:1.00 | 3.00:1.00 | 2.25:1.00 | |||||||||
FQ2 2007 | 4.50:1.00 | 3.00:1.00 | 2.25:1.00 | |||||||||
FQ3 2007 | 4.25:1.00 | 3.00:1.00 | 2.25:1.00 | |||||||||
FQ4 2007 | 4.00:1.00 | 2.50:1.00 | 2.50:1.00 |
As of December 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 (“Senior Subordinated Notes”) due 2014 for gross proceeds of $160.0 million. The Senior Subordinated Notes mature on April 15, 2014. Interest on the Senior Subordinated Notes is payable semi annually on October 15 and April 15. The Senior 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 Senior 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 Senior 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 indebtedness under our Credit Facilities.
The Senior 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 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 Senior 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
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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.
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 declared effective within specified time frames. Prior to the third quarter of 2005, as we had not complied with these requirements of the Registration Rights Agreement, we were required to pay liquidated damages to the holders of the notes. These liquidated damages were expensed as incurred and were payable, in cash, at the same time as interest payments due under the Subordinated 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 Placements
On December 15, 2006, we issued 7,000,001 shares of our common stock to Westbury and Prides for a purchase price of $66.5 million. We also issued 2,894,737 shares of our common stock to Kelso in exchange for shares of our previously outstanding Preferred Stock in an amount equal to $27.5 million, all of which were owned by Kelso.
On March 4, 2005, we exercised our put rights under our standby purchase agreement with Michael DeGroote, thereby requiring Mr. DeGroote to purchase 2,640,845 (pre-reverse split) shares of our common stock and 264,085 (pre-reverse split) common stock purchase warrants for $7.5 million on or before March 28, 2005. This equity infusion was required as a condition to our amended Credit Facility.
On April 30, 2004, we raised approximately $50.7 million, after deducting expenses of approximately $2.9 million, from the sale of 13,400,000 (pre-reverse split) common shares and 1,340,000 (pre-reverse split) common stock purchase warrants in private placement transactions to certain investors. Sanders Morris Harris Inc. acted as the placement agent for the issuance and was paid a placement agent fee of approximately $2.7 million. Don A. Sanders, a director of ours at the time of such issuance, is a principal of Sanders Morris Harris Inc.
Cumulative Mandatory Redeemable Preferred Stock
In May 2003, we issued 55,000 shares of Preferred Stock to 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 (pre-reverse split) warrants to purchase shares of our common stock for $3.00 (pre-reverse split) per share. The warrants had an allocated value of $14.8 million and are classified as a component of equity. 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 were non-voting and entitled the holders to cash dividends of 17.75% per annum compounding and accruing quarterly in arrears.
In December 2006, we exchangedand/or redeemed the outstanding shares of Preferred Stock through the proceeds of a private placement of our common shares. The liquidation preference on the date of redemption approximated $103.1 million. A portion of the redemption was funded by an exchange and redemption agreement with Kelso pursuant to which we agreed, through a private placement, to issue 2,894,737 shares of common stock to Kelso, at a price of $9.50 per share, in exchange for shares of our Preferred Stock in an amount equal to $27.5 million. We recognized a non-cash charge of approximately $1.2 million for the exchange of common stock for the Preferred Stock, representing the difference between the issue price of the common stock to Kelso and the fair market value of our common shares on the date of redemption, which is included in cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs on the Statements of Operations and Comprehensive Loss.
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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 (pre-reverse split) shares of our common stock; and (ii) the conversion of the remaining 9,229,676 common shares of Waste Services (CA) held bynon-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 will (i) receive the same dividends as holders of shares of our common stock and (ii) 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-third of one vote for each exchangeable share).
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 one-third of one share of our common stock, plus all declared and unpaid dividends on the exchangeable share and payment for any fractional shares. Unless certain events occur, such redemption date will not be earlier than December 31, 2016. Holders of exchangeable shares also have the right at any anytime at their option, to exchange their exchangeable shares for shares of our common stock on the basis of one-third of a share of our common stock for each one exchangeable share.
Surety Bonds and Letters of Credit
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 December 31, 2006, we had provided customers, various regulatory authorities and our insurer with such bonds and letters of credit amounting to approximately $74.6 million to collateralize our obligations, of which $20.7 million relates to estimated closure and post closure obligations at our landfills and transfer stations. We expect future increases in these levels of financial assurance relative to our closure and post closure obligations as we utilize capacity at our landfills.
Cash Flows
The following discussion relates to the major components of the changes in cash flows for the years ended December 31, 2006, 2005 and 2004.
Cash Flows from Operating Activities
Cash provided by operating activities of our continuing operations was $35.5 million and $21.8 million for the years ended December 31, 2006 and 2005, respectively. The increase in cash provided by operating activities is primarily due to increased cash generated from our operations, which primarily relates to improved operating margins in our domestic segments, offset by investments in working capital.
Cash provided by operating activities of our continuing operations was $21.8 million and $26.7 million for the years ended December 31, 2005 and 2004, respectively. Improvements in operations were offset by decreased cash provided by working capital.
Cash flows from discontinued operations — Cash flows from our discontinued operations are disclosed separately on the Consolidated Statements of Cash Flows included elsewhere in this document. Following the
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conclusion of the sale of our Arizona operations we will cease to be impacted by these cashflows, and we do not anticipate any subsequent adverse affect on our future liquidity or financial covenants.
Cash Flows used in Investing Activities
Cash used in investing activities of our continuing operations was $147.3 million and $31.2 million for the years ended December 31, 2006 and 2005, respectively. The increase in cash used in investing activities is primarily due to increased capital expenditures and business acquisitions. Company-wide capital expenditures were $49.5 million and $33.6 million for the years ended December 31, 2006 and 2005, respectively. The increase in capital expenditures was primarily driven by landfill development projects. We expect our capital expenditures, excluding the potential impact from additional acquisitions, to range from $55.0 million to $60.0 million for all of 2007. Cash used in business acquisitions of $103.5 million for 2006 primarily relates to the acquisitions of Taft Recycling, Liberty Waste, Sun Country Materials, the SLD Landfill and Pro Disposal.
Cash used in investing activities of our continuing operations was $31.2 million and $181.1 million for the years ended December 31, 2005 and 2004, respectively. The decrease in cash used in investing activities is primarily due to the various business acquisitions we completed during 2004, which used $155.9 million of cash, coupled with lower capital expenditures as compared to 2004. Company-wide capital expenditures were $33.6 million and $46.2 million for the years ended December 31, 2005 and 2004, respectively. Cash used in deposits for business acquisitions primarily relates to ongoing negotiations with Lucien Rémillard, one of our directors, concerning the potential acquisition of the solid waste collection and disposal business assets owned by a company 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 accordingly we recognized an expense related to these previously deferred acquisition costs of approximately $5.6 million during the first quarter of 2006.
Cash Flows from Financing Activities
Cash provided by financing activities of our continuing operations was $109.8 million and $14.9 million for the years ended December 31, 2006 and 2005, respectively. For the year ended December 31, 2006, cash flows from financing activities relate to additional proceeds of $123.0 million from our term loan facility and gross proceeds of $66.5 million from a private placement of shares of our common stock at $9.50 per share, offset by the retirement of our Preferred Stock of $75.6 million.
In March 2005, pursuant to a bank amendment entered into in October 2004, we received an equity investment of $7.5 million ($6.8 million net). As consideration we issued 2,640,845 (pre-reverse split) shares of our common stock and 264,085 (pre-reverse split) warrants to purchase our common stock at $2.84 (pre-reverse split) per share.
Cash provided by financing activities was $14.9 million and $160.7 million for the years ended December 31, 2005 and 2004, respectively. The decrease in cash provided by financing activities is due to our debt and equity private placements of $336.6 million in 2004 not recurring to the same extent in 2005. In 2005, we issued $25.0 million under our credit facilities and equity private placements of $7.5 million.
New Accounting Pronouncements
In December 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Staff PositionEITF 00-19-2, “Accounting for Registration Payment Arrangements” (“FSP EITF00-19-2”). FSP EITF00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies.” FSP EITF00-19-2 further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable GAAP without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. FSP EITF00-19-2 is
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effective for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to December 21, 2006. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of FSP EITF00-19-2, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. Early adoption for interim or annual periods for which financial statements or interim reports have not been issued is permitted. We adopted the provisions of FSP EITF00-19-2 during the fourth quarter of 2006, however, we did not have any cumulative effect adjustments relative to this adoption.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS 157 to have a material effect on our financial position or results of operations.
In September 2006 the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 “Considering the effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance for quantifying the effect on current year financial statement of uncorrected prior year misstatements. SAB 108 is effective for any report for an interim period of the first fiscal period ending after November 15, 2006. The adoption of SAB 108 did not have a material effect on our financial position or results of operations.
In July 2006, the FASB issued SFAS Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretations of SFAS Statement No. 109” (FIN 48) applies to all “tax positions” accounted for under SFAS 109. FIN 48 refers to “tax positions” as positions taken in a previously filed tax return or positions expected to be taken in a future tax return which are reflected in measuring current or deferred income tax assets and liabilities reported in the financial statements. FIN 48 further clarifies a tax position to include, but not limited to, the following:
• | an allocation or a shift of income between taxing jurisdictions, | |
• | the characterization of income or a decision to exclude reporting taxable income in a tax return, or | |
• | a decision to classify a transaction, entity, or other position in a tax return as tax exempt. |
FIN 48 clarifies that a tax benefit may be reflected in the financial statements only if it is “more likely than not” that a company will be able to sustain the tax return position, based on its technical merits. If a tax benefit meets this criterion, it should be measured and recognized based on the largest amount of benefit that is cumulatively greater than 50% likely to be realized. This is a change from occurring practice, whereby companies may recognize a tax benefit only if it is probable a tax position will be sustained.
FIN 48 also requires that we make qualitative and quantitative disclosures, including a discussion of reasonably possible changes that might occur in unrecognized tax benefits over the next 12 months; a description of open tax years by major jurisdictions; and a roll-forward of all unrecognized tax benefits, presented as a reconciliation of the beginning and ending balances of the unrecognized tax benefits on an aggregated basis.
This statement became effective for us on January 1, 2007 and , based on our analysis, we do not expect FIN 48 to have a material effect on our consolidated results of operations, cash flows or financial position.
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 residents in some of our service areas, resulting in more residential and commercial collection. Consequently, we expect
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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 on our Canadian operations.
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. Details of these agreements are further described in the notes to our Consolidated Financial Statements. The companies within the RCI group are controlled by a director of oursand/or individuals related to that director.
Tabular Disclosure of Contractual Obligations
We have various commitments primarily related to funding of short-term debt, closure and post-closure obligations and capital and operating lease commitments. You should also read our discussion regarding “Liquidity and Capital Resources” earlier in this Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. The following table provides details regarding our contractual obligations and other commercial commitments subsequent to December 31, 2006 (in thousands):
Beyond 5 | ||||||||||||||||||||||||||||
2007 | 2008 | 2009 | 2010 | 2011 | Years | Total | ||||||||||||||||||||||
Contractual cash obligations: | ||||||||||||||||||||||||||||
Senior secured credit facilities(1) | $ | 2,453 | $ | 2,453 | $ | 2,453 | $ | 178,580 | $ | 59,321 | $ | — | $ | 245,260 | ||||||||||||||
Senior subordinated notes payable(1) | — | — | — | — | — | 160,000 | 160,000 | |||||||||||||||||||||
Other secured notes payable(1) | 1,332 | 117 | 123 | 128 | 26 | 315 | 2,041 | |||||||||||||||||||||
Capital lease obligations | 93 | 71 | 132 | — | — | — | 296 | |||||||||||||||||||||
Other subordinated notes payable(1) | 190 | 202 | 216 | 232 | 248 | 1,699 | 2,787 | |||||||||||||||||||||
Operating lease commitments, continuing operations | 4,203 | 3,686 | 2,613 | 2,204 | 2,141 | 8,189 | 23,036 | |||||||||||||||||||||
Operating lease commitments, discontinued operations | 1,142 | 1,002 | 770 | 780 | 802 | 338 | 4,834 | |||||||||||||||||||||
Construction commitments | 10,509 | — | — | — | — | — | 10,509 | |||||||||||||||||||||
Closure and post-closure obligations, continuing operations(2) | 6,258 | 387 | 4,961 | 3,119 | 6,657 | 175,009 | 196,391 | |||||||||||||||||||||
Closure and post-closure obligations, discontinued operations(2) | — | — | — | — | — | 54,083 | 54,083 | |||||||||||||||||||||
$ | 26,180 | $ | 7,918 | $ | 11,268 | $ | 185,043 | $ | 69,195 | $ | 399,633 | $ | 699,237 | |||||||||||||||
(1) | Refer to the Notes to our Consolidated Financial Statements included elsewhere in this annual report for information relative to interest repayment provisions. |
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(2) | Future payments on closure and post-closure obligations are not discounted and contemplate full utilization of current and probable expansion airspace. |
Other Contractual Arrangements
In January of 2007, we entered into certain purchase agreements to acquire a roll-off collection and transfer operation, a transfer station development project and a landfill development project for an aggregate purchase price of $51.2 million in cash. Of the total $51.2 million purchase price, $10.0 million is solely contingent upon the receipt of certain operating permits and $19.5 million is due and payable at the earlier of the receipt of all operating permits for the landfill site or the expiration of eighteen months from the date of the agreement. The existing transfer station is permitted to accept construction and demolition waste volume. We expect to close on these acquisitions in the second quarter of 2007.
As a condition of the purchase of the Cactus Landfill in Arizona, the sellers are entitled to additional purchase consideration upon the landfill achieving certain average tons per day thresholds in any quarter. Should the landfill achieve a maximum 5,000 tons per day, the total contingent payments would not exceed $18.0 million. During 2005, we paid $3.0 million relative to our obligation under this agreement. No other amounts have been paid under this agreement in 2006 or 2004.
From time to time and in the ordinary course of business, we may enter into certain acquisitions of disposal facilities 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.
In the normal course of our business, we have other commitments and contingencies relating to environmental and legal matters. For a further discussion of commitments and contingencies, see our Consolidated Financial Statements contained elsewhere in this annual report. In addition certain of our executives are retained under employment agreements. These employment agreements vary in term and related benefits. Refer to Item 11 — “Executive Compensation” contained elsewhere in this annual report for a more detailed discussion of our employment agreements.
Registration Rights Agreements
In November 2006, we entered into a subscription agreement with Westbury and Prides pursuant to which we agreed through a private placement to issue an aggregate of 7,000,001 shares of our common stock to Westbury and Prides for a purchase price of $66.5 million. We also entered into an exchange and redemption agreement with Kelso pursuant to which we have agreed through a private placement to issue 2,894,737 shares of our common stock to Kelso in exchange for shares of our Preferred Stock in an amount equal to $27.5 million. In connection with this private placement, we entered into a registration rights agreement with these purchasers whereby within 15 days of the closing date of the private placement (December 15, 2006) we have agreed to have an effective registration statement filed with the SEC to register the common shares for resale under the Securities Act. After the filing of the registration statement, we have 90 days to have the registration agreement declared effective by the SEC. Should we be late or are unable to keep the registration statement effective, we may be subject to penalties of 1.0% of the proceeds per 30 day period, not to exceed 12.0% in the aggregate
During 2006, we issued 6,114,866 shares of our common stock in connection with our acquisitions of Liberty Waste and Sun Country Materials, which are subject to a registration rights agreement that provides for the shares to be registered six months after request for registration. The request for registration was received on June 30, 2006. Should a registration statement not be declared effective in accordance with the registration rights agreement, partial damages shall be paid to the holders in an amount equal to 8.0% per annum of the fair value, as defined, of the shares issued. Accordingly, as of December 31, 2006 we have accrued the necessary penalties.
In March 2005, pursuant to a bank amendment entered into in October 2004, we received an equity investment of $7.5 million ($6.8 million net). As consideration we issued 2,640,845 (pre-reverse split) shares of our common stock and 264,085 (pre-reverse split) warrants to purchase our common stock at $2.84 (pre-reverse split) per share. We also entered in to a registration rights agreement that required us to use our best commercial efforts to obtain and
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maintain an effective registration statement. The registration rights agreement does not provide for penalties or monetary consideration for our failure to obtain, or maintain, an effective registration statement.
On December 21, 2006 we filed aForm S-3 seeking to register all of these shares and on February 5, 2007 the registration statement was declared effective.
Item 7A. | 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, our reported results of 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 have been 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 have been 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 years ended December 31, 2006 and 2005 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 less than $0.6 million.
As of December 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 Eurodollar loans as defined. A 25 basis point increase in base interest rates relative to our revolving and term facilities would increase annual cash interest expense by approximately $0.6 million.
Item 8. | Financial Statements and Supplementary Data |
All financial statements and supplementary data that are required by this Item are listed in Part IV, Item 15 of this annual report and are presented beginning onPage F-1.
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Not Applicable
Item 9A. | 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 and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (pursuant to Exchange ActRule 13a-15). Based upon this evaluation, the Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are effective. The conclusions of the Chief Executive Officer and Principal Financial Officer from this evaluation were communicated to the Audit Committee.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2006, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Management’s Report on Internal Control Over Financial Reporting
The report is included in Item 8 of this annual report.
Attestation Report of Independent Registered Public Accounting Firm
The report is included in Item 8 of this annual report.
Item 9B. | Other Information |
None.
PART III
Item 10. | Directors, Executive Officers and Corporate Governance |
Information relating to the Registrant’s executive officers is included under the heading “Executive Officers” in Part I of this Annual Report onForm 10-K. Information relating to directors of the Registrant, including its audit committee and audit committee financial experts, and its executive officers will be in the Registrant’s definitive Proxy which will be filed within 120 days of the end of our fiscal year ended December 31, 2006 (“the 2007 Proxy Statement”) and is incorporated herein by reference.
Item 11. | Executive Compensation |
Information relating to the Registrant’s executive officer and director compensation will be in the 2007 Proxy Statement and is incorporated herein by reference.
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Information relating to security ownership of certain beneficial owners of the Registrant’s common stock and information relating to the security ownership of the Registrant’s management will be in the 2007 Proxy Statement and is incorporated herein by reference.
The following table summarizes our equity compensation plans as of December 31, 2006:
(c) | ||||||||||||
Number of Securities | ||||||||||||
Remaining Available for | ||||||||||||
Future Issuance Under Equity | ||||||||||||
(a) | (b) | Compensation Plans | ||||||||||
Number of Securities to be | Weighted-Average | (Excluding Securities to be | ||||||||||
Issued upon Exercise of | Exercise Price of | Issued upon Exercise of | ||||||||||
Outstanding Options, | Outstanding Options, | Outstanding Options, | ||||||||||
Plan Category | Warrants and Rights | Warrants and Rights | Warrants or Rights) | |||||||||
Equity compensation plans approved by security holders | 3,115,500 | $ | 14.98 | 5,619,195 | (1) | |||||||
Equity compensation plans not approved by security holders | 333,333 | (2) | $ | 8.10 | — | |||||||
Total | 3,448,833 | $ | 14.32 | 5,619,195 | (1) | |||||||
(1) | Under our 1999 Stock Option Plan, we may grant options to a maximum of 19% of our issued common shares and common share equivalents outstanding from time to time. | |
(2) | Warrants to purchase 333,333 shares of our common stock, at an exercise price of $8.10 per share, were granted to David Sutherland-Yoest in September 2001 as a term of the commencement of his employment. All of the warrants have vested and will expire in September 2011. The warrants are exercisable until their expiration so long as Mr. Sutherland-Yoest is an employee. In the event of a change of control, or if Mr. Sutherland-Yoest’s employment is terminated by reason of death, disability or by us without cause, the warrants continue to be |
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exercisable as if Mr. Sutherland-Yoest had remained an employee. If Mr. Sutherland-Yoest’s employment is terminated by his voluntary resignation or by us for cause, all vested warrants may be exercised within 180 days of the date of such termination. |
Item 13. | Certain Relationships, Related Transactions and Director Independence |
Information regarding certain relationships and related transactions will be in the 2007 Proxy Statement and is incorporated herein by reference.
