Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Quarterly Period Ended September 30, 2007
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-25955
Waste Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 01-0780204 (I.R.S. Employer Identification No.) |
1122 International Blvd., Suite 601, Burlington, Ontario, Canada L7L 6Z8
(Address of principal executive offices) (zip code)
(905) 319-1237
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No 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” in Rule 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 in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at October 30, 2007 was 46,074,982 (assuming exchange of 6,307,862 exchangeable shares of Waste Services (CA) Inc. not owned by Capital Environmental Holdings Company for 2,102,620 shares of the registrant’s common stock).
TABLE OF CONTENTS
1
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
WASTE SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 15,998 | $ | 8,532 | ||||
Accounts receivable (net of allowance for doubtful accounts of $817 and $572 as of September 30, 2007 and December 31 2006, respectively) | 70,553 | 51,804 | ||||||
Prepaid expenses and other current assets | 10,767 | 6,224 | ||||||
Current assets of discontinued operations | — | 4,559 | ||||||
Total current assets | 97,318 | 71,119 | ||||||
Property and equipment, net | 198,618 | 140,673 | ||||||
Landfill sites, net | 200,055 | 195,881 | ||||||
Goodwill and other intangible assets, net | 423,703 | 350,035 | ||||||
Other assets | 18,348 | 10,667 | ||||||
Non-current assets of discontinued operations | — | 96,688 | ||||||
Total assets | $ | 938,042 | $ | 865,063 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 27,045 | $ | 24,033 | ||||
Accrued expenses and other current liabilities | 69,435 | 53,566 | ||||||
Short-term financing and current portion of long-term debt | 1,915 | 3,975 | ||||||
Current liabilities of discontinued operations | — | 4,784 | ||||||
Total current liabilities | 98,395 | 86,358 | ||||||
Long-term debt | 442,822 | 406,113 | ||||||
Accrued closure, post-closure and other obligations | 47,595 | 32,625 | ||||||
Non-current liabilities of discontinued operations | — | 610 | ||||||
Total liabilities | 588,812 | 525,706 | ||||||
Shareholders’ equity: | ||||||||
Common stock $0.01 par value: 166,666,666 shares authorized, 43,972,362 and 43,868,606 shares issued and outstanding as of September 30, 2007 and December 31, 2006, respectively | 439 | 438 | ||||||
Additional paid-in capital | 509,741 | 506,751 | ||||||
Accumulated other comprehensive income | 65,185 | 35,201 | ||||||
Accumulated deficit | (226,135 | ) | (203,033 | ) | ||||
Total shareholders’ equity | 349,230 | 339,357 | ||||||
Total liabilities and shareholders’ equity | $ | 938,042 | $ | 865,063 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
Table of Contents
WASTE SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Revenue | $ | 130,605 | $ | 103,739 | $ | 358,158 | $ | 291,703 | ||||||||
Operating and other expenses: | ||||||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) | 85,346 | 70,312 | 235,478 | 201,373 | ||||||||||||
Selling, general and administrative expense (exclusive of depreciation, depletion and amortization) | 18,587 | 14,753 | 48,479 | 44,083 | ||||||||||||
Deferred acquisition costs | — | — | — | 5,612 | ||||||||||||
Depreciation, depletion and amortization | 16,143 | 10,602 | 43,234 | 29,694 | ||||||||||||
Foreign exchange loss (gain) and other | 638 | (92 | ) | 51 | 2,024 | |||||||||||
Income from operations | 9,891 | 8,164 | 30,916 | 8,917 | ||||||||||||
Interest expense | 10,243 | 7,996 | 30,818 | 22,876 | ||||||||||||
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs | — | 4,256 | — | 14,793 | ||||||||||||
Income (loss) from continuing operations before income taxes | (352 | ) | (4,088 | ) | 98 | (28,752 | ) | |||||||||
Income tax provision | 4,474 | 4,045 | 10,618 | 8,386 | ||||||||||||
Net loss from continuing operations | (4,826 | ) | (8,133 | ) | (10,520 | ) | (37,138 | ) | ||||||||
Net loss from discontinued operations, net of tax of $0 | — | (460 | ) | (1,130 | ) | (1,297 | ) | |||||||||
Loss on sale of discontinued operations, net of tax of $0 | (198 | ) | — | (11,452 | ) | — | ||||||||||
Net loss | $ | (5,024 | ) | $ | (8,593 | ) | $ | (23,102 | ) | $ | (38,435 | ) | ||||
Basic and diluted loss per share: | ||||||||||||||||
Loss per share — continuing operations | $ | (0.11 | ) | $ | (0.23 | ) | $ | (0.23 | ) | $ | (1.08 | ) | ||||
Loss per share — discontinued operations | — | (0.01 | ) | (0.27 | ) | (0.03 | ) | |||||||||
Loss per share — basic and diluted | $ | (0.11 | ) | $ | (0.24 | ) | $ | (0.50 | ) | $ | (1.11 | ) | ||||
Weighted average common shares outstanding — basic and diluted | 46,007 | 36,066 | 45,984 | 34,534 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
Table of Contents
WASTE SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the Nine Months Ended September 30, 2007
(In thousands)
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the Nine Months Ended September 30, 2007
(In thousands)
Accumulated | ||||||||||||||||||||||||
Waste Services, Inc. | Other | Total | ||||||||||||||||||||||
Common Stock | Additional | Comprehensive | Accumulated | Shareholders’ | ||||||||||||||||||||
Shares | Amount | Paid-in Capital | Income | Deficit | Equity | |||||||||||||||||||
Balance, December 31, 2006 | 43,869 | $ | 438 | $ | 506,751 | $ | 35,201 | $ | (203,033 | ) | $ | 339,357 | ||||||||||||
Exercise of options and warrants | 103 | 1 | 690 | — | — | 691 | ||||||||||||||||||
Stock-based compensation | — | — | 2,300 | — | — | 2,300 | ||||||||||||||||||
Foreign currency translation adjustment | — | — | — | 29,984 | — | 29,984 | ||||||||||||||||||
Net loss | — | — | — | — | (23,102 | ) | (23,102 | ) | ||||||||||||||||
Balance, September 30, 2007 | 43,972 | $ | 439 | $ | 509,741 | $ | 65,185 | $ | (226,135 | ) | $ | 349,230 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Table of Contents
WASTE SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended September 30, | ||||||||
2007 | 2006 | |||||||
Cash flows from operating activities: | ||||||||
Net loss | $ | (23,102 | ) | $ | (38,435 | ) | ||
Adjustments to reconcile net loss to net cash flows from operating activities: | ||||||||
Net loss from discontinued operations | 12,582 | 1,297 | ||||||
Depreciation, depletion and amortization | 43,234 | 29,694 | ||||||
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs | — | 14,793 | ||||||
Amortization of debt issue costs | 1,837 | 1,172 | ||||||
Deferred income tax provision | 3,766 | 8,298 | ||||||
Non-cash stock-based compensation expense | 2,300 | 2,918 | ||||||
Severance costs expensed, exclusive of stock-based compensation | 3,252 | — | ||||||
Deferred acquisition costs expensed | — | 5,173 | ||||||
Foreign exchange loss and loss on disposal of property and equipment | 735 | 2,005 | ||||||
Other non-cash items | 319 | 515 | ||||||
Changes in operating assets and liabilities (excluding the effects of acquisitions and dispositions): | ||||||||
Accounts receivable | (5,007 | ) | (4,638 | ) | ||||
Prepaid expenses and other current assets | (645 | ) | (608 | ) | ||||
Accounts payable | 335 | (5,375 | ) | |||||
Accrued expenses and other current liabilities | 6,180 | 7,891 | ||||||
Net cash provided by continuing operations | 45,786 | 24,700 | ||||||
Net cash provided by discontinued operations | 1,567 | 4,346 | ||||||
Net cash provided by operating activities | 47,353 | 29,046 | ||||||
Cash flows from investing activities: | ||||||||
Cash used in business combinations and significant asset acquisitions, net of cash acquired | (32,289 | ) | (28,973 | ) | ||||
Capital expenditures | (48,624 | ) | (37,007 | ) | ||||
Proceeds from asset sales and business divestitures | 17,832 | 4,929 | ||||||
Deposits for business acquisitions and other | (9,820 | ) | (929 | ) | ||||
Net cash used in continuing operations | (72,901 | ) | (61,980 | ) | ||||
Net cash used in discontinued operations | (2,187 | ) | (3,025 | ) | ||||
Net cash used in investing activities | (75,088 | ) | (65,005 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of debt and draw on revolving credit facility | 84,066 | 40,532 | ||||||
Principal repayments of debt and capital lease obligations | (49,537 | ) | (11,861 | ) | ||||
Proceeds from the exercise of options and warrants | 691 | 86 | ||||||
Fees paid for financing transactions | (1,259 | ) | (149 | ) | ||||
Net cash provided by financing activities — continuing operations | 33,961 | 28,608 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 1,240 | 161 | ||||||
Increase (decrease) in cash and cash equivalents | 7,466 | (7,190 | ) | |||||
Cash and cash equivalents at the beginning of the period | 8,532 | 8,886 | ||||||
Cash and cash equivalents at the end of the period | $ | 15,998 | $ | 1,696 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization of Business and Basis of Presentation
The accompanying Unaudited Condensed Consolidated Financial Statements include the accounts of Waste Services, Inc. (“Waste Services”) and its wholly owned subsidiaries (collectively, “we”, “us”, or “our”). We are a multi-regional, integrated solid waste services company, providing collection, transfer, landfill disposal and recycling services for commercial, industrial and residential customers. Our operating strategy is disposal-based, whereby we enter geographic markets with attractive growth or positive competitive characteristics by acquiring and developing landfill disposal capacity, then acquiring and developing waste collection and transfer operations. Our operations are located in the United States and Canada. Our U.S. operations are located in Florida and our Canadian operations are located in Eastern Canada (Ontario) and Western Canada (Alberta, Saskatchewan and British Columbia). In March 2007 we divested our Arizona operations and in June 2007 we divested our Texas operations and as a result, these operations are presented as discontinued for all periods presented.
These condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. All significant intercompany transactions and accounts have been eliminated. All figures are presented in thousands of U.S. dollars, except share and per share data, or except where expressly stated as being in Canadian dollars (“C$”) or in millions. Certain information related to our organization, significant accounting policies and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States has been condensed or omitted. The accounting policies followed in the preparation of these unaudited condensed consolidated financial statements are consistent with those followed in our annual consolidated financial statements for the year ended December 31, 2006, as filed on Form 10-K. In the opinion of management, these unaudited condensed consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to fairly state our financial position, results of operations and cash flows for the periods presented and the presentations and disclosures herein are adequate when read in conjunction with our Form 10-K for the year ended December 31, 2006. Income taxes during these interim periods have been provided based upon our anticipated annual effective income tax rate. Certain reclassifications have been made to the prior period financial statement amounts to conform to the current presentation. Due to the seasonal nature of our business, operating results for interim periods are not necessarily indicative of the results for full years.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the allowance for doubtful accounts, depletion of landfill development costs, goodwill and other intangible assets, liabilities for landfill capping, closure and post-closure obligations, insurance reserves, liabilities for potential litigation and deferred taxes.
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 our 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 or loss. 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 $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.
6
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Basic earnings (loss) per share is calculated by dividing income (loss) by the weighted average number of common shares outstanding for the period, including exchangeable shares of Waste Services (CA) not owned by us, on an as exchanged basis. Diluted earnings (loss) per share is calculated based on the weighted average number of shares of common stock outstanding, including the exchangeable shares, during the period plus the dilutive effect of common stock purchase warrants and stock options using the treasury stock method. Contingently issuable shares are included in the computation of basic earnings (loss) per share when issuance of the shares is no longer contingent. Due to the net losses for the three and nine months ended September 30, 2007 and 2006, basic and diluted loss per share were the same, as the effect of potentially dilutive securities would have been anti-dilutive. Basic and diluted earnings (loss) per share have been retroactively restated to reflect the one for three split to the earliest period presented.
Potentially dilutive securities not included in the diluted loss per share calculation, due to net losses, are as follows, giving effect to the reverse one for three split to the earliest period presented (unaudited) (in thousands):
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Common Shares issuable under option grants | 57 | — | 37 | — | ||||||||||||
Common Shares issuable under warrants outstanding | 669 | 219 | 625 | 190 | ||||||||||||
Dilutive securities | 726 | 219 | 662 | 190 | ||||||||||||
For purposes of computing net income (loss) per common share — basic and diluted, for the three and nine months ended September 30, 2007, the weighted average number of shares of common stock outstanding includes the effect of 6,307,862 and 6,308,359 exchangeable shares of Waste Services (CA), respectively (exchangeable for 2,102,620 and 2,102,786 shares of our common stock, respectively), as if they were shares of our outstanding common stock from July 31, 2004, the date our migration transaction was completed. For the three and nine months ended September 30, 2006, the weighted average number of shares of common stock outstanding includes the effect of 6,323,959 and 6,326,067 exchangeable shares of Waste Services (CA), respectively (exchangeable for 2,107,986 and 2,108,689 shares of our common stock, respectively), as if they were shares of our outstanding common stock from July 31, 2004.
2. Adopted Accounting
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”), which we have adopted effective January 1, 2007. 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 be 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 previous practice, whereby companies may have recognized a tax benefit only if it was probable a tax position would 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.
We are subject to tax audits in the U.S. and Canada. Tax audits by their very nature are often complex and can require several years to complete. Information relating to our tax examinations by jurisdiction is as follows:
• | Federal — We are subject to U.S. federal tax examinations by tax authorities for the tax years ended December 31, 2004 to 2006. |
7
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
• | State — We are subject to state tax examinations by tax authorities for the tax years ended December 31, 2004 to 2006. | ||
• | Canada — We are no longer subject to foreign tax examinations by tax authorities for years before January 1, 1999. | ||
• | Provincial — We are no longer subject to foreign tax examinations by tax authorities for years before January 1, 1999. |
The adoption of FIN 48 did not have a material impact on our financial statements or disclosures. As of January 1, 2007 and September 30, 2007 we did not recognize any assets or liabilities for unrecognized tax benefits relative to uncertain tax positions nor do we anticipate any significant unrecognized tax benefits will be recorded during the next 12 months. Any interest or penalties resulting from examinations will be recognized as a component of the income tax provision. However, since there are no unrecognized tax benefits as a result of tax positions taken, there are no accrued interest and penalties.
3. Discontinued Operations
In March 2007, we completed transactions to acquire Allied Waste Industries, Inc’s. (“Allied Waste”) South Florida operations and to sell our Arizona operations to Allied Waste and paid $15.8 million for net working capital between the two operations and transaction costs. In June 2007 we completed transactions to acquire WCA Waste Corporation’s (“WCA”) hauling and transfer station operations near Fort Myers, Florida and to sell our Texas operations to WCA. Additionally, as part of the transaction with WCA, we received $23.7 million in cash and issued a $10.5 million non-interest bearing promissory note with payments of $125,000 per month until June 2014. The net present value of the note was approximately $8.1 million at the time it was issued. Accordingly, we have presented the net assets and operations of our Arizona and Texas operations as discontinued operations for all periods presented. Revenue from discontinued operations was nil and $8.1 million for the three months ended September 30, 2007 and 2006, respectively, and $10.3 million and $24.8 million for the nine months ended September 30, 2007 and 2006, respectively. Pre-tax net loss from discontinued operations was nil and $0.5 million for the three months ended September 30, 2007 and 2006, respectively, and $1.1 million and $1.3 million for the nine months ended September 30, 2007 and 2006, respectively. During 2007 we recognized a gain on disposal of $0.8 million for the Arizona operations and a loss on disposal of $12.2 million for the Texas operations. No income tax benefit or provision has been attributed to discontinued operations for each period presented.
The fair market value of proceeds for our Arizona operations was $52.4 million and was determined by estimating the fair value of the Allied operations received. Additionally, we paid $15.8 million for net working capital between the two operations and transaction costs. The fair market value of $18.5 million of proceeds attributed to the Texas operations was determined by estimating the fair value of the WCA Florida operations received plus cash received of $23.7 million less the net present value of the note issued of $8.1 million plus working capital. We have determined, that if our Texas operations were held and used, we would not have recognized a long-lived asset impairment in prior periods.
The following table summarizes our proceeds and the resulting gain (loss) on sale:
Arizona | Texas | |||||||||||
Operations | Operations | Total | ||||||||||
Fair value of operations received | $ | 52,351 | $ | 18,471 | $ | 70,822 | ||||||
Cash received, net of promissory note issued | — | 15,638 | 15,638 | |||||||||
Less: | ||||||||||||
Carrying value of operations sold | 51,559 | 46,353 | 97,912 | |||||||||
Gain (loss) on disposition of discontinued operations | $ | 792 | $ | (12,244 | ) | $ | (11,452 | ) | ||||
8
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net assets related to our discontinued operations as of December 31, 2006 are as follows (unaudited):
Arizona | Texas | |||||||||||
Operations | Operations | Total | ||||||||||
Accounts receivable | $ | 3,418 | $ | 658 | $ | 4,076 | ||||||
Prepaid expenses and other current assets | 452 | 31 | 483 | |||||||||
Current assets of discontinued operations | 3,870 | 689 | 4,559 | |||||||||
Property and equipment | 11,803 | 4,646 | 16,449 | |||||||||
Landfill sites | 17,229 | 41,456 | 58,685 | |||||||||
Goodwill and other intangible assets | 21,433 | — | 21,433 | |||||||||
Other assets | 121 | — | 121 | |||||||||
Non-current assets of discontinued operations | 50,586 | 46,102 | 96,688 | |||||||||
Total assets of discontinued operations | $ | 54,456 | $ | 46,791 | $ | 101,247 | ||||||
Accounts payable | $ | 356 | $ | — | $ | 356 | ||||||
Accrued expenses and other current liabilities | 3,518 | 910 | 4,428 | |||||||||
Current liabilities of discontinued operations | 3,874 | 910 | 4,784 | |||||||||
Accrued closure, post closure and other obligations | 336 | 274 | 610 | |||||||||
Non-current liabilities of discontinued operations | 336 | 274 | 610 | |||||||||
Total liabilities of discontinued operations | $ | 4,210 | $ | 1,184 | $ | 5,394 | ||||||
Net assets of discontinued operations | $ | 50,246 | $ | 45,607 | $ | 95,853 | ||||||
4. Share-Based Payments
Stock based compensation expense was $1.3 million and $1.4 million, for the three months ended September 30, 2007 and 2006, respectively, and $2.3 million and $2.9 million, for the nine months ended September 30, 2007 and 2006, respectively. During the nine months ended September 30, 2007 and 2006, we granted options to purchase 822,000 shares of our common stock and 55,000 shares of our common stock, respectively, to certain employees with option exercise prices equal to the market value of our common stock on the date immediately preceding the grant date. The weighted-average grant-date fair value of these option grants was $5.94 and $6.36, for the nine months ended September 30, 2007 and 2006 respectively. The fair value of options granted is estimated using the Black-Scholes option pricing model using the following assumptions:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Annual dividend yield | — | N/A | — | — | ||||||||||||
Weighted-average expected life (years) | 3.0 | N/A | 3.0 | 3.0 | ||||||||||||
Risk-free interest rate | 4.6 | % | N/A | 4.5 | % | 4.8 | % | |||||||||
Expected volatility | 89 | % | N/A | 92 | % | 38 | % |
Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for the most recent three years. We believe this method produces an estimate that is representative of our expectations of the future volatility over the expected term 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 expiration. 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 No. 123 (revised 2004), “Share-Based Payment” 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.