Item 14. | Principal Accountant Fees and Services |
Information regarding principle accountant fees and services will be in the 2007 Proxy Statement and is incorporated herein by reference.
PART IV
Item 15. | Exhibits and Financial Statement Schedules |
Consolidated Financial Statements
(1) Consolidated Financial Statements
Management’s Report on Internal Control over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule II — Valuation and Qualifying Accounts schedule has been omitted as the required information is included in the Notes to Consolidated Financial Statements included herewith.
All other schedules have been omitted because they are not applicable.
(3) Exhibits
Documents filed as exhibits to this report or incorporated by reference:
2 | .1 | Plan of Arrangement under Section 182 of the Business Corporations Act (Ontario). (Incorporated by reference to Exhibit 2.1 toForm 10-K(No. 000-25955) filed March 16,2004). | ||
3 | .1 | Amended and Restated Certificate of Incorporation of Waste Services, Inc. (Incorporated by reference to Exhibit 3.1 toForm 8-K(No. 000-25955) filed August 2, 2004). | ||
3 | .2 | Certificate of Amendment of Amended and Restated Credit Certificate of Incorporation of Waste Services, Inc. effective June 30, 2006 (Incorporated by reference to Exhibit 3.1 toForm 8-K(No. 000-25955) filed July 5, 2006). | ||
3 | .3 | Provisions for Exchangeable Shares of Waste Services (CA) Inc. (Incorporated by reference to Exhibit 3.2 toForm 10-K(No. 000-25955) filed March 16, 2004). | ||
3 | .4 | Amendment to Provisions for Exchangeable Shares of Waste Services (CA) Inc. (Incorporated by reference to Exhibit 3.3 toForm 8-K(No. 000-25955) filed July 5, 2006). | ||
3 | .5 | Certificate of Designation of Special Voting Preferred Stock of Waste Services, Inc. (Incorporated by reference to Exhibit 3.2 toForm 8-K(No. 000-25955) filed August 2,2004). | ||
3 | .6 | Amended Certificate of Designations of Special Voting Preferred Stock of Waste Services, Inc. (Incorporated by reference to Exhibit 3.2 toForm 8-K(No. 000-25955) filed July 5, 2006). | ||
3 | .7 | By-law No. 1 of Waste Services, Inc. (Incorporated by reference to Exhibit 3.3 toForm 8-K(No. 000-25955) filed August 2, 2004). |
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3 | .8 | Certificate of Designations of Waste Services, Inc.(Incorporated by reference to Exhibit 1.3 toForm 20-F(No. 000-25955) filed July 15, 2003). | ||
3 | .9 | Amended Certificate of Designations of Waste Services, Inc.(Incorporated by reference to Exhibit 4.1 toForm 8-K(No. 000-25955) filed May 10, 2004). | ||
4 | .1 | Preferred Subscription Agreement dated as of May 6, 2003,among Waste Services, Inc., Capital Environmental Resource Inc., Kelso Investment Associates VI, L.P. and KEP VI LLC (Incorporated by reference to Exhibit 4.4 toForm 20-F(No. 000-25955) filed July 15, 2003). | ||
4 | .2 | Amending Agreement No. 1 to Preferred Subscription Agreement dated as of February 13, 2003, among Waste Services, Inc., Capital Environmental Resource Inc., Kelso Investment Associates VI, L.P. and KEP VI, LLC (Incorporated by reference to Exhibit 4.1 toForm 6-K(No. 000-25955) filed February 26, 2004). | ||
4 | .3 | Amending Agreement No. 2 to Preferred Subscription Agreement dated June 8, 2004 (Incorporated by reference to Exhibit 4.1 toForm 8-K(No. 000-25955) filed June 9, 2004). | ||
4 | .4 | Agreement effective as of December 28, 2005 between Waste Services, Inc. and Kelso Investment Associates VI, L.P. and KEP VI, LLC. (Incorporated by reference to Exhibit 4.4 toForm 10-K(No. 000-25955) filed March 14, 2006). | ||
4 | .5 | Agreement effective as of March 30, 2006 among Waste Service, Inc. and Kelso Investment Associates VI, L.P. and KEP VI, LLC (Incorporated by reference to Exhibit 20.3 toForm 8-K((No. 000-25955) filed on April 5, 2006). | ||
4 | .6 | Form of Warrants to Purchase Common Stock by and between the Company and certain investors (Incorporated by reference to Exhibit 4.2 toForm 20-F(No. 000-25955) filed July 15,2003). | ||
4 | .7 | Warrant Agreement dated as of May 6, 2003, between Waste Service Inc., and certain holders of the Preferred Stock (Incorporated by reference to Exhibit 4.6 toForm 20-F(No. 000-25955) filed July 15, 2003). | ||
4 | .8 | Warrant, dated July 27, 2001 issued by us to David Sutherland-Yoest (Incorporated by reference to Exhibit 4.8 toForm 20-F(No. 000-25955) filed July 12, 2002). | ||
4 | .9 | Form of Warrant to Purchase Common Shares by and between Capital Environmental Resource Inc. and certain investors.(Incorporated by reference to Exhibit 4.4 toForm 8-K(No. 000-25955) filed May 10, 2004). | ||
4 | .10 | Indenture regarding 91/2% Senior Subordinated Notes among Waste Services, Inc., the Guarantors and Wells Fargo Bank, National Association, as trustee, dated as of April 30, 2004 (Incorporated by reference to Exhibit 4.3 toForm 8-K(No. 000-25955) filed May 10, 2004). | ||
4 | .11 | Supplemental Indenture dated as of August 8, 2005 to the Notes Indenture among Sanford Recycling and Transfer, Inc., Waste Services, Inc., the other guarantors and Wells Fargo Bank, National Association, as Trustee (Incorporated by reference to Exhibit 4.2 toForm S-4(No. 333-127444) filed August 11, 2005). | ||
4 | .12 | Supplemental Indenture dated as of November 29, 2005 to the Notes Indenture among WSI Waste Services of Texas, LP., Waste Services, Inc., the other guarantors and Wells Fargo Bank, National Association, as Trustee. (Incorporated by reference to Exhibit 4.11 toForm 10-K(No. 000-25955) filed March 14, 2006). | ||
4 | .13 | Supplemental Indenture dated as of May 12, 2006 to the Notes Indenture among Liberty Waste, LLC., Waste Services, Inc., the other guarantors and Wells Fargo Bank, National Association, as Trustee. (Incorporated by reference to Exhibit 4.16 toForm 10-Q(No. 000-25955) filed August 1, 2006). | ||
4 | .14 | Supplemental Indenture dated as of June 30, 2006 to the Notes Indenture among Sun Country Materials, LLC., Waste Services, Inc., the other guarantors and Wells Fargo Bank, National Association, as Trustee. (Incorporated by reference to Exhibit 4.18 toForm 10-Q(No. 000-25955) filed August 1, 2006). | ||
4 | .15 | Supplemental Indenture dated as of June 30, 2006, 2006 to the Notes Indenture among Taft Recycling, Inc., Waste Services, Inc., the other guarantors and Wells Fargo Bank, National Association, as Trustee. (Incorporated by reference to Exhibit 4.17 toForm 10-Q(No. 000-25955) filed August 1, 2006). | ||
4 | .16 | Supplemental Indenture dated as of January 5, 2007 to the Notes Indenture among Pro Disposal, Inc., SLD Landfill, Inc., Waste Services, Inc., the other guarantors and Wells Fargo Bank, National Association, as Trustee. | ||
4 | .17 | Support Agreement among Waste Services, Inc. Capital Environmental Resource Inc. (Incorporated by reference to Exhibit 4.9 toForm 10-K(No. 000-25955) filed March 16,2004). |
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4 | .18 | Support Agreement dated July 31, 2004, among Waste Services, Inc. and Michael DeGroote (Incorporated by reference to Exhibit 10 toForm 8-K(No. 000-25955) filed March 16,2004). | ||
4 | .19 | Standby Purchase Agreement dated as of September 30, 2004 between Waste Services, Inc. and Michael DeGroote (Incorporated by reference to Exhibit 10.2 toForm 8-K(No. 000-25955) filed on October 5, 2004). | ||
10 | .1 | Capital Environmental Resource Inc. 1999 Stock Option Plan (Incorporated by reference to Exhibit 4 to Schedule 13D(No. 005-57445) dated February 5, 2002 and filed by certain holders of the Company’s Common Shares with the Commission on February 15,2002). | ||
10 | .2 | Amended and Restated Stock Purchase Agreement dated as of March 11, 2004, by and among Waste Services, Inc., certain affiliates of Waste Services, Inc., Capital Environmental Resource Inc., Florida Recycling Services, Inc. and certain affiliates thereof (Incorporated by reference to Exhibit 10.5 toForm 8-K(No. 000-25955) filed May 10, 2004). | ||
10 | .3 | First Amendment to Amended and Restated Stock Purchase Agreement and Settlement Agreement dated September 24, 2004 (Incorporated by Reference to Exhibit 10.2 toForm 8-K(No. 000-25955) filed September 24, 2004). | ||
10 | .4 | Form of Subscription Agreement dated as of April 30, 2004,between Capital Environmental Resource Inc. and certain investors. (Incorporated by reference to Exhibit 10.1 toForm 8-K(No. 000-25955) filed May 10, 2004). | ||
10 | .5 | Form of Registration Rights Agreement dated as of April 30,2004, among us and certain investors. (Incorporated by Reference to Exhibit 10.2 toForm 8-K(No. 000-25955) filed May 10, 2004) | ||
10 | .6 | 91/2% Senior Subordinated Notes Registration Rights Agreement dated April 20, 2004. (Incorporated by reference to Exhibit 10.3 toForm 8-K(No. 000-25955) filed May 10,2004). | ||
10 | .7 | Second Amended and Restated Credit Agreement dated as of December 28,2006 among Waste Services, Inc., Waste Services (CA) Inc., the several lenders from time to time parties thereto, Lehman Brothers Inc., as Arranger, CIBC World Markets Corp., as Syndication Agent, Bank of America, N.A., as Documentation Agent, Canadian Imperial Bank of Commerce, as Canadian Agent, and Lehman Commercial Paper Inc., as Administrative Agent. (Incorporated by reference to Exhibit 20.1 to Form 8-K (No. 000-25955) filed January 3, 2007). | ||
10 | .8 | Employment Agreement dated as of October 26, 2005 between Waste Services, Inc. and David Sutherland-Yoest (Incorporated by reference to Exhibit 10.1 toForm 10-Q(No. 000-25955) filed October 31, 2005). | ||
10 | .9 | Employment Agreement dated as of July 1, 2004 between Waste Services, Inc. and Charles A. Wilcox (Incorporated by reference to Exhibit 10.13 toForm 10-K(No. 000-25955) filed March 16, 2004). | ||
10 | .10 | Employment Agreement dated January 5, 2004, between Capital Environmental Resource Inc., Waste Services, Inc. and Ivan R. Cairns. (Incorporated by reference to Exhibit 10.1 toForm 10-Q(No. 000-25955), filed May 17, 2004). | ||
10 | .11 | Employment Agreement dated as of February 23, 2004 between Capital Environmental Resource Inc., Waste Services, Inc. and Mark A. Pytosh (Incorporated by reference to Exhibit 10.2 toForm 10-Q(No. 000-25955) filed on May 17, 2004). | ||
10 | .12 | Employment Agreement dated October 1, 2003, between Capital Environmental Resource Inc. and Brian A. Goebel (Incorporated by reference to Exhibit 4.27 toForm 20-F for the year ended December 31, 2003(No. 000-25955), filed March 31, 2004). | ||
10 | .13 | Subscription Agreement dated as of November 8, 2006 by and among Waste Services, Inc. , Westbury (Bermuda) Limited and Prides Capital Fund, LP. (Incorporated by reference to Exhibit 20.1 toForm 8-K(No. 000-25955) filed on November 9, 2006). | ||
10 | .14 | Exchange and Redemption Agreement dated as of November 8, 2006 by and among Waste Services, Inc. and Kelso Investment Associates VI, L.P. and KEP VI, LLC. (Incorporated by reference to Exhibit No. 20.2 toForm 8-K(No. 000-25955) filed on November 9, 2006). | ||
10 | .15 | Form of Registration Rights Agreement dated as of November 8, 2006 by and among Waste Services, Inc., Westbury (Bermuda) Limited and Prides Capital Fund, LP. (Incorporated by reference to Exhibit No. 20.3 toForm 8-K(No. 000-25955) filed on November 9, 2006). | ||
10 | .16 | Form of Registration Rights Agreement dated as of November 8, 2006 by and among Waste Services, Inc. and Kelso Investment Associates VI, L.P. and KEP VI, LLC. (Incorporated by reference to Exhibit No. 20.3 toForm 8-K(No. 000-25955) filed on November 9, 2006). |
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14 | .1 | Code of Ethics (Incorporated by reference to Exhibit 14.1 toForm 10-K for the year ended December 31, 2003(No. 000-25955), filed June 9, 2004). | ||
16 | .1 | Letter from BDO Dunwoody LLP to the Securities and Exchange Commission dated July 27, 2004 (Incorporated by reference to Exhibit 16.1 toForm 8-K(No. 000-25955), filed July 27,2004). | ||
18 | .1 | Letter regarding change in accounting principle executed by BDO Dunwoody LLP on May 12, 2004 (Incorporated by reference to Exhibit 18.1 toForm 10-Q for the quarterly period ended March 31, 2004(No. 000-25955) filed May 17, 2004). | ||
21 | .1 | List of Subsidiaries. | ||
23 | .1 | Consent of BDO Seidman, LLP. | ||
31 | .1 | Certification pursuant toRule 15d-14(a) under the Securities Exchange Act of 1934 as amended of David Sutherland-Yoest, Chief Executive Officer. | ||
31 | .2 | Certification pursuant toRule 15d-14(a) under the Securities Exchange Act of 1934 as amended of Brian A. Goebel, Principal Financial Officer. | ||
32 | .1 | Certification of Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the U.S. Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
WASTE SERVICES, INC.
/s/ David Sutherland-Yoest |
David Sutherland-Yoest
Chairman of the Board,
Chief Executive Officer and Director
March 5, 2007
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||||
/s/ DAVID SUTHERLAND-YOEST David Sutherland-Yoest | Chairman of the Board, Chief Executive Officer Director | March 5, 2007 | ||||
/s/ BRIAN A. GOEBEL Brian A. Goebel | Vice President, Corporate Controller and Acting Chief Financial Officer, (Principal Accounting Officer and Principal Financial Officer) | March 5, 2007 | ||||
/s/ GARY W. DEGROOTE Gary W. DeGroote | Director | March 5, 2007 | ||||
/s/ MICHAEL B. LAZAR Michael B. Lazar | Director | March 5, 2007 | ||||
/s/ GEORGE E. MATELICH George E. Matelich | Director | March 5, 2007 | ||||
/s/ CHARLES E. MCCARTHY Charles E. McCarthy | Director | March 5, 2007 | ||||
/s/ LUCIEN RÉMILLARD Lucien Rémillard | Director | March 5, 2007 | ||||
/s/ JACK E. SHORT Jack E. Short | Director | March 5, 2007 | ||||
/s/ WALLACE L. TIMMENY Wallace L. Timmeny | Director | March 5, 2007 | ||||
/s/ MICHAEL J. VERROCHI Michael J. Verrochi | Director | March 5, 2007 |
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-2 | ||||
F-3 | ||||
F-5 | ||||
F-6 | ||||
F-7 | ||||
F-8 | ||||
F-9 |
F-1
Table of Contents
MANAGEMENT’S REPORT ON INTERNAL CONTROL
OVER FINANCIAL REPORTING
OVER FINANCIAL REPORTING
Management including the Chief Executive Officer and the Chief Financial Officer, is responsible for establishing and maintaining adequate internal controls over financial reporting, as defined inRules 13a-15(f) and15d-15(f) of the Securities Exchange Act of 1934, as amended. Our internal controls were designed to provide reasonable assurance as to the reliability of our financial reporting and the preparation and presentation of the consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States, as well as to safeguard assets from unauthorized use or disposition.
We conducted an evaluation of the effectiveness of our internal controls over financial reporting as of December 31, 2006 based on the framework inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. This evaluation included review of the documentation of controls, evaluation of the design effectiveness of controls, testing of the operating effectiveness of controls and a conclusion on this evaluation. Through this evaluation, we did not identify any material weaknesses in our internal controls. There are inherent limitations in the effectiveness of any system of internal controls over financial reporting; however, based on our evaluation, we have concluded that our internal controls over financial reporting were effective as of December 31, 2006.
BDO Seidman, LLP, an independent registered public accounting firm, has issued an attestation report on our assessment of internal control over financial reporting, which is included herein.
F-2
Table of Contents
Report of Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting
Internal Control over Financial Reporting
To the Board of Directors and Shareholders of
Waste Services, Inc.
We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 8 of Part II of thisForm 10-K, that Waste Services, Inc. (the “Company”) maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on the COSO criteria. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company as of December 31, 2006 and 2005 and the related consolidated statements of operations and comprehensive loss, shareholders’ equity and cash flows thereon for each of the three years in the period ended December 31, 2006 and our report dated March 5, 2007 expressed an unqualified opinion on those consolidated financial statements.
/s/ BDO Seidman, LLP
Phoenix, Arizona
March 5, 2007
F-3
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Waste Services, Inc.
We have audited the accompanying consolidated balance sheets of Waste Services, Inc. (the “Company”) as of December 31, 2006 and 2005 and the related consolidated statements of operations and comprehensive loss, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Waste Services, Inc. at December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the Consolidated Financial Statements, effective January 1, 2006 the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment.
As discussed in Note 2 to the Consolidated Financial Statements, effective January 1, 2004, the Company changed its method of accounting for closure and post-closure obligations and the associated asset retirement costs.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2006 based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 5, 2007 expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Phoenix, Arizona
March 5, 2007
F-4
Table of Contents
WASTE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share amounts)
As of December 31,
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except share amounts)
As of December 31,
2006 | 2005 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 8,532 | $ | 8,886 | ||||
Accounts receivable (net of allowance for doubtful accounts of $574 and $672 as of December 31, 2006 and 2005, respectively) | 52,461 | 45,381 | ||||||
Prepaid expenses and other current assets | 6,256 | 10,063 | ||||||
Current assets of discontinued operations | 3,870 | 5,252 | ||||||
Total current assets | 71,119 | 69,582 | ||||||
Property and equipment, net | 145,318 | 119,485 | ||||||
Landfill sites, net | 237,338 | 156,498 | ||||||
Goodwill and other intangible assets, net | 350,035 | 307,869 | ||||||
Other assets | 10,667 | 23,816 | ||||||
Non-current assets of discontinued operations | 50,586 | 51,139 | ||||||
Total assets | $ | 865,063 | $ | 728,389 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 24,033 | $ | 25,959 | ||||
Accrued expenses and other current liabilities | 54,476 | 39,065 | ||||||
Short-term financing and current portion of long-term debt | 3,975 | 1,365 | ||||||
Current liabilities of discontinued operations | 3,874 | 1,827 | ||||||
Total current liabilities | 86,358 | 68,216 | ||||||
Long-term debt | 406,113 | 284,850 | ||||||
Accrued closure, post-closure and other obligations | 32,899 | 25,651 | ||||||
Cumulative mandatorily redeemable Preferred Stock (net of discount of $2,347 as of December 31, 2005) | — | 84,971 | ||||||
Non-current liabilities of discontinued operations | 336 | 210 | ||||||
Total liabilities | 525,706 | 463,898 | ||||||
Shareholders’ equity: | ||||||||
Common stock $0.01 par value: 166,666,666 and 500,000,000 (pre-reverse split) shares authorized at December 31, 2006 and December 31, 2005, respectively; 43,868,606 shares issued and outstanding at December 31, 2006; 93,685,889 (pre-reverse split) shares issued and 93,185,889 (pre-reverse split) shares outstanding at December 31, 2005 | 438 | 937 | ||||||
Additional paid-in capital | 506,751 | 383,618 | ||||||
Treasury stock at cost: 500,000 (pre-reverse split) shares | — | (1,235 | ) | |||||
Accumulated other comprehensive income | 35,201 | 35,673 | ||||||
Accumulated deficit | (203,033 | ) | (154,502 | ) | ||||
Total shareholders’ equity | 339,357 | 264,491 | ||||||
Total liabilities and shareholders’ equity | $ | 865,063 | $ | 728,389 | ||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-5
Table of Contents
WASTE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands of U.S. dollars, except per share amounts)
For the Years Ended December 31,
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands of U.S. dollars, except per share amounts)
For the Years Ended December 31,
2006 | 2005 | 2004 | ||||||||||
Revenue | $ | 396,123 | $ | 356,056 | $ | 287,105 | ||||||
Operating and other expenses: | ||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) | 270,454 | 255,675 | 205,512 | |||||||||
Selling, general and administrative expense (exclusive of depreciation, depletion and amortization) | 58,941 | 53,123 | 50,331 | |||||||||
Deferred acquisition costs | 5,612 | — | — | |||||||||
Settlement with sellers of Florida Recycling | — | (4,120 | ) | (8,635 | ) | |||||||
Depreciation, depletion and amortization | 42,813 | 40,661 | 32,157 | |||||||||
Foreign exchange loss (gain) and other | 1,993 | (175 | ) | (400 | ) | |||||||
Income from operations | 16,310 | 10,892 | 8,140 | |||||||||
Interest expense | 30,905 | 28,196 | 30,843 | |||||||||
Change in fair value of warrants | — | — | (111 | ) | ||||||||
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs | 19,653 | 20,984 | 17,582 | |||||||||
Loss from continuing operations before income taxes | (34,248 | ) | (38,288 | ) | (40,174 | ) | ||||||
Income tax provision | 12,820 | 12,136 | 7,587 | |||||||||
Net loss from continuing operations | (47,068 | ) | (50,424 | ) | (47,761 | ) | ||||||
Net income (loss) from discontinued operations | (1,463 | ) | 134 | (618 | ) | |||||||
Loss before cumulative effect of change in accounting principle | (48,531 | ) | (50,290 | ) | (48,379 | ) | ||||||
Cumulative effect of change in accounting principle, net of provision for income taxes of $132 for the year ended December 31, 2004 | — | — | 225 | |||||||||
Net loss | $ | (48,531 | ) | $ | (50,290 | ) | $ | (48,154 | ) | |||
Basic and diluted loss per share: | ||||||||||||
Loss per share — continuing operations | (1.33 | ) | (1.53 | ) | (1.62 | ) | ||||||
Loss per share — discontinued operations | (0.04 | ) | — | (0.02 | ) | |||||||
Basic and diluted loss per share before cumulative effect of change in accounting principle | (1.37 | ) | (1.53 | ) | (1.64 | ) | ||||||
Cumulative affect of change in accounting principle | — | — | 0.01 | |||||||||
Loss per share — basic and diluted | $ | (1.37 | ) | $ | (1.53 | ) | $ | (1.63 | ) | |||
Weighted average common shares outstanding — basic and diluted | 35,354 | 32,880 | 29,410 | |||||||||
Consolidated Statements of Comprehensive Loss: | ||||||||||||
Net loss | $ | (48,531 | ) | $ | (50,290 | ) | $ | (48,154 | ) | |||
Foreign currency translation adjustment gain (loss) | (472 | ) | 6,540 | 13,181 | ||||||||
Comprehensive loss | $ | (49,003 | ) | $ | (43,750 | ) | $ | (34,973 | ) | |||
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-6
Table of Contents
WASTE SERVICES, INC.
Accumulated | ||||||||||||||||||||||||||||||||||||
Waste Services, (CA) Inc. | Waste Services, Inc. | Additional | Treasury | Other | Total | |||||||||||||||||||||||||||||||
Common Stock | Common Stock | Paid-in | Stock | Comprehensive | Accumulated | Shareholders’ | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | at Cost | Income | Deficit | Equity | ||||||||||||||||||||||||||||
(In thousands of U.S. dollars and share amounts) | ||||||||||||||||||||||||||||||||||||
Balance, December 31, 2003 | 68,339 | $ | 215,395 | — | $ | — | $ | 25,828 | $ | — | $ | 15,952 | $ | (56,058 | ) | $ | 201,117 | |||||||||||||||||||
Sale of common shares and warrants | 13,400 | 49,126 | — | — | 2,552 | — | — | — | 51,678 | |||||||||||||||||||||||||||
Common shares and warrants issued | 14,837 | 80,856 | 40 | — | 215 | — | — | — | 81,071 | |||||||||||||||||||||||||||
Exercise of options and warrants | 311 | 1,253 | — | — | (212 | ) | — | — | — | 1,041 | ||||||||||||||||||||||||||
Deferred stock-based compensation | — | — | — | — | 122 | — | — | — | 122 | |||||||||||||||||||||||||||
Migration transaction | (96,887 | ) | (346,630 | ) | 87,658 | 877 | 345,753 | — | — | — | — | |||||||||||||||||||||||||
Conversion of exchangeable shares | — | — | 2,660 | 27 | (27 | ) | — | — | — | — | ||||||||||||||||||||||||||
Settlement with sellers of Florida Recycling | — | — | — | — | — | (1,235 | ) | — | — | (1,235 | ) | |||||||||||||||||||||||||
Other paid-in capital | — | — | — | — | (45 | ) | — | — | — | (45 | ) | |||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | — | 13,181 | — | 13,181 | |||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (48,154 | ) | (48,154 | ) | |||||||||||||||||||||||||
Balance, December 31, 2004 | — | — | 90,358 | 904 | 374,186 | (1,235 | ) | 29,133 | (104,212 | ) | 298,776 | |||||||||||||||||||||||||
Common shares and warrants issued | — | — | 2,926 | 29 | 7,881 | — | — | — | 7,910 | |||||||||||||||||||||||||||
Exercise of options and warrants | — | — | 162 | 2 | 519 | — | — | — | 521 | |||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 1,060 | — | — | — | 1,060 | |||||||||||||||||||||||||||
Conversion of exchangeable shares | — | — | 240 | 2 | (2 | ) | — | — | — | — | ||||||||||||||||||||||||||
Other paid-in capital | — | — | — | — | (26 | ) | — | — | — | (26 | ) | |||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | — | 6,540 | — | 6,540 | |||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (50,290 | ) | (50,290 | ) | |||||||||||||||||||||||||
Balance, December 31, 2005 | — | — | 93,686 | 937 | 383,618 | (1,235 | ) | 35,673 | (154,502 | ) | 264,491 | |||||||||||||||||||||||||
Common shares issued | — | — | 8,154 | 81 | 25,265 | 1,235 | — | — | 26,581 | |||||||||||||||||||||||||||
Exercise of warrants | — | — | 28 | — | 86 | — | — | — | 86 | |||||||||||||||||||||||||||
Stock-based compensation | — | — | — | — | 3,089 | — | — | — | 3,089 | |||||||||||||||||||||||||||
Conversion of exchangeable shares | — | — | 8 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Share reimbursement agreement | — | — | — | — | (929 | ) | — | — | — | (929 | ) | |||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | — | (472 | ) | — | (472 | ) | |||||||||||||||||||||||||
Effect of reverse stock split | — | — | (67,916 | ) | (679 | ) | 679 | — | — | — | — | |||||||||||||||||||||||||
Sale of common shares and retirement of cumulative mandatorily redeemable Preferred Stock | — | — | 9,895 | 99 | 94,864 | — | — | — | 94,963 | |||||||||||||||||||||||||||
Exercise of warrants | — | — | 11 | — | 79 | — | — | — | 79 | |||||||||||||||||||||||||||
Conversion of exchangeable shares | — | — | 3 | — | — | — | — | — | — | |||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | (48,531 | ) | (48,531 | ) | |||||||||||||||||||||||||
Balance, December 31, 2006 | — | $ | — | 43,869 | $ | 438 | $ | 506,751 | $ | — | $ | 35,201 | $ | (203,033 | ) | $ | 339,357 | |||||||||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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WASTE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
For the Years Ended December 31,
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
For the Years Ended December 31,
2006 | 2005 | 2004 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net loss | $ | (48,531 | ) | $ | (50,290 | ) | $ | (48,154 | ) | |||
Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||||||
Net loss (income) from discontinued operations | 1,463 | (134 | ) | 618 | ||||||||
Depreciation, depletion and amortization | 42,813 | 40,661 | 32,157 | |||||||||
Non-cash component of settlement with sellers of Florida Recycling | — | (4,120 | ) | (1,235 | ) | |||||||
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs | 19,653 | 20,984 | 17,582 | |||||||||
Amortization of debt issue costs | 1,569 | 1,408 | 10,294 | |||||||||
Deferred income tax provision | 11,004 | 11,581 | 7,218 | |||||||||
Non-cash stock-based compensation expense (benefit) | 3,089 | 1,060 | (90 | ) | ||||||||
Deferred acquisition costs expensed | 5,173 | — | — | |||||||||
Changes in fair value of warrants | — | — | (111 | ) | ||||||||
Cumulative effect of change in accounting principle, net of tax | — | — | (225 | ) | ||||||||
Foreign exchange loss (gain) | 1,511 | 755 | (90 | ) | ||||||||
Other non-cash items | 806 | (412 | ) | 86 | ||||||||
Changes in operating assets and liabilities (excluding the effects of acquisitions): | ||||||||||||
Accounts receivable | (2,500 | ) | (1,385 | ) | (5,237 | ) | ||||||
Prepaid expenses and other current assets | (35 | ) | 4,414 | (1,405 | ) | |||||||
Accounts payable | (6,545 | ) | (1,776 | ) | 3,799 | |||||||
Accrued expenses and other current liabilities | 6,000 | (924 | ) | 11,534 | ||||||||
Net cash provided by continuing operations | 35,470 | 21,822 | 26,741 | |||||||||
Net cash provided by (used in) discontinued operations | 3,466 | 2,831 | (2,061 | ) | ||||||||
Net cash provided by operating activities | 38,936 | 24,653 | 24,680 | |||||||||
Cash flows from investing activities: | ||||||||||||
Cash used in business combinations and significant asset acquisitions, net of cash acquired | (103,532 | ) | (4,465 | ) | (155,916 | ) | ||||||
Capital expenditures | (47,285 | ) | (28,893 | ) | (37,823 | ) | ||||||
Proceeds from asset sales and business divestitures | 5,153 | 3,198 | 14,231 | |||||||||
Deposits for business acquisitions and other | (1,626 | ) | (1,046 | ) | (1,551 | ) | ||||||
Net cash used in continuing operations | (147,290 | ) | (31,206 | ) | (181,059 | ) | ||||||
Net cash used in discontinued operations | (1,717 | ) | (8,305 | ) | (17,149 | ) | ||||||
Net cash used in investing activities | (149,007 | ) | (39,511 | ) | (198,208 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from issuance of debt and draw on revolving credit facility | 157,527 | 25,000 | 283,000 | |||||||||
Principal repayments of debt and capital lease obligations | (37,026 | ) | (16,704 | ) | (187,158 | ) | ||||||
Sale of common shares and warrants | 66,500 | 7,125 | 53,600 | |||||||||
Proceeds from release of restricted cash and release of collateral supporting letters of credit | — | — | 24,341 | |||||||||
Proceeds from the exercise of options and warrants | 165 | 521 | 1,041 | |||||||||
Retirement of cumulative mandatorily redeemable Preferred Stock | (75,557 | ) | — | — | ||||||||
Fees paid for financing transactions | (1,805 | ) | (995 | ) | (14,141 | ) | ||||||
Net cash provided by financing activities — continuing operations | 109,804 | 14,947 | 160,683 | |||||||||
Effect of exchange rate changes on cash and cash equivalents | (87 | ) | 321 | 273 | ||||||||
Increase (decrease) in cash and cash equivalents | (354 | ) | 410 | (12,572 | ) | |||||||
Cash and cash equivalents at the beginning of the year | 8,886 | 8,476 | 21,048 | |||||||||
Cash and cash equivalents at the end of the year | $ | 8,532 | $ | 8,886 | $ | 8,476 | ||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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WASTE SERVICES, INC.
1. | Organization of Business and Basis of Presentation |
The accompanying 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). Due to a pending sale, our Arizona operations are presented as discontinued operations.
We are the successor to Capital Environmental Resource Inc. now Waste Services (CA) Inc. (“Waste Services (CA)”), by a migration transaction completed effective July 31, 2004. The migration transaction occurred by way of a plan of arrangement under the Business Corporations Act (Ontario) and was approved by the Ontario Superior Court of Justice. Pursuant to the plan of arrangement, holders of Waste Services (CA) common shares received shares of our common stock unless they elected to receive exchangeable shares of Waste Services (CA). The terms of the exchangeable shares of Waste Services (CA) are the functional and economic equivalent of our common stock. As a result of the migration, Waste Services (CA) became our indirect subsidiary and Waste Services became the parent company.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) 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.
Certain reclassifications have been made to prior period financial statement amounts to conform to the current presentation. All significant intercompany transactions and accounts have been eliminated. All amounts are in thousands of U.S. dollars, unless otherwise stated.
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, in accordance with SFAS No. 52, “Foreign Currency Translation”, (“SFAS 52”). 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 our 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 loss. Separately, monetary assets and liabilities, as well as intercompany receivables, 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.
On June 30, 2006, we effected a reverse one for three split of our common stock. As a result of the reverse split, each holder of three outstanding shares of common stock received one share of common stock. No fractional shares of common stock were issuable in connection with the reverse stock split. In lieu of such fractional shares, stockholders received a cash payment equal to the product obtained by multiplying the fraction of common stock by
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$9.15. Corresponding amendments have been made to the exchangeable shares of Waste Services (CA) Inc., so that each one exchangeable share entitles the holder to one-third of one share of our common stock, without regard to any fractional shares. The reverse split has been retroactively applied to all applicable information to the earliest period presented, unless otherwise noted as being “pre-reverse split”.
2. | Summary of Significant Accounting Policies |
Business Combinations and Acquisitions
We allocate the purchase price of an acquired business, on a preliminary basis, to the identified assets and liabilities acquired based on their estimated fair values at the dates of acquisition, with any residual amounts allocated to goodwill. Goodwill is allocated to our reporting units based on the reporting units that will benefit from the acquired assets and liabilities. The purchase price allocations are considered preliminary until we have obtained all required information to complete the allocation. Although the time required to obtain the necessary information will vary with circumstances specific to an individual acquisition, the “allocation period” for finalizing purchase price allocations generally does not exceed one year from the date of consummation of an acquisition. Adjustments to the allocation of purchase price may decrease those amounts allocated to goodwill and, as such, may increase those amounts allocated to other tangible or intangible assets, which may result in higher depreciation or amortization expense in future periods. Assets acquired in a business combination that will be sold are valued at fair value less cost to sell. Results of operating these assets are recognized currently in the period in which those operations occur. The value of shares issued in connection with an acquisition is based upon the average market price of our common stock during the five day period consisting of the period two days before, the day of and the two days after the terms of the acquisition are agreed toand/or announced.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents are defined as cash and short-term highly liquid deposits with initial maturities of three months or less.
Concentration of Credit Risk
Financial instruments that potentially subject us to credit risk consist primarily of cash and cash equivalents and trade accounts receivable. We place our cash and cash equivalents only with high credit quality financial institutions. Our customers are diversified as to both geographic and industry concentrations. Therefore, our trade accounts receivable are not subject to a concentration of credit risk.
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 over 120 days. We evaluate and revise our reserve on a monthly basis based upon a review of specific accounts outstanding and our history of uncollectible accounts.
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The changes to the allowance for doubtful accounts for the years ended December 31, 2006, 2005 and 2004 are as follows:
2006 | 2005 | 2004 | ||||||||||
Balance at the beginning of the year | $ | 672 | $ | 545 | $ | 445 | ||||||
Provisions | 695 | 953 | 1,305 | |||||||||
Bad debts charged to reserves, net of recoveries | (1,083 | ) | (831 | ) | (2,597 | ) | ||||||
Acquisitions | 290 | — | 1,380 | |||||||||
Impact of foreign exchange rate fluctuations | — | 5 | 12 | |||||||||
Balance at the end of the year | $ | 574 | $ | 672 | $ | 545 | ||||||
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation. Improvements or betterments, which extend the life of an asset, are capitalized. Expenditures for maintenance and repair costs are expensed as incurred. Gains or losses resulting from property and equipment retirements or disposals are credited or charged to earnings in the year of disposal. Depreciation is computed over the estimated useful life using the straight-line method as follows:
Buildings | 10 to 25 years | |
Vehicles | 10 years | |
Containers, compactors and landfill and recycling equipment | 5 to 12 years | |
Furniture, fixtures and other office equipment | 3 to 5 years | |
Leasehold improvements | Shorter of term of lease or estimated life |
Long-Lived Assets
We periodically evaluate whether events and circumstances have occurred that may warrant revision of the estimated useful life of property and equipment or whether the remaining balance of property and equipment, or other long-lived assets, should be evaluated for possible impairment. Instances that may lead to an impairment include: (i) a significant decrease in the market price of a long-lived asset group; (ii) a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition; (iii) a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or asset group, including an adverse action or assessment by a regulator; (iv) an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset or asset group; (v) a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; or (vi) a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
We use an estimate of the related undiscounted cash flows, excluding interest, over the remaining life of the property and equipment and long-lived assets in assessing their recoverability. We measure impairment loss as the amount by which the carrying amount of the asset(s) exceeds the fair value of the asset(s). We primarily employ two methodologies for determining the fair value of a long-lived asset: (i) the amount at which the asset could be bought or sold in a current transaction between willing parties; or (ii) the present value of estimated expected future cash flows grouped at the lowest level for which there are identifiable independent cash flows.
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Landfill Sites
Landfill sites are recorded at cost. Capitalized landfill costs include expenditures for land, permitting costs, cell construction costs and environmental structures. Capitalized permitting and cell construction costs are limited to direct costs relating to these activities, including legal, engineering and construction costs associated with excavation, liners and site berms, leachate management facilities and other costs associated with environmental equipment and structures.
Capitalized landfill costs may also include an allocation of the purchase price paid for landfills. For landfills purchased as part of a group of several assets, the purchase price assigned to the landfill is determined based upon the discounted expected future cash flows of the landfill relative to the other assets within the acquired group. If the landfill meets our expansion criteria, the purchase price is further allocated between permitted airspace and expansion airspace based upon the ratio of permitted versus probable expansion airspace to total available airspace.