9
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During the nine months ended September 30, 2007, 71,666 employee options were exercised, 172,330 options were forfeited and 78,990 options expired. During the nine months ended September 30, 2006, no employee options were exercised, 181,166 options were forfeited and 433,833 options expired. As of September 30, 2007, $3.1 million of total unrecognized compensation cost related to employee stock options is expected to be recognized over a weighted average period of approximately 1.4 years.
5. Business Combinations and Significant Asset Acquisitions
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.
In March 2007, we completed transactions to acquire Allied Waste’s South Florida operations and to sell our Arizona operations to Allied Waste. The South Florida operations consist of a collection company, a transfer station and a materials recovery facility, all providing service to Miami-Dade County.
In April 2007, we completed the acquisition of a roll-off collection and transfer operation, and a transfer station development project and a landfill development project in southwest Florida (USA Recycling Holdings, LLC., USA Recycling, LLC., and Freedom Recycling Holdings, LLC.) for a total purchase price of $51.2 million, of which, $7.5 million is contingent upon the receipt of certain landfill operating permits, $2.5 million is contingent on the receipt of certain operating permits for the transfer station 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, and delivery of title to the property. To date we have advanced $8.5 million towards the purchase of the landfill development project. The existing transfer station is permitted to accept construction and demolition waste volume, and we are internalizing this additional volume to our southwest Florida landfill site acquired in December 2006. Also in April 2007, we acquired a “tuck-in” hauling operation in Ontario, Canada for cash consideration of approximately C$1.5 million.
In June 2007, we completed transactions to acquire WCA’s hauling and transfer station operations near Fort Myers, Florida and to sell our Texas operations to WCA. The transfer station is permitted to accept construction and demolition waste volume, and we are internalizing this additional volume to our southwest Florida landfill site. The estimated fair value of the WCA assets approximated $18.5 million.
Details of the net assets acquired and cash used in asset acquisitions for the nine months ended September 30, 2007 are as follows (unaudited):
10
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Allied | USA | All | ||||||||||||||||||
South Florida | WCA | Recycling | Other | Total | ||||||||||||||||
Purchase price: | ||||||||||||||||||||
Cash paid and transaction costs | $ | 15,777 | $ | 10 | $ | 13,408 | $ | 1,351 | $ | 30,546 | ||||||||||
Fair value of operations received | 52,351 | 18,471 | — | — | 70,822 | |||||||||||||||
Total purchase price | 68,128 | 18,481 | 13,408 | 1,351 | 101,368 | |||||||||||||||
Allocated as follows: | ||||||||||||||||||||
Working capital assumed: | ||||||||||||||||||||
Cash and cash equivalents | 1 | — | 84 | — | 85 | |||||||||||||||
Accounts receivable | 7,417 | 1,163 | — | — | 8,580 | |||||||||||||||
Prepaid expenses and other current assets | 290 | — | — | — | 290 | |||||||||||||||
Accrued expenses and other current liabilities | (4,134 | ) | (85 | ) | — | (48 | ) | (4,267 | ) | |||||||||||
Net working capital | 3,574 | 1,078 | 84 | (48 | ) | 4,688 | ||||||||||||||
Property and equipment | 22,040 | 3,082 | 5,394 | 648 | 31,164 | |||||||||||||||
Accrued closure, post-closure and other obligations assumed | — | (312 | ) | — | — | (312 | ) | |||||||||||||
Net book value of assets acquired and liabilities assumed | 25,614 | 3,848 | 5,478 | 600 | 35,540 | |||||||||||||||
Excess purchase price to be allocated | $ | 42,514 | $ | 14,633 | $ | 7,930 | $ | 751 | $ | 65,828 | ||||||||||
Allocated as follows: | ||||||||||||||||||||
Goodwill | $ | 6,735 | $ | 12,645 | $ | 5,709 | $ | 386 | $ | 25,475 | ||||||||||
Other intangible assets | 35,779 | 1,988 | 2,221 | 365 | 40,353 | |||||||||||||||
Total allocated | $ | 42,514 | $ | 14,633 | $ | 7,930 | $ | 751 | $ | 65,828 | ||||||||||
For acquisitions completed within the last twelve months, we continue to obtain further information regarding the allocation of purchase price among the assets acquired and the liabilities assumed. Changes to the initial purchase price allocation for acquisitions completed in 2007, primarily relating to the valuation of property and equipment acquired, reduced goodwill by approximately $10.6 million during the nine months ended September 30, 2007.
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 to and/or announced. Contingent consideration is valued as of the date the contingency is resolved. We expect goodwill generated from these acquisitions to be deductible for income tax purposes.
The following unaudited pro forma information shows the results of our operations for the three and nine months ended September 30, 2007 and 2006 as if acquisitions completed in 2007 and 2006 had occurred as of January 1, 2006 (in thousands except per share amounts):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Revenue | $ | 130,605 | $ | 129,229 | $ | 379,800 | $ | 378,739 | ||||||||
Net loss from continuing operations | $ | (4,826 | ) | $ | (5,749 | ) | $ | (9,315 | ) | $ | (33,461 | ) | ||||
Basic and diluted loss per Share — continuing operations | $ | (0.11 | ) | $ | (0.16 | ) | $ | (0.20 | ) | $ | (0.93 | ) | ||||
Pro forma weighted average common shares outstanding — basic and diluted | 46,007 | 36,066 | 45,984 | 36,066 | ||||||||||||
11
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
These unaudited pro forma 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 of 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.