Landfill sites, including costs related to acquiring land, excluding the estimated residual value of un-permitted, non-buffer land, and costs related to permitting and cell construction, are depleted as airspace is consumed using theunits-of-consumption method over the total available airspace, including probable expansion airspace, where appropriate. Environmental structures, which include leachate collection systems, methane collection systems and groundwater monitoring wells, are charged to expense over the shorter of their useful life or the life of the landfill.
We assess the carrying value of our landfill sites in accordance with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment of Long-Lived Assets” (“SFAS 144”). These provisions, as well as possible instances that may lead to impairment, are addressed in the Long-Lived Assets discussion. We consider certain impairment indicators previously discussed that require significant judgment and understanding of the waste industry when applied to landfill development or expansion.
We have identified three sequential steps that landfills generally follow to obtain expansion permits. These steps are as follows: (i) obtaining approval from local authorities; (ii) submitting a permit application to state or provincial authorities; and (iii) obtaining permit approval from state or provincial authorities.
Before expansion airspace is included in our calculation of total available disposal capacity, the following criteria must be met: (i) the land associated with the expansion airspace is either owned by us or is controlled by us pursuant to an option agreement; (ii) we are committed to supporting the expansion project financially and with appropriate resources; (iii) there are no identified fatal flaws or impediments associated with the project, including political impediments; (iv) progress is being made on the project; (v) the expansion is attainable within a reasonable time frame; and (vi) based upon senior management’s review of the status of the permit process to date, we believe it is likely the expansion permit will be received within the next five years. Upon meeting our expansion criteria, the rates used at each applicable landfill to expense costs to acquire, construct, close and maintain a site during the post-closure period are adjusted to include probable expansion airspace and all additional costs to be capitalized or accrued associated with the expansion airspace.
Once expansion airspace meets our criteria for inclusion in our calculation of total available disposal capacity, management continuously monitors each site’s progress in obtaining the expansion permit. If at any point it is determined that an expansion area no longer meets the required criteria, the probable expansion airspace is removed from the landfill’s total available capacity and the rates used at the landfill to expense costs to acquire, construct, close and maintain a site during the post-closure period are adjusted accordingly.
Goodwill and Other Intangible Assets
We account for goodwill in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” and test goodwill for impairment using the two-step process. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. We have defined our reporting units
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to be consistent with our operating segments: Eastern Canada, Western Canada, Florida, Texas and Arizona. In determining the fair value, we may utilize: (i) discounted future cash flows; (ii) operating results based upon a comparative multiple of earnings or revenues; (iii) offers from interested investors, if any; or (iv) appraisals. Significant estimates used in the fair value calculation utilizing discounted future cash flows include, but are not limited to: (i) estimates of future revenue and expense growth by reporting unit; (ii) future estimated effective tax rates, which we estimate to range between 37% and 40%; (iii) future estimated rate of capital expenditures as well as future required investments in working capital; (iv) estimated average cost of capital, which we estimate to range between 9.0% and 10.0%; and (v) the future terminal value of our reporting unit, which is based upon its ability to exist into perpetuity. Significant estimates used in the fair value calculation utilizing market value multiples include but are not limited to: (i) estimated future growth potential of the reporting unit; (ii) estimated multiples of revenue or earnings a willing buyer is likely to pay; and (iii) estimated control premium a willing buyer is likely to pay.
In addition, we evaluate a reporting unit for impairment if events or circumstances change between annual tests, indicating a possible impairment. Examples of such events or circumstances include: (i) a significant adverse change in legal factors or in the business climate; (ii) an adverse action or assessment by a regulator; (iii) a more likely than not expectation that a reporting unit or a significant portion thereof will be sold; or (iv) the testing for recoverability under SFAS 144 of a significant asset group within the reporting unit.
Other intangible assets primarily include customer relationships and contracts and covenantsnot-to-compete. Other intangible assets are recorded at their cost, less accumulated amortization and are amortized over the period we are expected to benefit by such intangibles. We periodically evaluate the carrying value and remaining estimated useful life of our other intangible assets subject to amortization in accordance with the provisions of SFAS 144.
Other Non-Current Assets
Acquisition deposits and deferred acquisition costs include capitalized incremental direct costs associated with proposed business combinations that are currently being negotiated. 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 earnings. In the event that the target is acquired, these costs are incorporated in the cost of the acquired business. Indirect and internal costs, including executive salaries, overhead and travel costs related to acquisitions, are expensed as incurred.
Costs associated with arranging financing are deferred and expensed over the related financing arrangement using the effective interest method. Should we repay an obligation earlier then its contractual maturity, any remaining deferred financing costs are charged to earnings.
Fair Value of Financial Instruments
The book values of cash and cash equivalents, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these instruments. Borrowings under our senior credit facilities as of December 31, 2006 have carrying values that approximate their respective fair values based on the current rate offered to us for instruments with similar market risk and maturities. The fair value of our 9.5% Senior Subordinated Notes at December 31, 2006 is estimated at $165.2 million based on the year end quoted market price.
Environmental Costs
We accrue for costs associated with environmental remediation obligations when such costs are probable and can be reasonably estimated. Accruals for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change. Cost of future expenditures for environmental remediation obligations are not discounted to their present value.
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accrued Closure and Post-Closure Obligations
Accrued closure and post-closure obligations represent an estimate of the current value of the future obligations associated with closure and post-closure monitoring of solid waste landfills. Closure and post-closure monitoring and maintenance costs represent the costs related to cash expenditures yet to be incurred when a landfill facility ceases to accept waste and closes. Accruals for closure and post-closure monitoring and maintenance consider site inspection, groundwater monitoring, leachate management, methane gas management and recovery and operating and maintenance costs to be incurred during the period after the facility closes. Certain of these environmental costs, principally capping and methane gas management costs, are also incurred during the operating life of the site in accordance with the landfill operating requirements. Site specific closure and post-closure engineering cost estimates are prepared annually. The impact of changes in estimates is accounted for on a prospective basis.
Landfill closure and post-closure liabilities are calculated by estimating the total obligation of capping and closure events in current dollars, inflating the obligation based upon the expected date of the expenditure using an inflation rate of 2.5% and discounting the inflated total to its present value using an 8.0% credit-adjusted risk-free discount rate. Accretion of discounted cash flows associated with the closure and post closure obligations is accrued over the life of the landfill, as a charge to cost of operations.
Revenue Recognition
We recognize revenue when services, such as providing hauling services and accepting waste at our disposal facilities, are rendered. Amounts billed to customers prior to providing the related services, are reflected as deferred revenue and reported as revenue in the period in which the services are rendered.
Royalty Arrangements
It is customary in the waste industry for landfill acquisition agreements to include royalty arrangements. Amounts paid under these royalty arrangements are charged to operations based upon a systematic and rational allocation of the royalty over the period in which the royalty is incurred.
Advertising Costs
We expense advertising costs as they are incurred. Advertising expense was $0.8 million, $0.9 million and $0.8 million for the years ended December 31, 2006, 2005 and 2004, respectively. Advertising expense is included in selling, general and administrative expense on the accompanying Statements of Operations.
Risk Management
OurU.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. We have collateral requirements that are set by insurance companies, which underwrite our insurance programs. Collateral requirements may change from time to time, based on, among other things, size of our business, our claims experience, financial performance or credit quality and retention levels. As of December 31, 2006 we had posted letters of credit with our U.S. insurer of $9.3 million to cover the liability for losses within the deductible limit. Provisions for retained claims are made by charges to expense based upon periodic evaluations by management and outside actuaries of the estimated ultimate liabilities on reported and unreported claims. Adjustments, if any, to the estimated reserves resulting from ultimate claim payments will be
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
reflected in operations in the periods in which such adjustments become known. Changes in insurance reserves for our U.S. operations for the years ended December 31, 2006, 2005 and 2004 are as follows:
2006 | 2005 | 2004 | ||||||||||
Balance at the beginning of the year | $ | 4,356 | $ | 2,426 | $ | — | ||||||
Provisions | 4,615 | 4,419 | 2,978 | |||||||||
Payments | (3,475 | ) | (2,210 | ) | (552 | ) | ||||||
Favorable claim development related to prior periods | (169 | ) | (279 | ) | — | |||||||
Balance at the end of the year | $ | 5,327 | $ | 4,356 | $ | 2,426 | ||||||
Stock-Based Compensation
Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”), using the modified prospective transition method. Under that transition method, employee stock-based 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 No. 123, “Accounting for Stock-Based Compensation” (“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. Stock-based employee compensation cost (benefit) is recognized as a component of selling, general and administrative expense in the Statement of Operations.
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 SFAS 123. For the years ended December 31, 2005 and 2004, stock-based employee compensation expense (benefit) was $0.3 million and $(1.4) million, respectively. For 2005 and 2004, compensation expense (benefit) recognized for employee stock options subject to variable accounting is based on the intrinsic value (the difference between the exercise price and quoted market price) of the options at the end of each reporting period. Changes in the intrinsic value are recognized until such options are exercised, expire or are forfeited.
As a result of adopting SFAS 123(R) on January 1, 2006, our net loss and loss before income taxes for the year ended December 31, 2006, is approximately $1.9 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 because: (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. Prior to the adoption of SFAS 123(R), we presented all tax benefits, if any, of tax deductions resulting from the exercise of stock options as operating cash flows in the Statement of Cash Flows. As a result of adopting SFAS 123(R), tax benefits resulting from tax deductions in excess of the compensation cost recognized for options (excess tax benefits) are classified as financing cash flows.
We account for the issuance of options or warrants for services from non-employee consultants in accordance with Emerging Issues Task Force Issue96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services”(“EITF 96-18”), by estimating the fair value of options or warrants issued using the Black-Scholes pricing model. Variables used in the calculation of fair value include the option or warrant exercise price, the market price of our shares on the grant date, the risk-free interest rate, the life of the option or warrant, expected volatility of our stock and expected dividends. As at December 31, 2006, all options granted to non — employee consultants were fully vested.
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Income Taxes
We account for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” Accordingly, deferred income taxes have been provided to show the effect of temporary differences between the recognition of revenue and expenses for financial and income tax reporting purposes and between the tax basis of assets and liabilities and their reported amounts in the financial statements. In assessing the realizability of deferred tax assets, management assesses the likelihood that deferred tax assets will be recovered from future taxable income, and to the extent that recovery is not likely or there is insufficient operating history, a valuation allowance is established. We adjust the valuation allowance in the period management determines it is more likely than not that deferred tax assets will or will not be realized. We provide for current taxes on the distributed earnings of our Canadian subsidiaries, in connection with certain tax planning initiatives.
Net Income (Loss) Per Share Information
Basic earnings (loss) per share is calculated by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding for the year, including 6,323,161 exchangeable shares of Waste Services (CA) (exchangeable for 2,107,720 shares of our common stock) not owned by us as of December 31, 2006. Diluted earnings (loss) per share is calculated based on the weighted average number of common shares outstanding for the year, including the exchangeable shares, 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 years ended December 31, 2006, 2005 and 2004, basic and diluted loss per share were the same, as the effect of potentially dilutive securities would have been anti-dilutive.
Change in Accounting Principle
On January 1, 2003, we adopted the provisions of SFAS No. 143 “Accounting for Asset Retirement Obligations” (“SFAS 143”). SFAS 143 required us to change our methodology used to record liabilities related to capping, closure and post-closure of our landfill operations. Under SFAS 143, we are required to recognize as an asset, the fair value of the liability for an asset retirement obligation. The asset is then depleted, consistently with other capitalized landfill costs, over the remaining useful life of the site based upon units of consumption as airspace in the landfill is consumed. Upon adoption, the liability we recognized represented the present value of the total estimated future asset retirement obligation. The methodology we used to define the cost pool related to an obligating event included total capping, closure and post-closure costs to be incurred, on a discounted basis, over the remaining life of the site.
In connection with the opening of our JED Landfill in Florida in the first quarter of 2004, we re-evaluated and changed the methodology used to define an obligating event, and we segregated the cost pool for the obligation into closure and post-closure obligations and landfill capping obligations. Effective January 1, 2004, we recognize the fair value of the liability for the closure and post-closure obligations over the life of the landfill as waste is placed in the site as opposed to at the time at which the landfill commences operations. Additionally, under our new method, we view landfill capping events, which occur in phases throughout the life of a landfill, as discrete activities that are recognized as asset retirement obligations separately from other closure and post-closure obligations. These capping events occur generally during the operating life of a landfill and can be associated with specific waste placed under an area to be capped. As a result, we use a separate capping rate per ton to recognize the principal amount of the retirement obligation and related asset associated with each capping event. We deplete the asset recorded pursuant to this approach as waste volume, covered by the capping event, is placed into the landfill.
We believe this method is preferable as it (i) provides a better measure of the fair value of the asset retirement obligation by more precisely matching the landfill obligating events with the recognition of the fair value of the asset retirement obligation; (ii) is more consistent with our policies for the allocation of purchase price in landfill acquisitions and the related valuation of assumed retirement obligations; (iii) reflects a more accurate rate of
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accretion thereby creating a more accurate value of our current and future retirement obligations; and (iv) is the predominant method used in our industry. The effect of this change on basic or diluted loss per share as of December 31, 2004 would have been $0.01.
Recently Issued Accounting Pronouncements
In December 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position EITF00-19-2, “Accounting for Registration Payment Arrangements” (“FSP EITF00-19-2”). FSP EITF00-19-2 specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with SFAS No. 5, “Accounting for Contingencies.” FSP EITF00-19-2 further clarifies that a financial instrument subject to a registration payment arrangement should be accounted for in accordance with other applicable GAAP without regard to the contingent obligation to transfer consideration pursuant to the registration payment arrangement. FSP EITF00-19-2 is effective for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to December 21, 2006. For registration payment arrangements and financial instruments subject to those arrangements that were entered into prior to the issuance of FSP EITF00-19-2, the standard is effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years. Early adoption for interim or annual periods for which financial statements or interim reports have not been issued is permitted. We adopted the provisions of FSP EITF00-19-2 during the fourth quarter of 2006. We did not have any cumulative effect adjustments relative to this adoption.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. We do not expect the adoption of SFAS 157 to have a material effect on our financial position or results of operations.
In September 2006 the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 “Considering the effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 provides guidance for quantifying the effect on current year financial statement of uncorrected prior year misstatements. SAB 108 is effective for any report for an interim period of the first fiscal period ending after November 15, 2006. The adoption of SAB 108 did not have a material effect on our financial position or results of operations.
In July 2006, the FASB issued SFAS Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an interpretations of SFAS Statement No. 109” (“FIN 48”). FIN 48 applies to all “tax positions” accounted for under SFAS 109. FIN 48 refers to “tax positions” as positions taken in a previously filed tax return or positions expected to be taken in a future tax return which are reflected in measuring current or deferred income tax assets and liabilities reported in the financial statements. FIN 48 further clarifies a tax position to include, but not limited to, the following:
• | an allocation or a shift of income between taxing jurisdictions, | |
• | the characterization of income or a decision to exclude reporting taxable income in a tax return, or | |
• | a decision to classify a transaction, entity, or other position in a tax return as tax exempt. |
FIN 48 clarifies that a tax benefit may be reflected in the financial statements only if it is “more likely than not” that a company will be able to sustain the tax return position, based on its technical merits. If a tax benefit meets this criterion, it should be measured and recognized based on the largest amount of benefit that is cumulatively greater
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than 50% likely to be realized. This is a change from occurring practice, whereby companies may recognize a tax benefit only if it is probable a tax position will be sustained.
FIN 48 also requires that we make qualitative and quantitative disclosures, including a discussion of reasonably possible changes that might occur in unrecognized tax benefits over the next 12 months; a description of open tax years by major jurisdictions; and a roll-forward of all unrecognized tax benefits, presented as a reconciliation of the beginning and ending balances of the unrecognized tax benefits on an aggregated basis.
This statement became effective for us on January 1, 2007 and, based on our analysis, we do not expect FIN 48 to have a material effect on our consolidated results of operations, cash flows or financial position.
3. | Discontinued Operations |
In July 2006, we announced the execution of definitive agreements with Allied Waste Industries, Inc. (“Allied Waste”) whereby we will (i) purchase Allied Waste’s hauling, transfer station and recycling operations in Miami, Florida for $63.0 million in cash, and (ii) sell our Arizona hauling, transfer station and landfill operations to Allied Waste for $53.0 million in cash. We anticipate closing on this transaction during the first quarter of 2007. Accordingly, we have presented the net assets and operations of our Arizona operations as discontinued operations for all periods presented. No income tax benefit or provision has been attributed to discontinued operations for all periods presented. During June 2006 we evaluated our Arizona operations for possible impairment, and concluded that no impairment was necessary. Revenue from discontinued operations was $28.0 million, $26.4 million and $23.7 million for the years ended December 31, 2006, 2005 and 2004, respectively. Pre-tax net income (loss) from discontinued operations was $(1.5) million, $0.1 million and $(0.6) million for the years ended December 31, 2006, 2005 and 2004, respectively. Previously, our Arizona operations were reported as part of our “Other Operations” segment. Net assets related to discontinued operations are as follows:
December 31, | ||||||||
2006 | 2005 | |||||||
Accounts receivable | $ | 3,418 | $ | 4,202 | ||||
Prepaid expenses and other current assets | 452 | 1,050 | ||||||
Current assets of discontinued operations | 3,870 | 5,252 | ||||||
Property and equipment | 11,803 | 13,777 | ||||||
Landfill sites | 17,229 | 15,630 | ||||||
Goodwill and other intangible assets | 21,433 | 21,602 | ||||||
Other assets | 121 | 130 | ||||||
Non-current assets of discontinued operations | 50,586 | 51,139 | ||||||
Total assets of discontinued operations | $ | 54,456 | $ | 56,391 | ||||
Accounts payable | $ | 356 | $ | 192 | ||||
Accrued expenses and other current liabilities | 3,518 | 1,635 | ||||||
Current liabilities of discontinued operations | 3,874 | 1,827 | ||||||
Accrued closure, post closure and other obligations | 336 | 210 | ||||||
Non-current liabilities of discontinued operations | 336 | 210 | ||||||
Total liabilities of discontinued operations | $ | 4,210 | $ | 2,037 | ||||
Net assets of discontinued operations | $ | 50,246 | $ | 54,354 | ||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Prior to our decision to dispose of our Arizona operations we made a number of acquisitions that comprised our Arizona operations. Details of these acquisitions are as follows:
In July 2003, we purchased Cactus Waste Systems, LLC for $0.6 million in cash and a $1.2 million option that we exercised in September 2003 to purchase an800-acre site in Pinal County, Arizona, which had been zoned to permit the development of a landfill. During May 2004, we received the permits and authorizations necessary for the operation of the landfill (the “Cactus Landfill”) and as a condition of the purchase, we issued 1,250,000 (pre-reverse split) common shares valued at $5.5 million to the sellers during the second quarter of 2004, which has been capitalized as a cost of the landfill. The Cactus Landfill began operations during July 2004. The sellers are entitled to additional purchase consideration upon the Cactus Landfill achieving certain average tons per day thresholds in any quarter. Should the landfill achieve a maximum 5,000 tons per day, the total contingent payments would not exceed $18.0 million. During 2005 we paid $3.0 million relative to our obligation under this agreement. No other amounts have been paid under this agreement in 2006 or 2004.
During 2004, we acquired the assets of three collection businesses in the metropolitan Phoenix area for aggregate cash consideration of approximately $8.4 million plus the issuance of 989,800 (pre-reverse split) common shares valued at approximately $5.7 million. During 2005, we acquired minor“tuck-in” hauling assets in Arizona for cash consideration of $0.6 million.