12
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
6. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (unaudited):
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
Prepaid expenses | $ | 4,489 | $ | 2,969 | ||||
Parts and supplies | 2,243 | 1,710 | ||||||
Royalty receivable | 1,316 | — | ||||||
Other current assets | 2,719 | 1,545 | ||||||
$ | 10,767 | $ | 6,224 | |||||
7. Property and Equipment
Property and equipment consist of the following (unaudited):
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
Land and buildings | $ | 63,863 | $ | 31,470 | ||||
Vehicles | 145,929 | 116,436 | ||||||
Containers, compactors and landfill and recycling equipment | 98,913 | 74,597 | ||||||
Furniture, fixtures, other office equipment and leasehold improvements | 12,246 | 10,272 | ||||||
Total property and equipment | 320,951 | 232,775 | ||||||
Less: Accumulated depreciation | (122,333 | ) | (92,102 | ) | ||||
Property and equipment, net | $ | 198,618 | $ | 140,673 | ||||
8. Landfill Sites, Accrued Closure, Post-Closure and Other Obligations
Landfill Sites
Landfill sites consist of the following (unaudited):
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
Landfill sites | $ | 263,176 | $ | 240,938 | ||||
Less: Accumulated depletion | (63,121 | ) | (45,057 | ) | ||||
Landfill sites, net | $ | 200,055 | $ | 195,881 | ||||
The changes in landfill sites for the nine months ended September 30, 2007 and 2006 are as follows (unaudited):
September 30, | ||||||||
2007 | 2006 | |||||||
Balance at the beginning of the period | $ | 195,881 | $ | 116,781 | ||||
Landfill site construction costs | 13,394 | 11,057 | ||||||
Reclassification to conservatory | (1,028 | ) | — | |||||
Purchase price allocation adjustments for prior acquisitions | 505 | — | ||||||
Acquisitions | — | 23,290 | ||||||
Additional asset retirement obligations | 2,290 | 1,419 | ||||||
Depletion | (13,400 | ) | (9,153 | ) | ||||
Effect of foreign exchange rate fluctuations | 2,413 | 409 | ||||||
Balance at the end of the period | $ | 200,055 | $ | 143,803 | ||||
Accrued Closure, Post-Closure and Other Obligations
Accrued closure, post-closure and other obligations consist of the following (unaudited):
13
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
Accrued closure and post-closure obligations | $ | 15,794 | $ | 9,667 | ||||
Deferred income tax liability | 28,089 | 22,322 | ||||||
Accrued severance | 2,181 | — | ||||||
Capital lease obligations | 927 | 186 | ||||||
Other obligations | 604 | 450 | ||||||
$ | 47,595 | $ | 32,625 | |||||
Accrued closure and post-closure obligations include costs associated with obligations for closure and post-closure of our landfills. The anticipated timeframe for paying these costs varies based on the remaining useful life of each landfill as well as the duration of the post-closure monitoring period. The changes in accrued closure and post-closure obligations for the nine months ended September 30, 2007 and 2006 are as follows (unaudited):
September 30, | ||||||||
2007 | 2006 | |||||||
Current portion at the beginning of period | $ | 6,258 | $ | — | ||||
Long-term portion at the beginning of period | 9,667 | 8,971 | ||||||
Balance at the beginning of period | 15,925 | 8,971 | ||||||
Additional asset retirement obligations | 2,290 | 1,419 | ||||||
Accretion | 546 | 591 | ||||||
Acquisitions | — | 2,037 | ||||||
Payments | (1,281 | ) | — | |||||
Effect of foreign exchange rate fluctuations | 1,270 | 255 | ||||||
Balance at the end of period | 18,750 | 13,273 | ||||||
Less: Current portion | (2,956 | ) | — | |||||
Long-term portion | $ | 15,794 | $ | 13,273 | ||||
9. Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following (unaudited):
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
Other intangible assets subject to amortization: | ||||||||
Customer relationships and contracts | $ | 77,376 | $ | 43,964 | ||||
Non-competition agreements and other | 6,995 | 3,694 | ||||||
84,371 | 47,658 | |||||||
Less: Accumulated amortization: | ||||||||
Customer relationships and contracts | (24,500 | ) | (17,080 | ) | ||||
Non-competition agreements and other | (2,074 | ) | (2,435 | ) | ||||
Other intangible assets subject to amortization, net | 57,797 | 28,143 | ||||||
Goodwill | 365,906 | 321,892 | ||||||
Goodwill and other intangible assets, net | $ | 423,703 | $ | 350,035 | ||||
The changes in goodwill for the nine months ended September 30, 2007 and 2006 are as follows (unaudited):
14
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Nine Months Ended September 30, 2007 | ||||||||||||
Florida | Canada | Total | ||||||||||
Balance at the beginning of the period | $ | 235,044 | $ | 86,848 | $ | 321,892 | ||||||
Acquisitions | 25,089 | 386 | 25,475 | |||||||||
Purchase price allocation adjustments for prior acquisitions | 3,536 | 61 | 3,597 | |||||||||
Effect of foreign exchange rate fluctuations | — | 14,942 | 14,942 | |||||||||
Balance at the end of the period | $ | 263,669 | $ | 102,237 | $ | 365,906 | ||||||
Nine Months Ended September 30, 2006 | ||||||||||||
Florida | Canada | Total | ||||||||||
Balance at the beginning of the period | $ | 199,377 | $ | 84,869 | $ | 284,246 | ||||||
Acquisitions | 22,094 | 1,672 | 23,766 | |||||||||
Purchase price allocation adjustments for prior acquisitions | (258 | ) | — | (258 | ) | |||||||
Effect of foreign exchange rate fluctuations | — | 3,439 | 3,439 | |||||||||
Balance at the end of the period | $ | 221,213 | $ | 89,980 | $ | 311,193 | ||||||
10. Other Assets
Other assets consist of the following (unaudited):
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
Debt issue costs, net of accumulated amortization of $5,261 and $3,853 as of September 30, 2007 and December 31, 2006, respectively | $ | 8,347 | $ | 9,060 | ||||
Acquisition deposits and deferred acquisition costs | 9,484 | 1,048 | ||||||
Other assets | 517 | 559 | ||||||
$ | 18,348 | $ | 10,667 | |||||
Included in acquisition deposits and deferred acquisition costs as of September 30, 2007 are amounts advanced for the acquisition of our landfill development project in southwest Florida.
11. Debt
Debt consists of the following (unaudited):
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
Senior Secured Credit Facilities: | ||||||||
Revolving credit facility | $ | — | $ | — | ||||
Term loan facility, floating interest rate at 8.1% as of September 30, 2007 and 10.0% (adjusted to 8.1% in January 2007) as of December 31, 2006, due $693 per quarter from September 2008 through March 2010, $67,264 per quarter thereafter, due March 2011 | 273,910 | 245,260 | ||||||
Senior Subordinated Notes, fixed interest rate at 9.5%, due 2014 | 160,000 | 160,000 | ||||||
Other secured notes payable, interest at 4.5% to 7.8%, due through 2014 (net of discount of $2,277 and $0 at September 30, 2007 and December 31, 2006, respectively) | 8,181 | 2,041 | ||||||
Other subordinated notes payable, interest at 6.7%, due through 2017 | 2,646 | 2,787 | ||||||
444,737 | 410,088 | |||||||
Less: Current portion | (1,915 | ) | (3,975 | ) | ||||
Long-term portion | $ | 442,822 | $ | 406,113 | ||||
15
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, as amended, 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 $65.0 million, of which $45.0 million is available to our U.S. operations and $20.0 million is available to our Canadian operations, and a term loan facility in the amount of $273.9 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. 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 September 30, 2007, there were no amounts outstanding on the revolving credit facility, while $13.2 million and $13.4 million of revolver capacity were used to support outstanding letters of credit in the U.S. and Canada, respectively.
In April 2007, we entered into an amendment that increased the term loans outstanding by an additional $50.0 million to $294.6 million in total, reduced the current interest rate on the term loans by 25 basis points to LIBOR plus 2.50% and provided for certain other modifications. In June of 2007, we made an optional prepayment of principal in the amount of $20.0 million. In August 2007, we increased the revolving credit facility capacity available to our Canadian operations by $5.0 million to the current $20.0 million of capacity.
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 September 30, 2007, we are in compliance with the financial covenants, as amended, and we expect to continue to be in compliance in future periods.
Other Secured Notes Payable
Included in our other secured notes payable is a $10.5 million non-interest bearing promissory note with payments of $125,000 per month until June 2014. The note was entered into as part of our transactions with WCA to acquire certain of their assets in Florida and sell our Texas operations. The net present value of the remaining payments due under the note as of September 30, 2007 approximates $7.8 million, and will accrete at 7.8%. The note is secured by the material recovery facility acquired from WCA.
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. 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; (iv) certain investments; (v) transactions with affiliates; and (vi) certain sales of assets.
16
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. Cumulative Mandatorily Redeemable Preferred Stock
In May 2003, we issued 55,000 shares of redeemable Preferred Stock (the “Preferred Stock”) to Kelso Investment Associates VI, L.P. and KEP VI, LLC (collectively “Kelso”), pursuant to the terms of an agreement dated as of May 6, 2003, as amended in February 2004, (the “Subscription Agreement”), at a price of $1,000 per share. We also issued to Kelso warrants to purchase 2,383,333 shares of our common stock for $9.00 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 exchanged and/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.
13. Commitments and Contingencies
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 our acquisition of such facilities. Pollutants or hazardous substances whose transportation, treatment, or disposal was arranged by us or our predecessors, may also subject us to liability for any off-site environmental contamination caused by these pollutants or hazardous substances.
Any substantial liability for environmental damage incurred by us could have a material adverse effect on our financial condition, results of operations or cash flows. As of the date of these condensed consolidated financial statements, we estimate the range of reasonably possible losses related to environmental matters to be insignificant and we are not aware of any such environmental liabilities that would be material to our operations or financial condition.
Legal Proceedings
In the normal course of our business and as a result of the extensive governmental regulation of the solid waste industry, we may periodically become subject to various judicial and administrative proceedings involving federal, 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 March 2005, we filed a Complaint against Waste Management, Inc. (“Waste Management”) 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 have appealed this judgment.
No provision has been made in these financial statements for the above matters. We do not currently believe that the possible losses in respect of outstanding litigation matters would have a material adverse impact on our business, financial condition, results of operations or cash flows.
17
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Surety Bonds, Letters of Credit and Insurance
Municipal solid waste service contracts and permits and licenses to operate transfer stations, landfills and recycling facilities may require performance or surety bonds, letters of credit or other means of financial assurance to secure contractual performance. As of September 30, 2007 and December 31, 2006, we had provided customers, our insurers and various regulatory authorities with such bonds and letters of credit amounting to approximately $88.3 million and $74.6 million, respectively, to collateralize our obligations.
Our domestic based automobile, general liability and workers’ compensation insurance coverage is subject to certain deductible limits. We retain up to $0.5 million and $0.25 million of risk per claim, plus claims handling expense under our workers’ compensation and our auto and general liability insurance programs, respectively. Claims in excess of such deductible levels are fully insured subject to our policy limits. However, we have a limited claims history for our U.S. operations and it is reasonably possible that recorded reserves may not be adequate to cover future payments of claims. Adjustments, if any, to our reserves will be reflected in the period in which the adjustments are known. As of September 30, 2007, and included in the $88.3 million of bonds and letters of credit previously discussed, we have posted a letter of credit with our U.S. insurer of approximately $9.8 million to secure the liability for losses within the deductible limit.
The changes in insurance reserves for our U.S. operations for the nine months ended September 30, 2007 and 2006 are as follows (unaudited):
Nine Months Ended September 30, | ||||||||
2007 | 2006 | |||||||
Balance at the beginning of the period | $ | 5,327 | $ | 4,356 | ||||
Provisions | 3,343 | 3,630 | ||||||
Payments | (2,838 | ) | (2,754 | ) | ||||
Favorable claim development for prior periods | (336 | ) | (107 | ) | ||||
Balance at the end of the period | $ | 5,496 | $ | 5,125 | ||||
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 ours and/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.
Other Contractual Arrangements
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. Authorized Capital Stock and Migration Transaction
Total Shares
As of September 30, 2007, we were authorized to issue a total of 171,666,666 shares of capital stock consisting of:
18
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
• | 166,666,666 shares of common stock, par value 0.01 per share; and | ||
• | 5,000,000 shares of preferred stock, par value 0.01 per share, of which 45,000 shares have been designated as Series A Preferred Stock and one share has been designated as Special Voting Preferred Stock. |
Preferred Stock
The Series A Preferred Stock, with a par value of $0.01 per share and a liquidation preference of $1,000.00 per share, have the powers, preferences and other special rights and the qualifications, limitations and restrictions that are set forth in the Certificate of Designations of Series A Preferred Stock as amended. As of September 30, 2007 and December 31, 2006, no shares of Series A Preferred Stock were outstanding. The Special Voting Preferred Stock has the rights, preference, and limitations set forth in the Amended Certificate of Designation of Special Voting Preferred Stock. One share of Special Voting Preferred Stock is presently outstanding.
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 29,219,011 shares of our common stock; and (ii) the conversion of the remaining 9,229,676 common shares of Waste Services (CA) held by non-U.S. residents who elected to receive exchangeable shares into 9,229,676 exchangeable shares of Waste Services (CA) which are exchangeable into 3,076,558 shares of our common stock. 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 time 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.
15. Comprehensive Income (Loss)
Comprehensive income (loss) includes the effects of foreign currency translation. Comprehensive income (loss) for the three and nine months ended September 30, 2007 and 2006 is as follows (unaudited):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Net loss | $ | (5,024 | ) | $ | (8,593 | ) | $ | (23,102 | ) | $ | (38,435 | ) | ||||
Foreign currency translation adjustment | 13,881 | (194 | ) | 29,984 | 7,207 | |||||||||||
Comprehensive income (loss) | $ | 8,857 | $ | (8,787 | ) | $ | 6,882 | $ | (31,228 | ) | ||||||
19
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16. 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 in the U.S. we operate exclusively in Florida. As previously discussed, we have divested of our Arizona and Texas operations, as such the results of our Arizona and Texas operations are presented as discontinued operations and are not included in the segment data presented.
We believe our Canadian geographic segments meet the “Aggregation Criteria” set forth in SFAS 131 for the following reasons: (i) these segments are economically similar, (ii) the nature of the service, waste collection and disposal, is the same and transferable across locations; (iii) the type and class of customer is consistent among regions/districts; (iv) the methods used to deliver services are essentially the same (e.g. containers collect waste at market locations and trucks collect and transfer waste to landfills); and (v) the regulatory environment is consistent within Canada. We do not have significant (in volume or dollars) inter-segment related transactions. We have reflected both of our domestic corporate and Canadian corporate offices as “Corporate.”
Summarized financial information concerning our reportable segments for the three and nine months ended September 30, 2007 and 2006 is as follows (unaudited):
Three Months Ended September 30, 2007 | ||||||||||||||||
Florida | Canada | Corporate | Total | |||||||||||||
Revenue | $ | 70,616 | $ | 59,989 | $ | — | $ | 130,605 | ||||||||
Depreciation, depletion and amortization | 10,982 | 4,814 | 347 | 16,143 | ||||||||||||
Income (loss) from operations | 6,991 | 11,262 | (8,362 | ) | 9,891 | |||||||||||
Capital expenditures | 11,826 | 12,357 | 274 | 24,457 |
Three Months Ended September 30, 2006 | ||||||||||||||||
Florida | Canada | Corporate | Total | |||||||||||||
Revenue | $ | 51,910 | $ | 51,829 | $ | — | $ | 103,739 | ||||||||
Depreciation, depletion and amortization | 6,091 | 4,155 | 356 | 10,602 | ||||||||||||
Income (loss) from operations | 7,072 | 8,903 | (7,811 | ) | 8,164 | |||||||||||
Capital expenditures | 7,261 | 5,459 | 35 | 12,755 |
Nine Months Ended September 30, 2007 | ||||||||||||||||
Florida | Canada | Corporate | Total | |||||||||||||
Revenue | $ | 197,510 | $ | 160,648 | $ | — | $ | 358,158 | ||||||||
Depreciation, depletion and amortization | 29,106 | 13,128 | 1,000 | 43,234 | ||||||||||||
Income (loss) from operations | 23,942 | 27,972 | (20,998 | ) | 30,916 | |||||||||||
Capital expenditures | 27,873 | 19,629 | 1,122 | 48,624 |
Nine Months Ended September 30, 2006 | ||||||||||||||||
Florida | Canada | Corporate | Total | |||||||||||||
Revenue | $ | 152,940 | $ | 138,763 | $ | — | $ | 291,703 | ||||||||
Depreciation, depletion and amortization | 16,946 | 11,635 | 1,113 | 29,694 | ||||||||||||
Income (loss) from operations | 19,860 | 21,281 | (32,224 | ) | 8,917 | |||||||||||
Capital expenditures | 17,521 | 18,637 | 849 | 37,007 |
17. Condensed Consolidating Financial Statements
Waste Services is the primary obligor under the Subordinated Notes, however Waste Services has no independent assets or operations, and the guarantees of our domestic subsidiaries, which are wholly owned subsidiaries, are full and unconditional and joint and several with respect to the Subordinated Notes, including principal, interest, premium, if any, and liquidated damages, if any. Presented below are our Unaudited Condensed Consolidating Balance Sheets as of September 30, 2007 and December 31, 2006 and the related Unaudited Condensed Consolidating Statements of Operations and Condensed Consolidating Statements of Cash Flows for the three and nine months ended September 30, 2007 and 2006 of Waste Services, Inc. (the “Parent”), our U.S. guarantor subsidiaries (“Guarantors”) and the non-guarantor Canadian subsidiaries (“Non-guarantors”):
20
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
September 30, 2007 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 5,678 | $ | 1,019 | $ | 9,301 | $ | — | $ | 15,998 | ||||||||||
Accounts receivable, net | — | 33,784 | 36,769 | — | 70,553 | |||||||||||||||
Prepaid expenses and other current assets | 863 | 2,737 | 7,167 | — | 10,767 | |||||||||||||||
Total current assets | 6,541 | 37,540 | 53,237 | — | 97,318 | |||||||||||||||
Property and equipment, net | 236 | 109,649 | 88,733 | — | 198,618 | |||||||||||||||
Landfill sites, net | — | 183,431 | 16,624 | — | 200,055 | |||||||||||||||
Goodwill and other intangible assets, net | — | 320,214 | 103,489 | — | 423,703 | |||||||||||||||
Other assets | 18,147 | 201 | — | — | 18,348 | |||||||||||||||
Due from affiliates | — | — | 651 | (651 | ) | — | ||||||||||||||
Investment in subsidiary | 822,745 | — | — | (822,745 | ) | — | ||||||||||||||
Total assets | $ | 847,669 | $ | 651,035 | $ | 262,734 | $ | (823,396 | ) | $ | 938,042 | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Accounts payable | $ | 11,757 | $ | 2,305 | $ | 12,983 | $ | — | $ | 27,045 | ||||||||||
Accrued expenses and other current liabilities | 21,146 | 25,211 | 23,078 | — | 69,435 | |||||||||||||||
Short-term financing and current portion of long-term debt | 1,715 | 200 | — | — | 1,915 | |||||||||||||||
Total current liabilities | 34,618 | 27,716 | 36,061 | — | 98,395 | |||||||||||||||
Long-term debt | 440,376 | 2,446 | — | — | 442,822 | |||||||||||||||
Accrued closure, post-closure and other obligations | 22,794 | 7,815 | 16,986 | — | 47,595 | |||||||||||||||
Due to affiliates | 651 | — | — | (651 | ) | — | ||||||||||||||
Total liabilities | 498,439 | 37,977 | 53,047 | (651 | ) | 588,812 | ||||||||||||||
Shareholders’ equity: | ||||||||||||||||||||
Common stock of Waste Services, Inc | 439 | — | — | — | 439 | |||||||||||||||
Other equity | 348,791 | 613,058 | 209,687 | (822,745 | ) | 348,791 | ||||||||||||||
Total shareholders’ equity | 349,230 | 613,058 | 209,687 | (822,745 | ) | 349,230 | ||||||||||||||
Total liabilities and shareholders’ equity | $ | 847,669 | $ | 651,035 | $ | 262,734 | $ | (823,396 | ) | $ | 938,042 | |||||||||
21
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2006 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 2,190 | $ | 563 | $ | 5,779 | $ | — | $ | 8,532 | ||||||||||
Accounts receivable, net | — | 24,144 | 27,660 | — | 51,804 | |||||||||||||||
Prepaid expenses and other current assets | 570 | 2,292 | 3,362 | — | 6,224 | |||||||||||||||
Current asets of discontinued operations | — | 4,559 | — | — | 4,559 | |||||||||||||||
Total current assets | 2,760 | 31,558 | 36,801 | — | 71,119 | |||||||||||||||
Property and equipment, net | 167 | 71,305 | 69,201 | — | 140,673 | |||||||||||||||
Landfill sites, net | — | 182,050 | 13,831 | — | 195,881 | |||||||||||||||
Goodwill and other intangible assets, net | — | 262,056 | 87,979 | — | 350,035 | |||||||||||||||
Other assets | 10,429 | 238 | — | — | 10,667 | |||||||||||||||
Due from affiliates | — | — | 344 | (344 | ) | — | ||||||||||||||