4. | Business Combinations, Significant Asset Acquisitions and Disposals of Businesses |
In November 2003, we entered into an agreement to acquire the assets of Allied Waste Industries, Inc.’s (“Allied”) northern and central Florida operations (the “Allied Assets”) for a cash purchase price of approximately $120.0 million subject to an adjustment for working capital. The primary metropolitan areas served by the Allied Assets are Tampa, Sarasota and Jacksonville, Florida. On December 31, 2003, we completed the first phase of the Allied Assets acquisition. During the first six months of 2004, we completed the acquisition of the remaining Allied Assets. In the second quarter of 2004, we divested a certain landfill and related assets and liabilities in exchange for a collection operation in the metropolitan Orlando area and cash proceeds of $10.0 million.
In May 2003, we acquired the JED Landfill, a newly permitted landfill in central Florida, for $68.1 million in cash, assumed liabilities of $6.2 million and the issuance of 2,050,000 (pre-reverse split) shares of our common stock valued at approximately $9.7 million. In addition, we issued 1,200,000 (pre-reverse split) shares of our common stock valued at approximately $4.8 million in consideration for transaction related services provided to us in connection with the acquisition. The landfill commenced operations during January 2004.
In April 2004, we also completed the acquisition of the issued and outstanding shares of Florida Recycling Services, Inc. (“Florida Recycling”) for an aggregate purchase price of approximately $99.0 million in cash, working capital of approximately $2.2 million, and the issuance of 9,250,000 (pre-reverse split) shares of our common stock valued at approximately $51.4 million. Florida Recycling’s operations are based in central Florida, primarily serving the Orlando, Daytona, Fort Myers and Tampa markets. Shortly after the acquisition, the performance of the operations of Florida Recycling was below our expectations and we engaged an independent third party to conduct a review of Florida Recycling’s business. Based on the results of this review, the 2003 financial statements of Florida Recycling, provided by the sellers, contained misstatements and could not be relied upon. During the first half of 2005 these financial statements were re-audited by our independent auditors. On September 24, 2004, we reached an agreement with the selling shareholders of Florida Recycling to adjust the purchase price paid for the shares of Florida Recycling whereby, in October 2004, the selling shareholders paid us $7.5 million in cash and returned 500,000 (pre-reverse split) shares of our common stock. The cash and the shares received (valued at the quoted market price as of September 24, 2004) with a total value of approximately $8.6 million, were recorded as income. In the third quarter of 2005 and as part of the September 2004 settlement, we received title to the Sanford Recycling and Transfer Station in Sanford, Florida. The facility is valued at the cost incurred to acquire the property and construct the facility to its percentage of completion at such date. The gain recognized on the settlement approximated $4.1 million for 2005.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In February 2004, we acquired a permitted undeveloped municipal solid waste landfill in Fort Bend County, Texas (the “Fort Bend Regional Landfill”). The landfill commenced operations during August 2004. The purchase price was comprised of $5.1 million in cash, a seller financed promissory note of $5.0 million, which has since been repaid, and the issuance of 4,375,000 (pre-reverse split) shares of our common stock valued at approximately $25.0 million. The Fort Bend Regional Landfill, which serves the metropolitan Houston, Texas area, is approximately 2,600 acres and has an initial permitted capacity of 47.6 million cubic yards. In addition to the landfill, we acquired a leasehold interest in a fully permitted transfer station site near Houston, which we subsequently constructed and opened in January 2005.
In January 2004, we acquired an industrial-permitted waste landfill site in Saskatchewan, Canada. The purchase price was comprised of $1.1 million in cash and the issuance of 12,000 (pre-reverse split) shares of our common stock valued at approximately $0.1 million.
During 2005, we acquired minor“tuck-in” hauling assets in Canada for aggregate cash consideration of $0.5 million.
In April 2006, we acquired a materials recovery facility and solid waste transfer station in Taft, Florida (“Taft Recycling”). The purchase price for the facility consisted of $11.3 million in cash and the issuance of 1,269,841 (pre-reverse split) shares of our common stock valued at approximately $3.9 million. In addition, upon the issuance of the final operating permit on June 15, 2006, we paid $1.5 million in cash and delivered an additional 1,269,842 (pre-reverse split) shares of our common stock valued at approximately $3.7 million, of which 769,842 (pre-reverse split) shares were newly issued and 500,000 (pre-reverse split) shares were transferred from treasury. The acquisition of Taft Recycling will allow us greater access to third party waste volumes that can be disposed of at our JED Landfill in Osceola County, Florida.
In May 2006, we acquired Liberty Waste, LLC (“Liberty Waste”) in Tampa, Florida. The purchase price for Liberty Waste consisted of $8.0 million in cash and the issuance of 1,155,116 (pre-reverse split) shares of our common stock valued at approximately $3.6 million. We had previously paid a deposit of $6.0 million in cash and issued 946,372 (pre-reverse split) shares of our common stock valued at approximately $2.9 million. Liberty Waste is a collection operation based in Tampa with two transfer stations, one located in Tampa and the other in Clearwater. The transfer stations are both permitted to accept construction and demolition and Class III waste volumes.
In June 2006, we acquired Sun Country Materials, LLC (“Sun Country Materials”) in Hillsborough County, Florida. The purchase price for Sun Country Materials consisted of $5.0 million in cash and the issuance of 4,013,378 (pre-reverse split) shares of our common stock valued at approximately $12.4 million. Sun Country Materials owns a construction and demolition landfill located in Hillsborough County, Florida, which has recently been issued an expansion permit.
In December 2006, we acquired (i) a construction and demolition waste landfill in Charlotte County, Florida (the “SLD Landfill”), and (ii) Pro Disposal, Inc. (“Pro Disposal”), which operates a roll-off collection and transfer business. The aggregate purchase price for the SLD Landfill and Pro Disposal was $75.0 million in cash. The SLD Landfill, which has a permitted capacity of 15.8 million cubic yards, commenced operations in December 2006. Pro Disposal has collection operations in Lee County, Florida and Collier County, Florida with two transfer stations, one located in Fort Myers and the other in Naples. The transfer stations are both permitted to accept construction and demolition waste volumes. We expect to internalize our Pro Disposal waste volumes into the SLD Landfill.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Details of the net assets acquired and cash used in asset and business acquisitions for the year ended December 31, 2006 are as follows:
Liberty Waste | SLD | |||||||||||||||||||
Taft | and Sun Country | Landfill and | All | |||||||||||||||||
Recycling | Materials | Pro Disposal | Others | Total | ||||||||||||||||
Purchase price: | ||||||||||||||||||||
Cash | $ | 13,300 | $ | 20,653 | $ | 75,674 | $ | 3,949 | $ | 113,576 | ||||||||||
Common stock | 7,645 | 18,936 | — | — | 26,581 | |||||||||||||||
Total purchase price | 20,945 | 39,589 | 75,674 | 3,949 | 140,157 | |||||||||||||||
Allocated as follows: | ||||||||||||||||||||
Working capital assumed: | ||||||||||||||||||||
Cash and cash equivalents | 125 | 488 | 187 | — | 800 | |||||||||||||||
Accounts receivable | 952 | 2,126 | 1,650 | — | 4,728 | |||||||||||||||
Prepaid expenses and other current assets | 10 | 591 | 70 | — | 671 | |||||||||||||||
Accounts payable | (462 | ) | (2,724 | ) | (1,889 | ) | — | (5,075 | ) | |||||||||||
Accrued expenses and other current liabilities | (252 | ) | (787 | ) | — | (143 | ) | (1,182 | ) | |||||||||||
Net working capital | 373 | (306 | ) | 18 | (143 | ) | (58 | ) | ||||||||||||
Property and equipment | 3,237 | 10,272 | 9,779 | 1,257 | 24,545 | |||||||||||||||
Landfill sites | — | 23,290 | 49,834 | — | 73,124 | |||||||||||||||
Other assets | — | — | 110 | — | 110 | |||||||||||||||
Debt | — | (396 | ) | (422 | ) | — | (818 | ) | ||||||||||||
Accrued closure, post-closure and other obligations assumed | (73 | ) | (3,796 | ) | (1,459 | ) | — | (5,328 | ) | |||||||||||
Net book value of assets acquired and liabilities assumed | 3,537 | 29,064 | 57,860 | 1,114 | 91,575 | |||||||||||||||
Excess purchase price to be allocated | $ | 17,408 | $ | 10,525 | $ | 17,814 | $ | 2,835 | $ | 48,582 | ||||||||||
Allocated as follows: | ||||||||||||||||||||
Goodwill | $ | 17,408 | $ | 6,043 | $ | 12,474 | $ | 2,242 | $ | 38,167 | ||||||||||
Other intangible assets | — | 4,482 | 5,340 | 593 | 10,415 | |||||||||||||||
Total allocated | $ | 17,408 | $ | 10,525 | $ | 17,814 | $ | 2,835 | $ | 48,582 | ||||||||||
For 2006, the above table includes: (i) cash deposits and acquisition related costs of $6.9 million, which relate to the Liberty Waste and Sun Country Materials acquisitions that were paid or deposited prior to 2006 and were capitalized as part of the cost of these acquisitions during 2006 and (ii) a holdback of approximately $2.4 million relative to our acquisition of Pro Disposal.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Details of the net assets acquired and cash used in asset and business acquisitions, including those now classed under ‘discontinued operations’ elsewhere in this document, for the years ended December 31, 2005 and 2004 are as follows:
2004 | ||||||||||||||||||||
Allied | Florida | All | ||||||||||||||||||
2005 | Assets | Recycling | Others | Total | ||||||||||||||||
Purchase price: | ||||||||||||||||||||
Cash | $ | 1,122 | $ | 45,988 | $ | 104,234 | $ | 18,350 | $ | 168,572 | ||||||||||
Common stock and warrants | — | — | 51,357 | 36,721 | 88,078 | |||||||||||||||
Seller financed note payable | — | — | — | 5,000 | 5,000 | |||||||||||||||
Total purchase price | 1,122 | 45,988 | 155,591 | 60,071 | 261,650 | |||||||||||||||
Allocated as follows: | ||||||||||||||||||||
Working capital assumed: | ||||||||||||||||||||
Accounts receivable | — | 3,755 | 7,426 | 409 | 11,590 | |||||||||||||||
Prepaid expenses and other current assets | 25 | 182 | 935 | 69 | 1,186 | |||||||||||||||
Accounts payable | — | — | (8,604 | ) | (738 | ) | (9,342 | ) | ||||||||||||
Accrued expenses and other current liabilities | (8 | ) | (870 | ) | (4,410 | ) | — | (5,280 | ) | |||||||||||
Net working capital | 17 | 3,067 | (4,653 | ) | (260 | ) | (1,846 | ) | ||||||||||||
Property and equipment | 810 | 10,728 | 23,911 | 6,044 | 40,683 | |||||||||||||||
Landfill sites | — | — | — | 41,982 | 41,982 | |||||||||||||||
Other assets | — | — | 271 | — | 271 | |||||||||||||||
Deferred taxes | — | — | — | (334 | ) | (334 | ) | |||||||||||||
Accrued closure, post-closure and other obligations assumed | — | — | — | (52 | ) | (52 | ) | |||||||||||||
Net book value of assets acquired and liabilities assumed | 827 | 13,795 | 19,529 | 47,380 | 80,704 | |||||||||||||||
Excess purchase price to be allocated | $ | 295 | $ | 32,193 | $ | 136,062 | $ | 12,691 | $ | 180,946 | ||||||||||
Allocated as follows: | ||||||||||||||||||||
Goodwill | $ | 172 | $ | 23,201 | $ | 108,906 | $ | 12,667 | $ | 144,774 | ||||||||||
Other intangible assets | 123 | 8,992 | 27,156 | 24 | 36,172 | |||||||||||||||
Total allocated | $ | 295 | $ | 32,193 | $ | 136,062 | $ | 12,691 | $ | 180,946 | ||||||||||
During 2005 we also made the following payments related to previously completed acquisitions and other asset purchases: (i) $2.5 million as additional purchase price for working capital delivered, primarily related to the Allied Assets acquisition and (ii) $1.5 million, 285,715 (pre-reverse split) shares of our common stock valued at approximately $1.1 million and an operating facility in Pinellas with a book value of approximately $0.6 million, for the acquisition of land adjacent to the Sanford Recycling and Transfer Station.
For 2004, the above table includes cash deposits and acquisition related costs of $4.0 million and 1,000,000 (pre-reverse split) shares of our common stock and warrants valued at $5.7 million, which relate to the Florida Recycling acquisition that were paid or deposited during 2003 and were capitalized to the cost of the acquisition during 2004.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We believe the primary value of an acquisition is the opportunities made available to vertically integrate operations or increase market presence within a geographic market. We expect goodwill generated from these acquisitions to be deductible for income tax purposes.
The following pro forma unaudited condensed consolidated statement of operations data shows the results of our operations for the years ended December 31, 2006, 2005 and 2004 as if completed business combinations had occurred at the beginning of the respective period (in thousands except per share amounts):
2006 | 2005 | 2004 | ||||||||||
Revenue | $ | 459,814 | $ | 432,990 | $ | 396,840 | ||||||
Net loss attributable to common shareholders | $ | (49,330 | ) | $ | (52,097 | ) | $ | (58,196 | ) | |||
Basic and diluted net loss per Common Share | $ | (1.35 | ) | $ | (1.46 | ) | $ | (1.76 | ) | |||
Basic and diluted pro forma weighted average number of common shares outstanding | 36,500 | 35,765 | 33,052 | |||||||||
The above table includes revenue of $28.0 million, $26.4 million and $23.7 million for the years ended December 31, 2006, 2005 and 2004, respectively, and net income (loss) of $(1.5) million, $0.1 million and $(0.6) million for the years ended December 31, 2006, 2005 and 2004, respectively, for our Arizona operations. These pro forma unaudited condensed consolidated results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the acquisitions taken place as of the beginning of the respective periods, or the results of our future operations. Furthermore, the pro forma results do not give effect to all cost savings or incremental costs that may occur as a result of the integration and consolidation of the acquisitions.
5. | Prepaid Expenses and Other Current Assets |
Prepaid expenses and other current assets consist of the following as of December 31, 2006 and 2005:
2006 | 2005 | |||||||
Prepaid expenses | $ | 2,991 | $ | 2,357 | ||||
Deferred income taxes | — | 4,763 | ||||||
Parts and supplies | 1,720 | 1,673 | ||||||
Other current assets | 1,545 | 1,270 | ||||||
$ | 6,256 | $ | 10,063 | |||||
6. | Property and Equipment |
Property and equipment consist of the following as of December 31, 2006 and 2005:
2006 | 2005 | |||||||
Land and buildings | $ | 35,275 | $ | 24,596 | ||||
Vehicles | 116,747 | 96,492 | ||||||
Containers, compactors and landfill and recycling equipment | 75,935 | 64,547 | ||||||
Furniture, fixtures, other office equipment and leasehold improvements | 10,288 | 9,393 | ||||||
Total property and equipment | 238,245 | 195,028 | ||||||
Less: Accumulated depreciation | (92,927 | ) | (75,543 | ) | ||||
Property and equipment, net | $ | 145,318 | $ | 119,485 | ||||
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Included in property and equipment are vehicles and equipment under capital leases with an aggregate cost of $0.4 million and $2.8 million and related accumulated depreciation of less than $0.1 million and $1.1 million as of December 31, 2006 and 2005, respectively.
7. | Landfill Sites, Accrued Closure, Post-Closure and Other Obligations |
Landfill Sites
Landfill sites consist of the following as of December 31, 2006 and 2005:
2006 | 2005 | |||||||
Landfill sites | $ | 284,315 | $ | 189,280 | ||||
Less: Accumulated depletion | (46,977 | ) | (32,782 | ) | ||||
Landfill sites, net | $ | 237,338 | $ | 156,498 | ||||
On an annual basis, we update the development cost estimates, closure and post-closure and future capacity estimates for our landfills. Future capacity estimates are updated using surveys to estimate utilized disposal capacity and remaining disposal capacity. These cost and capacity estimates are reviewed and approved by senior management on an annual basis.
Changes in landfill sites for the years ended December 31, 2006, 2005, and 2004 are as follows:
2006 | 2005 | 2004 | ||||||||||
Balance at the beginning of the year | $ | 156,498 | $ | 159,385 | $ | 115,620 | ||||||
Landfill site construction costs | 16,329 | 8,072 | 9,912 | |||||||||
Landfill site expansion costs | 3,162 | — | — | |||||||||
Landfill purchase price | 73,124 | — | 36,490 | |||||||||
Additional asset retirement obligations | 2,287 | 1,753 | 857 | |||||||||
Purchase price allocation adjustments for prior acquisitions | — | 99 | 5,907 | |||||||||
Depletion | (14,019 | ) | (13,106 | ) | (7,995 | ) | ||||||
Divestitures | — | — | (154 | ) | ||||||||
Capitalized interest | — | — | 178 | |||||||||
Effect of foreign exchange rate fluctuations | (43 | ) | 295 | 1,044 | ||||||||
Change in accounting principle | — | — | (2,474 | ) | ||||||||
Balance at the end of the year | $ | 237,338 | $ | 156,498 | $ | 159,385 | ||||||
Accrued Closure, Post-Closure and Other Obligations
Accrued closure, post-closure and other obligations consist of the following as of December 31, 2006 and 2005:
2006 | 2005 | |||||||
Accrued closure and post-closure obligations | $ | 9,941 | $ | 9,074 | ||||
Deferred income tax liability | 22,322 | 16,206 | ||||||
Capital lease obligations | 186 | — | ||||||
Other obligations | 450 | 371 | ||||||
$ | 32,899 | $ | 25,651 | |||||
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accrued closure and post-closure obligations include the 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. Changes in accrued closure and post-closure obligations for the years ended December 31, 2006, 2005 and 2004 are as follows:
2006 | 2005 | 2004 | ||||||||||
Balance at the beginning of the year | $ | 9,074 | $ | 6,385 | $ | 7,737 | ||||||
Additional asset retirement obligations | 2,287 | 1,753 | 857 | |||||||||
Accretion | 819 | 721 | 459 | |||||||||
Acquisitions | 4,199 | — | 52 | |||||||||
Payments | (147 | ) | — | — | ||||||||
Divestitures | — | — | (146 | ) | ||||||||
Purchase price allocation adjustments for prior acquisitions | — | — | (92 | ) | ||||||||
Effect of foreign exchange rate fluctuations | (33 | ) | 215 | 349 | ||||||||
Change in accounting principle | — | — | (2,831 | ) | ||||||||
Balance at the end of the year | 16,199 | 9,074 | 6,385 | |||||||||
Less: Current portion | (6,258 | ) | — | — | ||||||||
Long-term portion | $ | 9,941 | $ | 9,074 | $ | 6,385 | ||||||
The aggregate non-discounted annual payments required in respect of accrued closure and post-closure obligations for our permitted landfill sites as of December 31, 2006 are as follows:
Continuing | Discontinued | |||||||
Operations | Operations | |||||||
2007 | $ | 6,258 | $ | — | ||||
2008 | 387 | — | ||||||
2009 | 4,961 | — | ||||||
2010 | 3,119 | — | ||||||
2011 | 6,657 | — | ||||||
Thereafter | 175,009 | 54,083 | ||||||
$ | 196,391 | $ | 54,083 | |||||
The above future expenditures for closure and post-closure obligations assume full utilization of permitted and probable expansion airspace.
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8. | Goodwill and Other Intangible Assets |
Goodwill and other intangible assets consist of the following as of December 31, 2006 and 2005:
2006 | 2005 | |||||||
Other intangible assets subject to amortization: | ||||||||
Customer relationships and contracts | $ | 43,964 | $ | 34,768 | ||||
Non-competition agreements and other | 3,694 | 2,744 | ||||||
47,658 | 37,512 | |||||||
Less: Accumulated amortization: | ||||||||
Customer relationships and contracts | (17,080 | ) | (12,128 | ) | ||||
Non-competition agreements and other | (2,435 | ) | (1,761 | ) | ||||
Other intangible assets subject to amortization, net | 28,143 | 23,623 | ||||||
Goodwill | 321,892 | 284,246 | ||||||
Goodwill and other intangible assets, net | $ | 350,035 | $ | 307,869 | ||||
Changes in goodwill by reportable segment for the years ended December 31, 2006 and 2005 are as follows:
2006 | ||||||||||||
Florida | Canada | Total | ||||||||||
Balance at the beginning of the year | $ | 199,377 | $ | 84,869 | $ | 284,246 | ||||||
Acquisitions | 35,925 | 2,242 | 38,167 | |||||||||
Purchase price allocation adjustments for prior acquisitions | (258 | ) | — | (258 | ) | |||||||
Effect of foreign exchange rate fluctuations | — | (263 | ) | (263 | ) | |||||||
Balance at the end of the year | $ | 235,044 | $ | 86,848 | $ | 321,892 | ||||||
2005 | ||||||||||||
Florida | Canada | Total | ||||||||||
Balance at the beginning of the year | $ | 174,629 | $ | 85,255 | $ | 259,884 | ||||||
Acquisitions | — | 163 | 163 | |||||||||
Purchase price allocation adjustments for prior acquisitions | 24,748 | (3,279 | ) | 21,469 | ||||||||
Effect of foreign exchange rate fluctuations | — | 2,730 | 2,730 | |||||||||
Balance at the end of the year | $ | 199,377 | $ | 84,869 | $ | 284,246 | ||||||
During the first half 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.
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Amortization expense for other intangible assets was $5.7 million, $7.0 million and $5.9 million for the years ended December 31, 2006, 2005 and 2004, respectively. Estimated future amortization of other intangible assets based on balances existing at December 31, 2006 is as follows:
2007 | $ | 5,352 | ||
2008 | 4,093 | |||
2009 | 3,270 | |||
2010 | 2,850 | |||
2011 | 2,357 | |||
Thereafter | 10,221 | |||
$ | 28,143 | |||
As of December 31, 2006, the weighted average amortization period for other intangible assets is as follows:
Customer relationships and contracts | 11.5 years | |||
Non-competition agreements and other | 3.0 years |
9. | Other Assets |
Other assets consist of the following as of December 31, 2006 and 2005:
2006 | 2005 | |||||||
Debt and redeemable Preferred Stock issue costs, net of accumulated amortization of $3,853 and $4,761 as of December 31, 2006 and 2005, respectively | $ | 9,060 | $ | 9,428 | ||||
Acquisition deposits and deferred acquisition costs | 1,048 | 13,815 | ||||||
Other assets | 559 | 573 | ||||||
$ | 10,667 | $ | 23,816 | |||||
10. | Accrued Expenses and Other Current Liabilities |
Accrued expenses and other current liabilities consist of the following as of December 31, 2006 and 2005:
2006 | 2005 | |||||||
Deferred revenue | $ | 9,568 | $ | 9,145 | ||||
Accrued compensation, benefits and subcontractor costs | 9,670 | 7,849 | ||||||
Accrued waste disposal costs | 6,405 | 6,909 | ||||||
Accrued insurance | 5,327 | 4,360 | ||||||
Accrued interest | 3,557 | 4,207 | ||||||
Accrued acquisition costs | 3,651 | 1,637 | ||||||
Accrued closure and post-closure obligations | 6,258 | — | ||||||
Accrued professional fees | 2,829 | 1,651 | ||||||
Accrued royalties | 1,150 | 161 | ||||||
Current portion of capital lease obligations | 79 | 454 | ||||||
Other accrued expenses and current liabilities | 5,982 | 2,692 | ||||||
$ | 54,476 | $ | 39,065 | |||||
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11. | Debt |
Debt consists of the following as of December 31, 2006 and 2005:
2006 | 2005 | |||||||
Senior Secured Credit Facilities: | ||||||||
Revolving credit facility | $ | — | $ | — | ||||
Term loan facility, floating interest rate at 10.0% (adjusted to 8.1% in January 2007) and 7.9% as of December 31, 2006 and 2005, respectively, due $613 per quarter to March 2010, $59,322 per quarter thereafter, due March 2011 | 245,260 | 123,250 | ||||||
Senior Subordinated Notes, fixed interest rate at 9.5%, due 2014 | 160,000 | 160,000 | ||||||
Other secured notes payable, interest at 4.3% to 4.5%, due through 2025 | 2,041 | — | ||||||
Other subordinated notes payable, interest at 6.7%, due through 2017 | 2,787 | 2,965 | ||||||
410,088 | 286,215 | |||||||
Less: Current portion | (3,975 | ) | (1,365 | ) | ||||
Long-term portion | $ | 406,113 | $ | 284,850 | ||||
The aggregate annual principal repayments required in respect to debt as of December 31, 2006 are as follows:
2007 | $ | 3,975 | ||
2008 | 2,772 | |||
2009 | 2,792 | |||
2010 | 178,940 | |||
2011 | 59,595 | |||
Thereafter | 162,014 | |||
$ | 410,088 | |||
Senior Secured Credit Facilities
On April 30, 2004, we entered into 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 December 31, 2006, there were no amounts outstanding on the revolving credit facility, while $22.1 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 Euro dollar 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
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
March 28, 2005 we issued 2,640,845 (pre-reverse split) shares of common stock and 264,085 (pre-reverse split) 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 $48.0 million of this facility to refinance amounts then outstanding under our existing revolving credit facility and to finance certain acquisitions.
On December 28, 2006, we entered into the Second Amended and Restated Credit Agreement, replacing the previous credit agreement, with Lehman Brothers, Inc. as Arranger, and the other lenders named therein. The amended and restated agreement increased the amount of term loans outstanding by $100.0 million to $245.3 million in total, reduced the current interest rate on the term loans by 25 basis points from the previously effective rate to LIBOR plus 2.75% and provided for certain other modifications.
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 December 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 semiannually 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 indebtedness under 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 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. The 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;
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(iv) certain investments; (v) the repurchase of our Preferred Stock; (vi) transactions with affiliates; and (vii) certain sales of assets.
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.
12. | Cumulative Mandatorily Redeemable Preferred Shares |
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 (pre-reverse split) warrants to purchase shares of our common stock for $3.00 (pre-reverse split) per share. The warrants had an allocated value of $14.8 million and are classified as a component of equity. 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 were non-voting and entitled the holders to cash dividends of 17.75% per annum compounding and accruing quarterly in arrears.
In December 2006, we exchangedand/or redeemed the outstanding shares of Preferred Stock through the proceeds of a private placement of our common shares. The liquidation preference on the date of redemption approximated $103.1 million. A portion of the redemption was funded by an exchange and redemption agreement with Kelso pursuant to which we agreed, through a private placement, to issue 2,894,737 shares of common stock to Kelso, at a price of $9.50 per share, in exchange for shares of our Preferred Stock in an amount equal to $27.5 million. We recognized a non-cash charge of approximately $1.2 million for the exchange of common stock for the Preferred Stock, representing the difference between the issue price of the common stock to Kelso and the fair market value of our common shares on the date of redemption, which is included in cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs on the Statement of Operations and Comprehensive Loss.
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. | Commitments and Contingencies |
Leases
The following is a schedule of future minimum capital and operating lease payments as of December 31, 2006:
Operating Leases | ||||||||||||
Capital | Continuing | Discontinued | ||||||||||
Leases | Operations | Operations | ||||||||||
2007 | $ | 93 | $ | 4,203 | $ | 1,142 | ||||||
2008 | 71 | 3,686 | 1,002 | |||||||||
2009 | 132 | 2,613 | 770 | |||||||||
2010 | — | 2,204 | 780 | |||||||||
2011 | — | 2,141 | 802 | |||||||||
Thereafter | — | 8,189 | 338 | |||||||||
296 | $ | 23,036 | $ | 4,834 | ||||||||
Less: Amount representing interest | (31 | ) | ||||||||||
265 | ||||||||||||
Less: Current portion of capital lease obligations | (79 | ) | ||||||||||
Long-term capital lease obligations | $ | 186 | ||||||||||
We have entered into operating lease agreements, primarily consisting of leases for our various facilities. Total rent expense under operating leases charged to operations was approximately $3.3 million, $2.4 million and $3.4 million for the years ended December 31, 2006, 2005 and 2004, respectively. We lease certain heavy equipment and hauling vehicles under capital lease agreements. The assets related to these leases have been capitalized and are included in property and equipment. All capital lease obligations relate to our continuing operations.
Surety Bonds and Letters of Credit
Municipal solid waste service and other service contracts, 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. To collateralize our obligations we have provided customers, various regulatory authorities and our insurer with such bonds and letters of credit amounting to approximately $74.6 million and $65.5 million as of December 31, 2006 and 2005, respectively. The majority of these obligations expire each year and will need to be renewed.
Environmental Risks
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 the 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 Consolidated Financial Statements, we estimate the range of reasonably possible losses related to environmental matters to be insignificant and are not aware of any such environmental liabilities that would be material to our operations or financial condition.
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Disposal Agreement
On November 22, 2002, we entered into a Put or Pay Disposal Agreement (the “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. (“Intersan”), a subsidiary of Waste Management of Canada Corporation (formerly Canadian Waste Services, Inc.), pursuant to which we, together with the RCI Companies, agreed to deliver to certain of Intersan’s landfill sites and transfer stations in Quebec, Canada, over the 5 year period from the date of the Disposal Agreement, 850,000 metric tonnes of waste per year, and for the next 2 years after the expiration of the first 5 year term, 710,000 metric tonnes of waste per year at a fixed disposal rate set out in the Disposal Agreement. If we and the RCI Companies fail to deliver the required tonnage, we are jointly and severally required to pay to Intersan, C$23.67 per metric tonne for every tonne below the required tonnage. If a portion of the annual tonnage commitment is not delivered to a specific site we are also required to pay C$8.00 per metric tonne for every tonne below the site specific allocation. Our obligations to Intersan are secured by a letter of credit for C$4.0 million. The companies within the RCI Group are controlled by a director of oursand/or individuals related to that director.
Concurrent with the Disposal Agreement, we entered into a three-year agreement with Canadian Waste Services, Inc. to allow us to deliver up to 75,000 tons in year one and up to 100,000 tons in years two and three of non-hazardous solid waste to their landfill in Michigan at negotiated fixed rates per ton, which has now expired.
Collective Bargaining Agreements
As of December 31, 2006, approximately 48% of our employees in Canada were subject to various collective bargaining agreements. Currently, there are no significant grievances with regards to these agreements.
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, provincial, state 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.
In December 2002, Waste Management of Canada Corporation (formerly Canadian Waste Service, Inc.), one of our competitors, commenced an action in the Court of Queen’s Bench of Alberta against us and one of our former employees in Western Canada who had previously been employed by Canadian Waste. The action alleges breach of the employment contract between the former employee and Canadian Waste, and breach of fiduciary duties. The action also alleges that we participated in those alleged breaches. The action seeks damages in the amount of approximately C$14.5 million, and an injunction enjoining the former employee from acting contrary to his alleged employment contract and fiduciary duties.
In July 2004, Waste Management, Inc. filed a suit in the District Court of Harris County, Texas against our President and Chief Operating Officer, Charles A. Wilcox, for breach of contract, including breach of a non-competition agreement, and for a temporary and a permanent injunction. Mr. Wilcox is presently subject to a temporary order restraining him from engaging in certain activities adverse to the interests of Waste Management, Inc. In April 2005, Waste Management filed an amended petition and application for injunction naming us as a defendant to the suit and claiming, among other things, tortious interference with contractual relations and seeking compensatory damages from us.
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We intend to vigorously defend these actions both with respect to liability and damages. No provision has been made in these financial statements for the above matters. We do not 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.
In March 2005, we filed a Complaint against Waste Management, Inc. in the United States 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 would be liable for treble damages, or in excess of $75.0 million. On February 9, 2007, the Court granted summary judgment dismissing all of our claims. We intend to appeal this judgment.
Registration Rights Agreements
In March 2005, pursuant to a bank amendment entered into in October 2004, we received an equity investment of $7.5 million ($6.8 million net). As consideration we issued 2,640,845 (pre-reverse split) shares of our common stock and 264,085 (pre-reverse split) warrants to purchase our common stock at $2.84 (pre-reverse split) per share. We also entered into a registration rights agreement that required us to use our best commercial efforts to obtain and maintain an effective registration statement. The registration rights agreement does not provide for penalties or monetary consideration for our failure to obtain, or maintain, an effective registration statement.
During 2006, we issued 6,114,866 (pre-reverse split) shares of our common stock in connection with our acquisitions of Liberty Waste and Sun Country Materials, which are subject to a registration rights agreement that provides for the shares to be registered six months after request for registration. The request for registration was received on June 30, 2006. A registration statement in accordance with the registration rights agreement was declared effective on February 5, 2007, and subsequently only partial damages will be paid to the holders.
In November 2006, we entered into a subscription agreement with Westbury (Bermuda) Limited (“Westbury”) and Prides Capital, LLC (“Prides”) pursuant to which we agreed through a private placement to issue an aggregate of 7,000,001 shares of our common stock to Westbury and Prides for a purchase price of $66.5 million. We also entered into an exchange and redemption agreement with Kelso pursuant to which we have agreed through a private placement to issue 2,894,737 shares of our common stock to Kelso in exchange for shares of our Preferred Stock in an amount equal to $27.5 million. In connection with this private placement, we entered into a registration rights agreement with these purchasers whereby within 15 days of the closing date of the private placement (December 15, 2006) we have agreed to have a registration statement filed with the SEC to register the common shares for resale under the Securities Act. After the filing of the registration statement, we have 90 days to have the registration agreement declared effective by the SEC. Should we be late or are unable to keep the registration statement effective, we may be subject to penalties of 1.0% of the proceeds per 30 day period, not to exceed 12.0% in the aggregate. On December 21, 2006 we filed aForm S-3 seeking to register these shares and on February 5, 2007 the registration statement was declared effective.
Other Commitments
In December 2003, we issued 600,000 (pre-reverse split) 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 would reimburse the seller for the loss on sale of shares below $4.75 (pre-reverse split) per share. During the first quarter of 2006, we received a claim for reimbursement and full settlement under the agreement of $0.9 million, which was charged to additional paid-in capital.
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
14. | Capital Stock |
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 (pre-reverse split) shares of our common stock; and (ii) the conversion of the remaining 9,229,676 common shares of Waste Services (CA) held bynon-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 will (i) receive the same dividends as holders of shares of our common stock and (ii) 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-third of one vote for each exchangeable share).
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 one-third of one share of our common stock, plus all declared and unpaid dividends on the exchangeable share and payment for any fractional shares. Unless certain events occur, such redemption date will not be earlier than December 31, 2016. Holders of exchangeable shares also have the right at any anytime at their option, to exchange their exchangeable shares for shares of our common stock on the basis of one-third of a share of our common stock for each one exchangeable share.
Equity Placements
On December 15, 2006, we issued 7,000,001 shares of our common stock to Westbury and Prides for a purchase price of $66.5 million. We also issued 2,894,737 shares of our common stock to Kelso in exchange for shares of our previously outstanding Preferred Stock in an amount equal to $27.5 million, all of which were owned by Kelso.
On March 4, 2005, we exercised our put rights under our standby purchase agreement with Michael DeGroote, thereby requiring Mr. DeGroote to purchase 2,640,845 (pre-reverse split) shares of our common stock and 264,085 (pre-reverse split) common stock purchase warrants for $7.5 million on or before March 28, 2005. This equity infusion was required as a condition to our amended Credit Facility.
On April 30, 2004, we raised approximately $50.7 million, after deducting expenses of approximately $2.9 million, from the sale of 13,400,000 (pre-reverse split) common shares and 1,340,000 (pre-reverse split) common stock purchase warrants in private placement transactions to certain investors. Sanders Morris Harris Inc. acted as the placement agent for the issuance and was paid a placement agent fee of approximately $2.7 million. Don A. Sanders, a director of ours at the time of such issuance, is a principal of Sanders Morris Harris Inc.
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock Option Plans
We have a 1997 Stock Option Plan and a 1999 Stock Option Plan. All options granted under the 1997 and 1999 Stock Option Plans have been granted at or above market price. Under the 1997 Stock Option Plan, we may grant options to acquire shares of our common stock up to a maximum of 10.0% of the then issued and outstanding common shares on an as converted basis. All of the options issued under the 1997 plan vested on completion of the initial public offering of our securities. No options remain outstanding under the 1997 plan as of December 31, 2005.
Under the 1999 Stock Option Plan, we may grant options to acquire shares of our common stock up to a maximum of 19% of the then issued and outstanding shares of common stock and common stock equivalents, including stock options issued under the 1997 Stock Option Plan. Options granted to non-employee directors will generally vest one year from the date of grant. Options granted to employees become exercisable only after the second anniversary of the grant date, unless otherwise determined by the Compensation Committee. No option will remain exercisable later than five years after the grant date, unless the Compensation Committee determines otherwise. Upon a change of control event, options become immediately exercisable.
Certain of our options are priced in Canadian dollars and certain options are priced in U.S. dollars. Stock option activity, for employee options covered by the 1997 and 1999 Stock Option Plans for the years ended December 31, 2006, 2005 and 2004 is as follows:
2006 | 2005 | 2004 | ||||||||||
Options outstanding at the beginning of the year | 4,187,833 | 4,217,654 | 2,602,233 | |||||||||
Options granted | 55,000 | 292,000 | 1,824,000 | |||||||||
Options exercised | — | (5,000 | ) | (64,167 | ) | |||||||
Options forfeited | (181,167 | ) | (277,833 | ) | (102,667 | ) | ||||||
Options expired | (946,166 | ) | (38,988 | ) | (41,745 | ) | ||||||
Options outstanding at the end of the year | 3,115,500 | 4,187,833 | 4,217,654 | |||||||||
Weighted average exercise price: (US$ Options) | ||||||||||||
Options granted | $ | 9.99 | $ | 10.80 | $ | 14.46 | ||||||
Options exercised | — | 10.59 | 11.19 | |||||||||
Options forfeited | 13.35 | 15.15 | 14.82 | |||||||||
Options expired | 13.02 | 12.00 | 34.71 | |||||||||
Weighted average exercise price: (C$ Options In C$) | ||||||||||||
Options granted | $ | — | $ | — | $ | 22.11 | ||||||
Options exercised | — | — | 15.66 | |||||||||
Options forfeited | 15.96 | 19.47 | 19.41 | |||||||||
Options expired | 15.45 | 47.97 | 54.15 |
No options were exercised during 2006. The total intrinsic value of options exercised during the years ended December 31, 2005 and 2004 was less than $0.1 million and $0.2 million, respectively. The weighted-average grant-date fair value of options granted was $6.36, $10.80 and $6.99 for the years ended December 31, 2006, 2005 and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2004, respectively. The fair value of options granted is estimated using a Black-Scholes option pricing model using the following assumptions:
2006 | 2005 | 2004 | ||||||||||
Annual dividend yield | — | — | — | |||||||||
Weighted average expected life (years) | 3.0 | 2.8 | 3.0 | |||||||||
Risk-free interest rate | 4.83 | % | 2.57% — 4.62 | % | 2.57% — 3.25 | % | ||||||
Expected volatility | 38 | % | 39 | % | 84 | % |
Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for a term commensurate with the expected life of the options issued. We believe this method produces an estimate that is representative of our expectations of the volatility over the expected life of our options. We currently have no reason to believe future volatility over the expected life of these options is likely to differ materially from historical volatility. The weighted-average expected life is based upon share option exercises, pre and post vesting terminations and share option term expirations. 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.