Investment in subsidiary | 777,619 | — | — | (777,619 | ) | — | ||||||||||||||
Non-current assets of discontinued operations | — | 96,688 | — | — | 96,688 | |||||||||||||||
Total assets | $ | 790,975 | $ | 643,895 | $ | 208,156 | $ | (777,963 | ) | $ | 865,063 | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Accounts payable | $ | 9,411 | $ | 3,189 | $ | 11,433 | $ | — | $ | 24,033 | ||||||||||
Accrued expenses and other current liabilities | 18,503 | 19,600 | 15,463 | — | 53,566 | |||||||||||||||
Short-term financing and current portion of long-term debt | 3,786 | 189 | — | — | 3,975 | |||||||||||||||
Current liabilities of discontinued operations | — | 4,784 | — | — | 4,784 | |||||||||||||||
Total current liabilities | 31,700 | 27,762 | 26,896 | — | 86,358 | |||||||||||||||
Long-term debt | 403,516 | 2,597 | — | — | 406,113 | |||||||||||||||
Accrued closure, post-closure and other obligations | 16,058 | 2,755 | 13,812 | — | 32,625 | |||||||||||||||
Due to affiliates | 344 | — | — | (344 | ) | — | ||||||||||||||
Non-current liabilities of discontinued operations | — | 610 | — | — | 610 | |||||||||||||||
Total liabilities | 451,618 | 33,724 | 40,708 | (344 | ) | 525,706 | ||||||||||||||
Shareholders’ equity: | ||||||||||||||||||||
Common stock of Waste Services, Inc | 438 | — | — | — | 438 | |||||||||||||||
Other equity | 338,919 | 610,171 | 167,448 | (777,619 | ) | 338,919 | ||||||||||||||
Total shareholders’ equity | 339,357 | 610,171 | 167,448 | (777,619 | ) | 339,357 | ||||||||||||||
Total liabilities and shareholders’ equity | $ | 790,975 | $ | 643,895 | $ | 208,156 | $ | (777,963 | ) | $ | 865,063 | |||||||||
22
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Three Months Ended September 30, 2007 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Revenue | $ | — | $ | 70,616 | $ | 59,989 | $ | — | $ | 130,605 | ||||||||||
Operating and other expenses: | ||||||||||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) | — | 45,701 | 39,645 | — | 85,346 | |||||||||||||||
Selling, general and administrative expense (exclusive of depreciation, depletion and amortization) | 6,749 | 4,966 | 6,872 | — | 18,587 | |||||||||||||||
Depreciation, depletion and amortization | 22 | 10,982 | 5,139 | — | 16,143 | |||||||||||||||
Foreign exchange loss (gain) and other | — | 672 | (34 | ) | — | 638 | ||||||||||||||
Equity earnings in investees, net of tax | (11,938 | ) | — | — | 11,938 | — | ||||||||||||||
Income from operations | 5,167 | 8,295 | 8,367 | (11,938 | ) | 9,891 | ||||||||||||||
Interest expense | 10,191 | 39 | 13 | — | 10,243 | |||||||||||||||
Income (loss) from continuing operations before income taxes | (5,024 | ) | 8,256 | 8,354 | (11,938 | ) | (352 | ) | ||||||||||||
Income tax provision | — | 1,716 | 2,758 | — | 4,474 | |||||||||||||||
Net income (loss) from continuing operations | (5,024 | ) | 6,540 | 5,596 | (11,938 | ) | (4,826 | ) | ||||||||||||
Loss on sale of discontinued operations | — | (198 | ) | — | — | (198 | ) | |||||||||||||
Net income (loss) | $ | (5,024 | ) | $ | 6,342 | $ | 5,596 | $ | (11,938 | ) | $ | (5,024 | ) | |||||||
23
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Three Months Ended September 30, 2006 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Revenue | $ | — | $ | 51,910 | $ | 51,829 | $ | — | $ | 103,739 | ||||||||||
Operating and other expenses: | ||||||||||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) | — | 35,122 | 35,190 | — | 70,312 | |||||||||||||||
Selling, general and administrative expense (exclusive of depreciation, depletion and amortization) | 5,778 | 3,310 | 5,665 | — | 14,753 | |||||||||||||||
Depreciation, depletion and amortization | 12 | 6,091 | 4,499 | — | 10,602 | |||||||||||||||
Foreign exchange gain and other | — | (62 | ) | (30 | ) | — | (92 | ) | ||||||||||||
Equity earnings in investees, net of tax | (9,340 | ) | — | — | 9,340 | — | ||||||||||||||
Income from operations | 3,550 | 7,449 | 6,505 | (9,340 | ) | 8,164 | ||||||||||||||
Interest expense | 7,887 | 45 | 64 | — | 7,996 | |||||||||||||||
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs | 4,256 | — | — | — | 4,256 | |||||||||||||||
Income (loss) from continuing operations before income taxes | (8,593 | ) | 7,404 | 6,441 | (9,340 | ) | (4,088 | ) | ||||||||||||
Income tax provision | — | 1,452 | 2,593 | — | 4,045 | |||||||||||||||
Net income (loss) from continuing operations | (8,593 | ) | 5,952 | 3,848 | (9,340 | ) | (8,133 | ) | ||||||||||||
Net loss from discontinued operations | — | (460 | ) | — | — | (460 | ) | |||||||||||||
Net income (loss) | $ | (8,593 | ) | $ | 5,492 | $ | 3,848 | $ | (9,340 | ) | $ | (8,593 | ) | |||||||
24
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Nine Months Ended September 30, 2007 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Revenue | $ | — | $ | 197,510 | $ | 160,648 | $ | — | $ | 358,158 | ||||||||||
Operating and other expenses: | ||||||||||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) | — | 128,404 | 107,074 | — | 235,478 | |||||||||||||||
Selling, general and administrative expense (exclusive of depreciation, depletion and amortization) | 15,141 | 13,534 | 19,804 | — | 48,479 | |||||||||||||||
Depreciation, depletion and amortization | 52 | 29,106 | 14,076 | — | 43,234 | |||||||||||||||
Foreign exchange loss (gain) and other | (175 | ) | 513 | (287 | ) | — | 51 | |||||||||||||
Equity earnings in investees, net of tax | (22,443 | ) | — | — | 22,443 | — | ||||||||||||||
Income from operations | 7,425 | 25,953 | 19,981 | (22,443 | ) | 30,916 | ||||||||||||||
Interest expense | 30,527 | 140 | 151 | — | 30,818 | |||||||||||||||
Income (loss) from continuing operations before income taxes | (23,102 | ) | 25,813 | 19,830 | (22,443 | ) | 98 | |||||||||||||
Income tax provision | — | 3,504 | 7,114 | — | 10,618 | |||||||||||||||
Net income (loss) from continuing operations | (23,102 | ) | 22,309 | 12,716 | (22,443 | ) | (10,520 | ) | ||||||||||||
Net loss from discontinued operations | — | (1,130 | ) | — | — | �� | (1,130 | ) | ||||||||||||
Loss on sale of discontinued operations | — | (11,452 | ) | — | — | (11,452 | ) | |||||||||||||
Net income (loss) | $ | (23,102 | ) | $ | 9,727 | $ | 12,716 | $ | (22,443 | ) | $ | (23,102 | ) | |||||||
25
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Nine Months Ended September 30, 2006 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Revenue | $ | — | $ | 152,940 | $ | 138,763 | $ | — | $ | 291,703 | ||||||||||
Operating and other expenses: | — | |||||||||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) | — | 106,196 | 95,177 | — | 201,373 | |||||||||||||||
Selling, general and administrative expense (exclusive of depreciation, depletion and amortization) | 17,188 | 9,428 | 17,467 | — | 44,083 | |||||||||||||||
Deferred acquisition costs | 439 | — | 5,173 | — | 5,612 | |||||||||||||||
Depreciation, depletion and amortization | 31 | 16,945 | 12,718 | — | 29,694 | |||||||||||||||
Foreign exchange loss (gain) and other | 439 | (411 | ) | 1,996 | — | 2,024 | ||||||||||||||
Equity earnings in investees, net of tax | (16,916 | ) | — | — | 16,916 | — | ||||||||||||||
Income (loss) from operations | (1,181 | ) | 20,782 | 6,232 | (16,916 | ) | 8,917 | |||||||||||||
Interest expense | 22,461 | 134 | 281 | — | 22,876 | |||||||||||||||
Cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs | 14,793 | — | — | — | 14,793 | |||||||||||||||
Income (loss) from continuing operations before income taxes | (38,435 | ) | 20,648 | 5,951 | (16,916 | ) | (28,752 | ) | ||||||||||||
Income tax provision | — | 4,291 | 4,095 | — | 8,386 | |||||||||||||||
Net loss from continuing operations | (38,435 | ) | 16,357 | 1,856 | (16,916 | ) | (37,138 | ) | ||||||||||||
Net loss from discontinued operations | — | (1,297 | ) | — | — | (1,297 | ) | |||||||||||||
Net income (loss) | $ | (38,435 | ) | $ | 15,060 | $ | 1,856 | $ | (16,916 | ) | $ | (38,435 | ) | |||||||
26
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Nine Months Ended September 30, 2007 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net cash (used in) provided by operating activities | $ | (32,802 | ) | $ | 51,664 | $ | 28,491 | $ | — | $ | 47,353 | |||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Cash used in business combinations and significant asset acquisitions, net of cash acquired | — | (30,892 | ) | (1,397 | ) | — | (32,289 | ) | ||||||||||||
Capital expenditures | (123 | ) | (27,873 | ) | (20,628 | ) | — | (48,624 | ) | |||||||||||
Proceeds from asset sales and business divestitures | — | 17,772 | 60 | — | 17,832 | |||||||||||||||
Deposits for business acquisitions and other | (8,338 | ) | 117 | (1,599 | ) | — | (9,820 | ) | ||||||||||||
Intercompany | — | (8,003 | ) | (2,645 | ) | 10,648 | — | |||||||||||||
Net cash used in continuing operations | (8,461 | ) | (48,879 | ) | (26,209 | ) | 10,648 | (72,901 | ) | |||||||||||
Net cash used in discontinued operations | — | (2,187 | ) | — | — | (2,187 | ) | |||||||||||||
Net cash used in investing activities | (8,461 | ) | (51,066 | ) | (26,209 | ) | 10,648 | (75,088 | ) | |||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Proceeds from issuance of debt and draws on revolving credit facility | 84,066 | — | — | — | 84,066 | |||||||||||||||