As a result of adopting SFAS 123(R) our net loss from continuing operations for the year ended December 31, 2006 was reduced by $1.9 million ( and $1.9 million net of tax). The effect on both basic and diluted loss per share was $0.05.
As of December 31, 2006, $0.4 million of total unrecognized compensation cost related to employee stock options is expected to be recognized over a weighted average period of approximately 0.4 years. Additional information relative to our employee options outstanding at December 31, 2006 is summarized as follows:
Options | Options | |||||||
Outstanding | Exercisable | |||||||
Number of U.S. dollar denominated options | 1,962,833 | 1,693,833 | ||||||
Number of Canadian dollar denominated options | 1,152,667 | 1,152,667 | ||||||
Total number of options | 3,115,500 | 2,846,500 | ||||||
Aggregate intrinsic value of options | $ | 46 | $ | 42 | ||||
Weighted average remaining contractual term (years) | 2.1 | 2.0 | ||||||
Weighted average exercise price — U.S. dollar denominated options | $ | 13.35 | $ | 13.80 | ||||
Weighted average exercise price — Canadian dollar denominated options | $ | 20.55 | $ | 20.55 |
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 2006 and the exercise price, multiplied by the number ofin-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2006. As of December 31, 2006, we have not provided for forfeitures relative to our unvested stock options outstanding under our stock option plans due to the relatively short vesting period remaining on these options and the de minimus nature of potential future forfeitures for these options.
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 years ended December 31, 2005 and 2004:
2005 | 2004 | |||||||
Net loss as reported | $ | (50,290 | ) | $ | (48,154 | ) | ||
Add: Employee compensation expense (benefit) for equity awards included in the determination of net loss as reported | 344 | (1,420 | ) | |||||
Less: Stock based employee compensation expense for equity awards determined by the fair value based method prescribed under SFAS 123 | (9,994 | ) | (8,892 | ) | ||||
Pro forma net loss | $ | (59,940 | ) | $ | (58,466 | ) | ||
Basic and diluted loss per share: | ||||||||
As reported | $ | (1.53 | ) | $ | (1.63 | ) | ||
Pro forma | $ | (1.82 | ) | $ | (1.99 | ) | ||
The above pro forma disclosures are provided for 2005 and 2004 because employee stock options were not accounted for using the fair-value method during that period. No pro forma disclosure has been presented for 2006 as share-based payments to employees have been accounted for under SFAS 123(R)’s fair-value method for such periods.
Warrants
We have outstanding warrants to purchase shares of our common stock. The following table summarizes these warrants for the years ended December 31, 2006, 2005 and 2004 (showing the number of shares of our common stock that can be purchased on exercise):
2006 | 2005 | 2004 | ||||||||||||||||||||||
Number of | Warrant | Number of | Warrant | Number of | Warrant | |||||||||||||||||||
Warrants | Price Ranges | Warrants | Price Ranges | Warrants | Price Ranges | |||||||||||||||||||
Warrants outstanding at the beginning of the year | 5,064,850 | $ | 8.10 - $17.25 | 5,076,705 | $ | 8.10 - $17.25 | 4,603,505 | $ | 8.10 - $14.10 | |||||||||||||||
Warrants issued during the year | — | — | 88,028 | $ | 8.52 | 513,333 | $ | 4.00 - $17.25 | ||||||||||||||||
Warrants exercised during the year | (20,444 | ) | $ | 9.00 | (49,883 | ) | $ | 9.00 - $9.60 | (40,133 | ) | $ | 9.00 | ||||||||||||
Warrants expired during the year | — | — | (50,000 | ) | $ | 11.82 | — | — | ||||||||||||||||
Warrants outstanding at the end of the year | 5,044,406 | $ | 8.10 - $17.25 | 5,064,850 | $ | 8.10 -$17.25 | 5,076,705 | $ | 8.10 - $17.25 | |||||||||||||||
Warrants exercisable at the end of the year | 5,022,184 | $ | 8.10 - $17.25 | 5,020,406 | $ | 8.10 -$17.25 | 5,010,038 | $ | 8.10 - $17.25 | |||||||||||||||
The weighted average exercise price of warrants that were exercisable was $9.36, $9.30 and $9.33 as of December 31, 2006, 2005 and 2004, respectively. The weighted average remaining contractual life of warrants outstanding at December 31, 2006 was 1.7 years.
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
15. | Income Taxes |
The income tax provision for the years ended December 31, 2006, 2005 and 2004 consists of the following:
2006 | 2005 | 2004 | ||||||||||
Current: | ||||||||||||
Federal | $ | — | $ | — | $ | — | ||||||
State | — | — | — | |||||||||
Canada | 1,816 | 555 | 369 | |||||||||
Current income tax provision | 1,816 | 555 | 369 | |||||||||
Deferred: | ||||||||||||
Federal and state deferred | 6,436 | 5,452 | 3,983 | |||||||||
Foreign deferred | 4,568 | 6,129 | 3,235 | |||||||||
Deferred income tax provision | 11,004 | 11,581 | 7,218 | |||||||||
Provision for income taxes | $ | 12,820 | $ | 12,136 | $ | 7,587 | ||||||
Pre-tax loss from our continuing U.S. operations was $49.1 million, $53.1 million and $50.1 million for the years ended December 31, 2006, 2005 and 2004, respectively. Pre-tax income from our Canadian operations was $14.8 million, $14.8 million and $9.9 million for the years ended December 31, 2006, 2005 and 2004, respectively.
The reconciliation of the difference between income taxes at the statutory U.S. federal and Canadian federal and provincial income tax rates and the income tax provision before cumulative effect of change in accounting principle for the years ended December 31, 2006, 2005 and 2004 is as follows:
2006 | 2005 | 2004 | ||||||||||
Provision at statutory rate | $ | (12,408 | ) | $ | (13,263 | ) | $ | (14,277 | ) | |||
State, net of federal benefit | (1,787 | ) | (1,912 | ) | (2,042 | ) | ||||||
Non-deductible stock based compensation | 140 | 377 | 514 | |||||||||
Non-deductible interest expense and preferred stock dividends | 7,919 | 7,490 | 6,921 | |||||||||
Non-deductible foreign exchange (gains) and loss | 538 | 146 | (16 | ) | ||||||||
Other permanent differences | 478 | 710 | (601 | ) | ||||||||
Distributed earnings in foreign subsidiary | 3,033 | 2,430 | 1,866 | |||||||||
Valuation allowance | 14,907 | 15,922 | 14,953 | |||||||||
Large corporations tax | — | 236 | 269 | |||||||||
Income tax provision | $ | 12,820 | $ | 12,136 | $ | 7,587 | ||||||
The income tax provision of $0.1 million for the year ended December 31, 2004 related to the cumulative effect of change in accounting principle and was provided at statutory rates.
The income tax provision (benefit) of $(0.6) million, $0.1 million and $(0.2) million for the years ended December 31, 2006, 2005 and 2004, respectively, related to discontinued operations and was provided at statutory rates.
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred income tax assets and liabilities consist of the following as of December 31, 2006, 2005 and 2004:
2006 | 2005 | 2004 | ||||||||||
Deferred income tax assets: | ||||||||||||
Tax loss carry forward — U.S. | $ | 43,675 | $ | 31,922 | $ | 18,237 | ||||||
Foreign tax credit carry forward — U.S. | 1,155 | — | — | |||||||||
Tax loss carry forward — Canada | — | 4,763 | 10,602 | |||||||||
Accruals not currently deductibles — U.S. | 4,266 | 755 | 2,004 | |||||||||
Less: Valuation allowance — U.S. | (49,096 | ) | (32,677 | ) | (18,375 | ) | ||||||
Net deferred tax assets | — | 4,763 | 12,468 | |||||||||
Deferred income tax liabilities: | ||||||||||||
Book basis in property and goodwill in excess of tax basis — U.S. | (15,872 | ) | (9,436 | ) | (3,984 | ) | ||||||
Book basis in property and goodwill in excess of tax basis — Canada | (6,450 | ) | (6,770 | ) | (9,400 | ) | ||||||
Undistributed earnings in foreign subsidiary — U.S. | — | — | (1,866 | ) | ||||||||
Net deferred income tax liability | (22,322 | ) | (11,443 | ) | (2,782 | ) | ||||||
Less: current portion of deferred taxes | — | (4,763 | ) | — | ||||||||
Net deferred income tax liability long-term | $ | (22,322 | ) | $ | (16,206 | ) | $ | (2,782 | ) | |||
Due to the lack of operating history relative to our U.S. operations, we have provided a valuation allowance for our U.S. net operating loss carry forwards and deferred tax assets, net of certain deferred tax liabilities. We have provided for current taxes on the distributed earnings of our Canadian subsidiaries in connection with certain tax planning initiatives. As of December 31, 2006, we have approximately $109.2 million of gross net operating loss carry-forwards, which expire from 2023 to 2026. As of December 31, 2006, we have foreign tax credit carry-forwards of approximately $1.2 million, which expire during 2016.
For tax purposes generally, goodwill acquired as a result of an asset-based United States acquisition is deducted over a15-year period and 75% of goodwill acquired in an asset-based Canadian acquisition is deducted based on a 7% declining balance.
Changes in the deferred tax valuation allowance for the years ended December 31, 2006, 2005 and 2004 are as follows:
2006 | 2005 | 2004 | ||||||||||
Balance at the beginning of the year | $ | 32,677 | $ | 18,375 | $ | 2,641 | ||||||
Additions to valuation allowance | 14,907 | 15,922 | 14,953 | |||||||||
Increase due to acquisitions | 1,327 | — | — | |||||||||
Increase due to foreign tax credit carry-forwards | 1,155 | — | — | |||||||||
Adjustments to valuation allowance | (970 | ) | (1,620 | ) | 781 | |||||||
Balance at the end of the year | $ | 49,096 | $ | 32,677 | $ | 18,375 | ||||||
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16. | Net Loss Per Share Information |
The following table sets forth the calculation of the numerator and denominator used in the computation of basic and diluted net loss per share for the years ended December 31, 2006, 2005 and 2004:
2006 | 2005 | 2004 | ||||||||||
Numerator: | ||||||||||||
Net loss | $ | (48,531 | ) | $ | (50,290 | ) | $ | (48,154 | ) | |||
Denominator: | ||||||||||||
Basic and diluted weighted average number of common shares outstanding | 35,354 | 32,880 | 29,410 | |||||||||
Antidilutive securities not included in the diluted earnings per share calculation: | ||||||||||||
Options to purchase Common Shares | 1 | 14 | 99 | |||||||||
Warrants to purchase Common Shares | 245 | 719 | 729 | |||||||||
246 | 733 | 828 | ||||||||||
17. | Retirement Plan |
We sponsor a defined contribution Deferred Profit Sharing Plan (“DPSP”) for our Canadian domiciled employees. Eligible employees may contribute pre-tax compensation to a Registered Retirement Savings Plan, subject to certain governmental limits and restrictions. We match 100% of the employee contributions, up to the first 3% of the employee’s compensation which is deferred. Participant contributions vest immediately and employer contributions vest after the employee has two years of participation in the DPSP. The matched contributions totaled approximately $0.5 million, $0.5 million and $0.4 million for the years ended December 31, 2006, 2005 and 2004, respectively.
During 2004, we established a 401(k) Plan for employees located in the United States. The domestic plan provides for employees to contribute up to 50% of their eligible compensation, subject to certain IRS limits. Since the inception of the 401(k) Plan, we have provided a discretionary match of 50% of the employee contributions, on the first 6% of the employee’s contribution. Participant contributions vest immediately and employer contributions vest after two years of employment. The 401(k) Plan also provides for a loan provision, with limitation. We matched contributions totaling approximately $0.3 million, $0.4 million and $0.2 million for the years ended December 31, 2006, 2005 and 2004, respectively.
18. | 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. As previously discussed, we have entered into a definitive agreement whereby we plan to divest of our Arizona operations, as such the results of our Arizona operations are presented as discontinued operations and are not included in the segment data presented herein.
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
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 both of our domestic corporate and Canadian corporate offices as “Corporate.” For information regarding our geographic areas refer to Note 22.
Summarized financial information concerning our reportable segments as of and for the years ended December 31, 2006, 2005 and 2004 is as follows:
2006 | ||||||||||||||||||||
All Other | ||||||||||||||||||||
Florida | Canada | Operations | Corporate | Total | ||||||||||||||||
Revenue | $ | 203,381 | $ | 188,028 | $ | 4,714 | $ | — | $ | 396,123 | ||||||||||
Depreciation, depletion and amortization | 23,762 | 15,981 | 1,628 | 1,442 | 42,813 | |||||||||||||||
Income (loss) from operations | 26,081 | 29,332 | (395 | ) | (38,708 | ) | 16,310 | |||||||||||||
Capital expenditures | 22,156 | 21,265 | 2,623 | 1,241 | 47,285 | |||||||||||||||
Total assets | 482,776 | 203,754 | 46,883 | 77,194 | 810,607 |
2005 | ||||||||||||||||||||
All Other | ||||||||||||||||||||
Florida | Canada | Operations | Corporate | Total | ||||||||||||||||
Revenue | $ | 187,041 | $ | 166,331 | $ | 2,684 | $ | — | $ | 356,056 | ||||||||||
Depreciation, depletion and amortization | 20,044 | 18,045 | 992 | 1,580 | 40,661 | |||||||||||||||
Income (loss) from operations | 11,572 | 23,622 | (1,082 | ) | (23,220 | ) | 10,892 | |||||||||||||
Capital expenditures | 16,581 | 9,670 | 923 | 1,719 | 28,893 | |||||||||||||||
Total assets | 398,255 | 191,108 | 44,970 | 37,665 | 671,998 |
2004 | ||||||||||||||||||||
All Other | ||||||||||||||||||||
Florida | Canada | Operations | Corporate | Total | ||||||||||||||||
Revenue | $ | 144,089 | $ | 142,718 | $ | 298 | $ | — | $ | 287,105 | ||||||||||
Depreciation, depletion and amortization | 15,588 | 15,392 | 179 | 998 | 32,157 | |||||||||||||||
Income (loss) from operations | 8,170 | 16,550 | (332 | ) | (16,248 | ) | 8,140 | |||||||||||||
Capital expenditures | 14,687 | 12,054 | 9,793 | 1,289 | 37,823 | |||||||||||||||
Total assets | 368,619 | 196,204 | 45,150 | 60,853 | 670,826 |
19. | Related Party Transactions |
During 2004, David Sutherland-Yoest, our Chairman and Chief Executive Officer, used the services of an aircraft owned by Gary W. DeGroote, at a total cost of C$0.2 million. This amount was based upon the fixed and operating expenses of the aircraft.
Stanley A. Sutherland, thefather-in-law of David Sutherland-Yoest, our Chairman and Chief Executive Officer, was employed by us for each of the three years ended 2006 as Executive Vice President and Chief Operating Officer, Western Canada and received C$0.6 million, C$0.5 million and C$0.5 million in employment compensation for the years ended December 31, 2006, 2005 and 2004, respectively. This compensation was consistent with compensation paid to other executives in similar positions.
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During 2004 and 2005, David Sutherland-Yoest, our Chairman and Chief Executive Officer, conducted ongoing negotiations with Lucien Rémillard with respect to our potential acquisition of the solid waste collection and disposal assets owned by a company controlled by Mr. Rémillard in Quebec. In connection with these negotiations, we reimbursed Mr. Rémillard’s company for expenses in the aggregate amount of approximately C$3.2 million for services provided by third parties to December 31, 2005 in connection with preparing audited financial statements of the business and with ongoing efforts to expand the capacity of a solid waste landfill. In April 2006, we ceased being actively engaged in negotiations with Mr. Rémillard.
We lease office premises in an office tower in Burlington, Ontario owned by Westbury International (1991) Corporation, a property development company controlled by Michael H. DeGroote, a brother of Gary W. DeGroote, one of our directors. The leased premises consist of approximately 9,255 square feet. The term of the lease is 10.5 years commencing in 2004, with a right to extend for a further five years. Base rent escalates from C$0.1 million to C$0.2 million per year in increments over the term of the lease.
We paid Kelso and Company, L.P., an affiliate of Kelso, an advisory services fee of $1.65 million in connection with the issuance of 55,000 shares of WSI Preferred Stock to Kelso in May 2003. In February 2004, we also paid Kelso and Company, L.P., a $0.5 million fee in connection with services related to the arrangement of the364-Day Credit Facilities that was entered into on December 31, 2003 and repaid in full on April 30, 2004. One of our directors, George E. Matelich is a Managing Director of Kelso & Company L.P. Another of our directors, Michael B. Lazar was a Managing Director of Kelso & Company, L.P from 1993 to 2005.
In November of 2002, we entered into a Put or Pay Disposal agreement with the RCI Companies which are controlled by one of our directors, Mr. Lucien Rémillard. Concurrently with the Put or Pay Disposal Agreement, we entered into a three year disposal agreement with Canadian Waste Services Inc. which provided us with access to Canadian Waste’s Michigan landfill at negotiated fixed rates per ton and which expired in the third quarter of 2005. 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.
These transactions are in the normal course of operations and are recorded at the exchange amount, which is the consideration agreed to between the respective parties.
20. | Supplementary Cash Flow Information |
Supplemental non-cash financing activities and other cash flow information for the years ended December 31, 2006, 2005 and 2004 are as follows:
2006 | 2005 | 2004 | ||||||||||
Common Shares issued relative to acquisitions | $ | 26,581 | $ | 1,146 | $ | 88,078 | ||||||
Amounts accrued for capital expenditures | 2,354 | 1,543 | — | |||||||||
Capital expenditures financed with notes payable | 1,202 | — | — | |||||||||
Other cash flow information: | ||||||||||||
Cash paid for interest | $ | 31,555 | $ | 26,847 | $ | 15,782 | ||||||
Cash paid for income taxes | 853 | 683 | 341 |
During 2006, we exchangedand/or redeemed our Preferred Stock for approximately $103.1 million, of which approximately $75.6 million was paid in cash and $27.5 million was redeemed through an exchange of 2,894,737 shares of our common stock. Of the total $103.1 million Preferred Stock redeemed, approximately $48.1 million relates to accrued dividends.
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
21. | Selected Quarterly Financial Data (unaudited) |
The following table summarizes the unaudited quarterly results of operations as reported for 2006 and 2005 (in thousands of U.S. dollars, except per share amounts) (See also Note 4 — Business Combinations, Significant Asset Acquisitions and Disposals of Businesses):
2006 | ||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
Revenue | $ | 88,560 | $ | 101,587 | $ | 104,932 | $ | 101,044 | ||||||||
Income (loss) from operations | (4,304 | ) | 4,824 | 8,106 | 7,684 | |||||||||||
Net loss from continuing operations | (18,026 | ) | (11,212 | ) | (8,114 | ) | (9,716 | ) | ||||||||
Net income (loss) from discontinued operations | (739 | ) | 136 | (479 | ) | (381 | ) | |||||||||
Net loss | (18,765 | ) | (11,076 | ) | (8,593 | ) | (10,097 | ) | ||||||||
Basic and diluted loss per share: | ||||||||||||||||
Loss per share — continuing operations | $ | (0.54 | ) | $ | (0.33 | ) | $ | (0.22 | ) | $ | (0.26 | ) | ||||
Income (loss) per share — discontinued operations | (0.02 | ) | 0.01 | (0.02 | ) | (0.01 | ) | |||||||||
Loss per share — basic and diluted | $ | (0.56 | ) | $ | (0.32 | ) | $ | (0.24 | ) | $ | (0.27 | ) | ||||
Shares used in computing per share amounts | 33,377 | 34,130 | 36,066 | 37,788 |
2005 | ||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
Quarter | Quarter | Quarter | Quarter | |||||||||||||
Revenue | $ | 82,907 | $ | 88,853 | $ | 94,535 | $ | 89,761 | ||||||||
Income (loss) from operations | (437 | ) | 921 | 6,239 | 4,169 | |||||||||||
Net loss from continuing operations | (14,425 | ) | (14,374 | ) | (9,680 | ) | (11,945 | ) | ||||||||
Net income (loss) from discontinued operations | 158 | (140 | ) | 269 | (153 | ) | ||||||||||
Net loss | (14,267 | ) | (14,514 | ) | (9,411 | ) | (12,098 | ) | ||||||||
Basic and diluted loss per share: | ||||||||||||||||
Loss per share — continuing operations | $ | (0.44 | ) | $ | (0.44 | ) | $ | (0.29 | ) | $ | (0.36 | ) | ||||
Income (loss) per share — discontinued operations | — | — | 0.01 | — | ||||||||||||
Loss per share — basic and diluted | $ | (0.44 | ) | $ | (0.44 | ) | $ | (0.28 | ) | $ | (0.36 | ) | ||||
Shares used in computing per share amounts | 32,172 | 33,024 | 33,137 | 33,172 |
22. | 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 its domestic restricted subsidiaries are full and unconditional and joint and several with respect to the Senior Subordinated Notes, including principal, interest, premium, if any, and liquidated damages, if any. Presented below are Consolidating Balance Sheets as of December 31, 2006 and 2005 and the related Condensed Consolidating Statements of Operations and Cash Flows for each of the three years ended December 31, 2006 of Waste Services and the guarantor subsidiaries (“Guarantors”), our domestic operations, and the subsidiaries which are not guarantors (“Non-guarantors”), our Canadian operations. Changes in our investment in subsidiary balances are primarily affected by equity earnings in investee, changes in accumulated other comprehensive income, subsidiary stock-based compensation and contributions (distributions) from/to parent. These condensed consolidating statements have been re-cast to reflect Waste Services, Inc. as the parent from the earliest period presented:
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2006 | ||||||||||||||||
Non- | ||||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 2,753 | $ | 5,779 | $ | — | $ | 8,532 | ||||||||
Accounts receivable, net | 24,801 | 27,660 | — | 52,461 | ||||||||||||
Prepaid expenses and other current assets | 2,894 | 3,362 | — | 6,256 | ||||||||||||
Current assets of discontinued operations | 3,870 | — | — | 3,870 | ||||||||||||
Total current assets | 34,318 | 36,801 | — | 71,119 | ||||||||||||
Property and equipment, net | 76,117 | 69,201 | — | 145,318 | ||||||||||||
Landfill sites, net | 223,507 | 13,831 | — | 237,338 | ||||||||||||
Goodwill and other intangible assets, net | 262,056 | 87,979 | — | 350,035 | ||||||||||||
Other assets | 10,667 | — | — | 10,667 | ||||||||||||
Due from affiliates | — | 344 | (344 | ) | — | |||||||||||
Investment in subsidiary | 167,448 | — | (167,448 | ) | — | |||||||||||
Non-current assets of discontinued operations | 50,586 | — | — | 50,586 | ||||||||||||
Total assets | $ | 824,699 | $ | 208,156 | $ | (167,792 | ) | $ | 865,063 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 12,600 | $ | 11,433 | $ | — | $ | 24,033 | ||||||||
Accrued expenses and other current liabilities | 39,013 | 15,463 | — | 54,476 | ||||||||||||
Short-term financing and current portion of long-term debt | 3,975 | — | — | 3,975 | ||||||||||||
Current liabilities of discontinued operations | 3,874 | — | — | 3,874 | ||||||||||||
Total current liabilities | 59,462 | 26,896 | — | 86,358 | ||||||||||||
Long-term debt | 406,113 | — | — | 406,113 | ||||||||||||
Accrued closure, post-closure and other obligations | 19,087 | 13,812 | — | 32,899 | ||||||||||||
Cumulative mandatorily redeemable Preferred Stock | — | — | — | — | ||||||||||||
Due to affiliates | 344 | — | (344 | ) | — | |||||||||||
Non-current liabilities of discontinued operations | 336 | — | — | 336 | ||||||||||||
Total liabilities | 485,342 | 40,708 | (344 | ) | 525,706 | |||||||||||
Shareholders’ equity: | ||||||||||||||||
Common stock of Waste Services, Inc | 438 | — | — | 438 | ||||||||||||
Other equity | 338,919 | 167,448 | (167,448 | ) | 338,919 | |||||||||||
Total shareholders’ equity | 339,357 | 167,448 | (167,448 | ) | 339,357 | |||||||||||
Total liabilities and shareholders’ equity | $ | 824,699 | $ | 208,156 | $ | (167,792 | ) | $ | 865,063 | |||||||
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 | ||||||||||||||||
Non- | ||||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 3,680 | $ | 5,206 | $ | — | $ | 8,886 | ||||||||
Accounts receivable, net | 21,236 | 24,145 | — | 45,381 | ||||||||||||
Prepaid expenses and other current assets | 1,969 | 8,094 | — | 10,063 | ||||||||||||
Current assets of discontinued operations | 5,252 | — | — | 5,252 | ||||||||||||
Total current assets | 32,137 | 37,445 | — | 69,582 | ||||||||||||
Property and equipment, net | 53,576 | 65,909 | — | 119,485 | ||||||||||||
Landfill sites, net | 146,398 | 10,100 | — | 156,498 | ||||||||||||
Goodwill and other intangible assets, net | 221,674 | 86,195 | — | 307,869 | ||||||||||||
Other assets | 10,262 | 13,554 | — | 23,816 | ||||||||||||
Due from affiliates | — | 2,295 | (2,295 | ) | — | |||||||||||
Investment in subsidiary | 177,883 | — | (177,883 | ) | — | |||||||||||
Non-current assets of discontinued operations | 51,139 | — | — | 51,139 | ||||||||||||
Total assets | $ | 693,069 | $ | 215,498 | $ | (180,178 | ) | $ | 728,389 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 14,472 | $ | 11,487 | $ | — | $ | 25,959 | ||||||||
Accrued expenses and other current liabilities | 26,276 | 12,789 | — | 39,065 | ||||||||||||
Short-term financing and current portion of long-term debt | 1,365 | — | — | 1,365 | ||||||||||||
Current liabilities of discontinued operations | 1,827 | — | — | 1,827 | ||||||||||||
Total current liabilities | 43,940 | 24,276 | — | 68,216 | ||||||||||||
Long-term debt | 284,850 | — | — | 284,850 | ||||||||||||
Accrued closure, post-closure and other obligations | 12,312 | 13,339 | — | 25,651 | ||||||||||||
Cumulative mandatorily redeemable Preferred Stock | 84,971 | — | — | 84,971 | ||||||||||||
Due to affiliates | 2,295 | — | (2,295 | ) | — | |||||||||||
Non-current liabilities of discontinued operations | 210 | — | — | 210 | ||||||||||||
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 CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2006 | ||||||||||||||||
Non- | ||||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Revenue | $ | 208,095 | $ | 188,028 | $ | — | $ | 396,123 | ||||||||
Operating and other expenses: | ||||||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) | 142,278 | 128,176 | — | 270,454 | ||||||||||||
Selling, general and administrative expense (exclusive of depreciation, depletion and amortization) | 35,525 | 23,416 | — | 58,941 | ||||||||||||
Deferred acquisition costs | 439 | 5,173 | — | 5,612 | ||||||||||||
Depreciation, depletion and amortization | 25,431 | 17,382 | — | 42,813 | ||||||||||||
Foreign exchange gain and other | 494 | 1,499 | — | 1,993 | ||||||||||||
Equity earnings in investees | (5,598 | ) | — | 5,598 | — | |||||||||||
Income from operations | 9,526 | 12,382 | (5,598 | ) | 16,310 | |||||||||||
Interest expense | 30,506 | 399 | — | 30,905 | ||||||||||||
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs | 19,653 | — | — | 19,653 | ||||||||||||
Income (loss) from continuing operations before income taxes | (40,633 | ) | 11,983 | (5,598 | ) | (34,248 | ) | |||||||||
Income tax provision | 6,435 | 6,385 | — | 12,820 | ||||||||||||
Net income (loss) from continuing operations | (47,068 | ) | 5,598 | (5,598 | ) | (47,068 | ) | |||||||||
Net loss from discontinued operations | (1,463 | ) | — | — | (1,463 | ) | ||||||||||
Net income (loss) | $ | (48,531 | ) | $ | 5,598 | $ | (5,598 | ) | $ | (48,531 | ) | |||||
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 | ||||||||||||||||
Non- | ||||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Revenue | $ | 189,725 | $ | 166,331 | $ | — | $ | 356,056 | ||||||||
Operating and other expenses: | ||||||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) | 144,662 | 111,013 | — | 255,675 | ||||||||||||
Selling, general and administrative expense (exclusive of depreciation, depletion and amortization) | 29,926 | 23,197 | — | 53,123 | ||||||||||||
Settlement with sellers of Florida Recycling | (4,120 | ) | — | — | (4,120 | ) | ||||||||||
Depreciation, depletion and amortization | 21,305 | 19,356 | — | 40,661 | ||||||||||||
Foreign exchange loss (gain) and other | (746 | ) | 571 | — | (175 | ) | ||||||||||
Equity earnings in investees | (5,264 | ) | — | 5,264 | — | |||||||||||
Income from operations | 3,962 | 12,194 | (5,264 | ) | 10,892 | |||||||||||
Interest expense | 27,950 | 246 | — | 28,196 | ||||||||||||
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs | 20,984 | — | — | 20,984 | ||||||||||||
Income (loss) from continuing operations before income taxes | (44,972 | ) | 11,948 | (5,264 | ) | (38,288 | ) | |||||||||
Income tax provision | 5,452 | 6,684 | — | 12,136 | ||||||||||||
Net income (loss) from continuing operations | (50,424 | ) | 5,264 | (5,264 | ) | (50,424 | ) | |||||||||
Net income from discontinued operations | 134 | — | — | 134 | ||||||||||||
Net income (loss) | $ | (50,290 | ) | $ | 5,264 | $ | (5,264 | ) | $ | (50,290 | ) | |||||
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2004 | ||||||||||||||||
Non- | ||||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Revenue | $ | 144,387 | $ | 142,718 | $ | — | $ | 287,105 | ||||||||
Operating and other expenses: | ||||||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) | 108,521 | 96,991 | — | 205,512 | ||||||||||||
Selling, general and administrative expense (exclusive of depreciation, depletion and amortization) | 28,535 | 21,796 | — | 50,331 | ||||||||||||
Settlement with sellers of Florida Recycling | (8,635 | ) | — | — | (8,635 | ) | ||||||||||
Depreciation, depletion and amortization | 15,841 | 16,316 | — | 32,157 | ||||||||||||
Foreign exchange gain and other | (23 | ) | (377 | ) | — | (400 | ) | |||||||||
Equity earnings in investees | (4,403 | ) | — | 4,403 | — | |||||||||||
Income from operations | 4,551 | 7,992 | (4,403 | ) | 8,140 | |||||||||||
Interest expense | 30,522 | 321 | — | 30,843 | ||||||||||||
Change in fair value of warrants | — | (111 | ) | — | (111 | ) | ||||||||||
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs | 17,582 | — | — | 17,582 | ||||||||||||
Income (loss) from continuing operations before income taxes | (43,553 | ) | 7,782 | (4,403 | ) | (40,174 | ) | |||||||||
Income tax provision | 3,983 | 3,604 | — | 7,587 | ||||||||||||
Net income (loss) from continuing operations | (47,536 | ) | 4,178 | (4,403 | ) | (47,761 | ) | |||||||||
Net loss from discontinued operations | (618 | ) | — | — | (618 | ) | ||||||||||
Income (loss) before cumulative effect of change in accounting principle | (48,154 | ) | 4,178 | (4,403 | ) | (48,379 | ) | |||||||||
Cumulative effect of change in accounting principle, net of provision for income taxes of $132 | — | 225 | — | 225 | ||||||||||||
Net income (loss) attributable to common shareholders | $ | (48,154 | ) | $ | 4,403 | $ | (4,403 | ) | $ | (48,154 | ) | |||||
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2006 | ||||||||||||||||
Non- | ||||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net cash provided by operating activities | $ | 2,213 | $ | 36,723 | $ | — | $ | 38,936 | ||||||||
Cash flows from investing activities: | ||||||||||||||||
Cash used in business combinations and significant asset acquisitions, net of cash acquired | (99,583 | ) | (3,949 | ) | — | (103,532 | ) | |||||||||
Capital expenditures | (24,977 | ) | (22,308 | ) | — | (47,285 | ) | |||||||||
Proceeds from asset sales and business divestitures | 4,557 | 596 | — | 5,153 | ||||||||||||
Deposits for business acquisitions and other | (1,626 | ) | — | — | (1,626 | ) | ||||||||||
Intercompany | — | (9,936 | ) | 9,936 | — | |||||||||||
Net cash used in continuing operations | (121,629 | ) | (35,597 | ) | 9,936 | (147,290 | ) | |||||||||
Net cash used in discontinued operations | (1,717 | ) | — | — | (1,717 | ) | ||||||||||
Net cash used in investing activities | (123,346 | ) | (35,597 | ) | 9,936 | (149,007 | ) | |||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from issuance of debt and draws on revolving credit facility | 154,000 | 3,527 | — | 157,527 | ||||||||||||
Principal repayments of debt and capital lease obligations | (33,033 | ) | (3,993 | ) | — | (37,026 | ) | |||||||||
Sale of common shares and warrants | 66,500 | — | — | 66,500 | ||||||||||||
Proceeds from the exercise of options and warrants | 165 | — | — | 165 | ||||||||||||
Retirement of cumulative mandatorily redeemable Preferred Stock | (75,557 | ) | — | — | (75,557 | ) | ||||||||||
Fees paid for financing transactions | (1,805 | ) | — | — | (1,805 | ) | ||||||||||
Intercompany | 9,936 | — | (9,936 | ) | — | |||||||||||
Net cash provided by (used in) financing activities | 120,206 | (466 | ) | (9,936 | ) | 109,804 | ||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | (87 | ) | — | (87 | ) | ||||||||||
Increase (decrease) in cash and cash equivalents | (927 | ) | 573 | — | (354 | ) | ||||||||||
Cash and cash equivalents at the beginning of the year | 3,680 | 5,206 | — | 8,886 | ||||||||||||
Cash and cash equivalents at the end of the year | $ | 2,753 | $ | 5,779 | $ | — | $ | 8,532 | ||||||||
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2005 | ||||||||||||||||
Non- | ||||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Net cash provided by (used in) operating activities | $ | (13,912 | ) | $ | 38,565 | $ | — | $ | 24,653 | |||||||
Cash flows from investing activities: | ||||||||||||||||
Cash used in business combinations and significant asset acquisitions, net of cash acquired | (3,968 | ) | (497 | ) | — | (4,465 | ) | |||||||||
Capital expenditures | (17,526 | ) | (11,367 | ) | — | (28,893 | ) | |||||||||
Proceeds from asset sales and business divestitures | 2,487 | 711 | — | 3,198 | ||||||||||||
Deposits for business acquisitions and other | (73 | ) | (973 | ) | — | (1,046 | ) | |||||||||
Intercompany | — | (23,300 | ) | 23,300 | — | |||||||||||
Net cash used in continuing operations | (19,080 | ) | (35,426 | ) | 23,300 | (31,206 | ) | |||||||||
Net cash used in discontinued operations | (8,305 | ) | — | — | (8,305 | ) | ||||||||||
Net cash used in investing activities | (27,385 | ) | (35,426 | ) | 23,300 | (39,511 | ) | |||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from issuance of debt and draw on revolving credit facility | 25,000 | — | — | 25,000 | ||||||||||||
Principal repayments of debt and capital lease obligations | (16,166 | ) | (538 | ) | — | (16,704 | ) | |||||||||
Sale of common shares and warrants | 7,125 | — | — | 7,125 | ||||||||||||
Proceeds from the exercise of options and warrants | 521 | — | — | 521 | ||||||||||||
Fees paid for financing transactions | (995 | ) | — | — | (995 | ) | ||||||||||
Intercompany | 23,300 | — | (23,300 | ) | — | |||||||||||
Net cash provided by (used in) financing activities — continuing operations | 38,785 | (538 | ) | (23,300 | ) | 14,947 | ||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | 321 | — | 321 | ||||||||||||
Increase (decrease) in cash and cash equivalents | (2,512 | ) | 2,922 | — | 410 | |||||||||||
Cash and cash equivalents at the beginning of the year | 6,192 | 2,284 | — | 8,476 | ||||||||||||
Cash and cash equivalents at the end of the year | $ | 3,680 | $ | 5,206 | $ | — | $ | 8,886 | ||||||||
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WASTE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2004 | ||||||||||||||||
Non- | ||||||||||||||||
Guarantors | Guarantors | Eliminations | Consolidated | |||||||||||||
Net cash provided by (used in) operating activities | $ | (682 | ) | $ | 25,362 | $ | — | $ | 24,680 | |||||||
Cash flows from investing activities: | ||||||||||||||||
Cash used in business combinations and significant asset acquisitions, net of cash acquired | (154,792 | ) | (1,124 | ) | — | (155,916 | ) | |||||||||
Capital expenditures | (24,773 | ) | (13,050 | ) | — | (37,823 | ) | |||||||||
Proceeds from asset sales and business divestitures | 14,231 | — | — | 14,231 | ||||||||||||
Deposits for business acquisitions and other | 1,359 | (2,910 | ) | — | (1,551 | ) | ||||||||||
Intercompany | — | (78,985 | ) | 78,985 | — | |||||||||||
Net cash used in continuing operations | (163,975 | ) | (96,069 | ) | 78,985 | (181,059 | ) | |||||||||
Net cash used in discontinued operations | (17,149 | ) | — | — | (17,149 | ) | ||||||||||
Net cash used in investing activities | (181,124 | ) | (96,069 | ) | 78,985 | (198,208 | ) | |||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from issuance of debt and draw on revolving credit facility | 283,000 | — | — | 283,000 | ||||||||||||
Principal repayments of debt and capital lease obligations | (186,031 | ) | (1,127 | ) | — | (187,158 | ) | |||||||||
Sale of common shares and warrants | — | 53,600 | — | 53,600 | ||||||||||||
Proceeds from release of restricted cash and release of (deposits on) collateral supporting letters of credit | 14,433 | 9,908 | — | 24,341 | ||||||||||||
Proceeds from the exercise of options and warrants | — | 1,041 | — | 1,041 | ||||||||||||
Fees paid for financing transactions | (11,218 | ) | (2,923 | ) | — | (14,141 | ) | |||||||||
Intercompany | 78,985 | — | (78,985 | ) | — | |||||||||||
Net cash provided by financing activities — continuing operations | 179,169 | 60,499 | (78,985 | ) | 160,683 | |||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | 273 | — | 273 | ||||||||||||
Decrease in cash and cash equivalents | (2,637 | ) | (9,935 | ) | — | (12,572 | ) | |||||||||
Cash and cash equivalents at the beginning of the year | 8,829 | 12,219 | — | 21,048 | ||||||||||||
Cash and cash equivalents at the end of the year | $ | 6,192 | $ | 2,284 | $ | — | $ | 8,476 | ||||||||
F-51