Principal repayments of debt and capital lease obligations | (49,395 | ) | (142 | ) | — | — | (49,537 | ) | ||||||||||||
Proceeds from the exercise of options and warrants | 691 | — | — | — | 691 | |||||||||||||||
Fees paid for financing transactions | (1,259 | ) | — | — | — | (1,259 | ) | |||||||||||||
Intercompany | 10,648 | — | — | (10,648 | ) | — | ||||||||||||||
Net cash provided by financing activities — continuing operations | 44,751 | (142 | ) | — | (10,648 | ) | 33,961 | |||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | 1,240 | — | 1,240 | |||||||||||||||
Increase in cash and cash equivalents | 3,488 | 456 | 3,522 | — | 7,466 | |||||||||||||||
Cash and cash equivalents at the beginning of the period | 2,190 | 563 | 5,779 | — | 8,532 | |||||||||||||||
Cash and cash equivalents at the end of the period | $ | 5,678 | $ | 1,019 | $ | 9,301 | $ | — | $ | 15,998 | ||||||||||
27
Table of Contents
WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Nine Months Ended September 30, 2006 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net cash (used in) provided by operating activities | $ | (32,712 | ) | $ | 39,732 | $ | 22,026 | $ | — | $ | 29,046 | |||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Cash used in business combinations and significant asset acquisitions, net of cash acquired | — | (26,445 | ) | (2,528 | ) | — | (28,973 | ) | ||||||||||||
Capital expenditures | (188 | ) | (17,522 | ) | (19,297 | ) | — | (37,007 | ) | |||||||||||
Proceeds from asset sales and business divestitures | — | 4,356 | 573 | — | 4,929 | |||||||||||||||
Share reimbursement agreement | (929 | ) | — | — | — | (929 | ) | |||||||||||||
Intercompany | — | — | (4,345 | ) | 4,345 | — | ||||||||||||||
Net cash used in continuing operations | (1,117 | ) | (39,611 | ) | (25,597 | ) | 4,345 | (61,980 | ) | |||||||||||
Net cash used in discontinued operations | — | (3,025 | ) | — | — | (3,025 | ) | |||||||||||||
Net cash used in investing activities | (1,117 | ) | (42,636 | ) | (25,597 | ) | 4,345 | (65,005 | ) | |||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Proceeds from issuance of debt and draw on revolving credit facility | 37,000 | — | 3,532 | — | 40,532 | |||||||||||||||
Principal repayments of debt and capital lease obligations | (7,333 | ) | (529 | ) | (3,999 | ) | — | (11,861 | ) | |||||||||||
Proceeds from the exercise of options and warrants | 86 | — | — | — | 86 | |||||||||||||||
Fees paid for financing transactions | (149 | ) | — | — | — | (149 | ) | |||||||||||||
Intercompany | 1,095 | 3,250 | — | (4,345 | ) | — | ||||||||||||||
Net cash provided by (used in) financing activities — continuing operations | 30,699 | 2,721 | (467 | ) | (4,345 | ) | 28,608 | |||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | 161 | — | 161 | |||||||||||||||
Decrease in cash and cash equivalents | (3,130 | ) | (183 | ) | (3,877 | ) | — | (7,190 | ) | |||||||||||
Cash and cash equivalents at the beginning of the period | 3,130 | 550 | 5,206 | — | 8,886 | |||||||||||||||
Cash and cash equivalents at the end of the period | $ | — | $ | 367 | $ | 1,329 | $ | — | $ | 1,696 | ||||||||||
28
Table of Contents
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto included elsewhere herein as well as our annual report on Form 10-K for the year ended December 31, 2006, as filed with the Securities and Exchange Commission, including the factors set forth in the section titled “Disclosure Regarding Forward-Looking Statements” and factors affecting future results as well as our other filings made with the Securities and Exchange Commission.
Overview
We are a multi-regional, integrated solid waste services company, providing collection, transfer, landfill disposal and recycling services for commercial, industrial and residential customers. Our operating strategy is disposal-based, whereby we enter geographic markets with attractive growth or positive competitive characteristics by acquiring and developing landfill disposal capacity, then acquiring and developing waste collection and transfer operations. Our operations are located in the United States and Canada. Our U.S. operations are located in Florida and our Canadian operations are located in Eastern Canada (Ontario) and Western Canada (Alberta, Saskatchewan and British Columbia). In March 2007, we divested our Arizona operations and in June 2007 we divested our Texas operations, and as a result, these operations are presented as discontinued for all periods presented.
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.
29
Table of Contents
Expense Structure
Our cost of operations primarily includes tipping fees and related disposal costs, labor and related benefit costs, equipment maintenance, fuel, vehicle, liability and workers’ compensation insurance and landfill capping, closure and post-closure costs. Our strategy is to create vertically integrated operations where possible, using transfer stations to link collection operations with our landfills to increase internalization of our waste volume. Internalization lowers our disposal costs by allowing us to eliminate tipping fees otherwise paid to third party landfill or transfer station operators. We believe that internalization provides us with a competitive advantage by allowing us to be a low cost provider in our markets. We expect that our internalization will gradually increase over time as we develop our network of transfer stations and maximize delivery of collection volumes to our landfill sites.
In markets where we do not have our own landfills, we seek to secure disposal arrangements with municipalities or private owners of landfills or transfer stations. In these markets, our ability to maintain competitive prices for our collection services is generally dependent upon our ability to secure competitive disposal pricing. If owners of third party disposal sites discontinue our arrangements, we would have to seek alternative disposal sites, which could impact our profitability and cash flow. In addition, if third party disposal sites increase their tipping fees and we are unable to pass these increases on to our collection customers, our profitability and cash flow would be negatively impacted.
We believe that the age and condition of our vehicle fleet has a significant impact on operating costs, including, but not limited to, repairs and maintenance, insurance and driver training and retention costs. Through capital investment, we seek to maintain an average fleet age of approximately six years. We believe that this enables us to best control our repair and maintenance costs, safety and insurance costs and employee turnover related costs.
Selling, general and administrative expenses include managerial costs, information systems, sales force, administrative expenses and professional fees.
Depreciation, depletion and amortization includes depreciation of fixed assets over their estimated useful lives using the straight-line method, depletion of landfill costs, including capping, closure and post-closure obligations using the units-of-consumption method and amortization of intangible assets including customer relationships and contracts and covenants not-to-compete, which are amortized over the expected life of the benefit to be received from such intangibles.
We capitalize certain third party costs related to pending acquisitions or development projects. These costs remain deferred until we cease to be engaged on a regular and ongoing basis with completion of the proposed acquisition, at which point they are charged to current earnings. In the event that the target is acquired, these costs are incorporated in the cost of the acquired business. We expense indirect and internal costs including executive salaries, overhead and travel costs related to acquisitions as they are incurred.
Recent Developments
In March 2007, we completed transactions to acquire Allied Waste Industries, Inc’s. (“Allied Waste”) South Florida operations and to sell our Arizona operations to Allied Waste. The South Florida operations consist of a collection company, a transfer station and a materials recovery facility, all providing service to Miami-Dade County. The total purchase price of Allied Waste’s South Florida operations was $68.1 million.
In April 2007, we completed the acquisition of a roll-off collection and transfer operation, and a transfer station development project and a landfill development project in southwest Florida (USA Recycling Holdings, LLC., USA Recycling, LLC., and Freedom Recycling Holdings, LLC.) for a total purchase price of $51.2 million, of which, $7.5 million is contingent upon the receipt of certain landfill operating permits, $2.5 million is contingent on the receipt of certain operating permits for the transfer station 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, and delivery of title to the property. To date, we have advanced $8.5 million towards the purchase of the landfill development project. The existing transfer station is permitted to accept construction and demolition waste volume, and we are internalizing this additional volume to our southwest Florida landfill site acquired in December 2006. Also in April 2007, we acquired a “tuck-in” hauling operation in Ontario, Canada for cash consideration of approximately C$1.5 million.
In June 2007, we completed transactions to acquire WCA Waste Corporation’s (“WCA”) hauling and transfer station operations near Fort Myers, Florida and to sell our Texas operations to WCA. The transfer station is permitted to accept construction and demolition waste volume, and we are internalizing this additional volume to our southwest Florida landfill site. The estimated fair value of the WCA assets approximated $18.5 million. Additionally, as part of the transaction with WCA we received $23.7 million in cash and issued a $10.5 million non-interest bearing promissory note with payments of $125,000 per month until June 2014. The net present value of the note was approximately $8.1 million.
30
Table of Contents
We have presented the net assets and operations of our Arizona and Texas operations as discontinued operations for all periods presented. Revenue from discontinued operations was nil and $8.1 million for the three months ended September 30, 2007 and 2006, respectively and $10.3 million and $24.8 million for the nine months ended September 30, 2007 and 2006, respectively. Pre-tax net loss from discontinued operations was nil and $0.5 million for the three months ended September 30, 2007 and 2006, respectively and $1.1 million and $1.3 million for the nine months ended September 30, 2007 and 2006, respectively. No income tax benefit or provision has been attributed to discontinued operations for each period presented. The increase in pre-tax net loss from discontinued operations is primarily attributable to additional provisions for severance, contract termination penalties and settlements for final working capital delivered. During 2007 we recognized a gain on disposal of $0.8 million for the Arizona operations and a loss on disposal of $12.2 million for the Texas operations.
Results of Operations for the Three and Nine Months Ended September 30, 2007 and 2006
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 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 our 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 or loss. 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.
Our consolidated results of operations for the three and nine months ended September 30, 2007 and 2006 are as follows (in thousands):
Three Months Ended September 30, 2007 | ||||||||||||||||||||||||
US | Canada | Total | ||||||||||||||||||||||
Revenue | $ | 70,616 | 100.0 | % | $ | 59,989 | 100.0 | % | $ | 130,605 | 100.0 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of operations | 45,701 | 64.7 | % | 39,645 | 66.1 | % | 85,346 | 65.3 | % | |||||||||||||||
Selling, general and administrative expense | 7,720 | 10.9 | % | 6,872 | 11.5 | % | 14,592 | 11.2 | % | |||||||||||||||
Severance and related costs | 3,995 | 5.7 | % | — | 0.0 | % | 3,995 | 3.1 | % | |||||||||||||||
Depreciation, depletion and amortization | 11,004 | 15.6 | % | 5,139 | 8.6 | % | 16,143 | 12.4 | % | |||||||||||||||
Foreign exchange loss (gain) and other | 672 | 0.9 | % | (34 | ) | -0.1 | % | 638 | 0.4 | % | ||||||||||||||
Income from operations | $ | 1,524 | 2.2 | % | $ | 8,367 | 13.9 | % | $ | 9,891 | 7.6 | % | ||||||||||||
Three Months Ended September 30, 2006 | ||||||||||||||||||||||||
US | Canada | Total | ||||||||||||||||||||||
Revenue | $ | 51,910 | 100.0 | % | $ | 51,829 | 100.0 | % | $ | 103,739 | 100.0 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of operations | 35,122 | 67.6 | % | 35,190 | 67.9 | % | 70,312 | 67.8 | % | |||||||||||||||
Selling, general and administrative expense | 9,088 | 17.5 | % | 5,665 | 10.9 | % | 14,753 | 14.2 | % | |||||||||||||||
Depreciation, depletion and amortization | 6,103 | 11.8 | % | 4,499 | 8.7 | % | 10,602 | 10.2 | % | |||||||||||||||
Foreign exchange gain and other | (62 | ) | -0.1 | % | (30 | ) | -0.1 | % | (92 | ) | -0.1 | % | ||||||||||||
Income from operations | $ | 1,659 | 3.2 | % | $ | 6,505 | 12.6 | % | $ | 8,164 | 7.9 | % | ||||||||||||
31
Table of Contents
Nine Months Ended September 30, 2007 | ||||||||||||||||||||||||
US | Canada | Total | ||||||||||||||||||||||
Revenue | $ | 197,510 | 100.0 | % | $ | 160,648 | 100.0 | % | $ | 358,158 | 100.0 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of operations | 128,404 | 65.0 | % | 107,074 | 66.7 | % | 235,478 | 65.7 | % | |||||||||||||||
Selling, general and administrative expense | 24,680 | 12.5 | % | 19,804 | 12.3 | % | 44,484 | 12.4 | % | |||||||||||||||
Severance and related costs | 3,995 | 2.0 | % | — | 0.0 | % | 3,995 | 1.1 | % | |||||||||||||||
Depreciation, depletion and amortization | 29,158 | 14.8 | % | 14,076 | 8.8 | % | 43,234 | 12.1 | % | |||||||||||||||
Foreign exchange loss (gain) and other | 338 | 0.2 | % | (287 | ) | -0.2 | % | 51 | 0.1 | % | ||||||||||||||
Income from operations | $ | 10,935 | 5.5 | % | $ | 19,981 | 12.4 | % | $ | 30,916 | 8.6 | % | ||||||||||||
Nine Months Ended September 30, 2006 | ||||||||||||||||||||||||
US | Canada | Total | ||||||||||||||||||||||
Revenue | $ | 152,940 | 100.0 | % | $ | 138,763 | 100.0 | % | $ | 291,703 | 100.0 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of operations | 106,196 | 69.4 | % | 95,177 | 68.6 | % | 201,373 | 69.0 | % | |||||||||||||||
Selling, general and administrative expense | 26,616 | 17.4 | % | 17,467 | 12.6 | % | 44,083 | 15.1 | % | |||||||||||||||
Deferred acquisition costs | 439 | 0.3 | % | 5,173 | 3.7 | % | 5,612 | 1.9 | % | |||||||||||||||
Depreciation, depletion and amortization | 16,976 | 11.1 | % | 12,718 | 9.2 | % | 29,694 | 10.2 | % | |||||||||||||||
Foreign exchange loss and other | 28 | 0.0 | % | 1,996 | 1.4 | % | 2,024 | 0.7 | % | |||||||||||||||
Income from operations | $ | 2,685 | 1.8 | % | $ | 6,232 | 4.5 | % | $ | 8,917 | 3.1 | % | ||||||||||||
Revenue
A summary of our revenue is as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||||||||||||||||||
Collection | $ | 103,845 | 72.0 | % | $ | 84,143 | 74.7 | % | $ | 287,950 | 72.6 | % | $ | 240,748 | 76.6 | % | ||||||||||||||||
Landfill disposal | 17,184 | 11.9 | % | 13,225 | 11.7 | % | 46,683 | 11.8 | % | 35,640 | 11.3 | % | ||||||||||||||||||||
Transfer station | 16,809 | 11.7 | % | 11,659 | 10.4 | % | 46,075 | 11.6 | % | 28,924 | 9.2 | % | ||||||||||||||||||||
Material recovery facilities | 5,905 | 4.1 | % | 3,110 | 2.8 | % | 14,644 | 3.7 | % | 8,206 | 2.6 | % | ||||||||||||||||||||
Other specialized services | 506 | 0.3 | % | 471 | 0.4 | % | 1,016 | 0.3 | % | 915 | 0.3 | % | ||||||||||||||||||||
144,249 | 100.0 | % | 112,608 | 100.0 | % | 396,368 | 100.0 | % | 314,433 | 100.0 | % | |||||||||||||||||||||
Intercompany elimination | (13,644 | ) | (8,869 | ) | (38,210 | ) | (22,730 | ) | ||||||||||||||||||||||||
$ | 130,605 | $ | 103,739 | $ | 358,158 | $ | 291,703 | |||||||||||||||||||||||||
Total | ||||||||||||
Three Months Ended September 30, | Florida | Canada | Revenue | |||||||||
2007 | $ | 70,616 | $ | 59,989 | $ | 130,605 | ||||||
2006 | 51,910 | 51,829 | 103,739 |
Total | ||||||||||||
Nine Months Ended September 30, | Florida | Canada | Revenue | |||||||||
2007 | $ | 197,510 | $ | 160,648 | $ | 358,158 | ||||||
2006 | 152,940 | 138,763 | 291,703 |
32
Table of Contents
Revenue was $130.6 million and $103.7 million for the three months ended September 30, 2007 and 2006, respectively, an increase of $26.9 million or 25.9%. The increase in revenue from our Florida operations for the three months ended September 30, 2007 of $18.7 million or 36.0% was driven by acquisitions net of dispositions of $21.8 million and price increases of $2.6 million, offset by decreases in fuel surcharges of $0.4 million. Offsetting these net increases were decreased collection, primarily in our industrial line of business, transfer station and third party landfill volumes of $2.3 million and other net decreases of $3.0 million, primarily related to the expiration or assignment of certain lower margin residential collection contracts.
The increase in revenue from our Canadian operations for the three months ended September 30, 2007 of $8.2 million or 15.7% was due to price increases of $2.0 million, which were not significantly impacted by fuel surcharges, and increased transfer station and third party landfill volumes of $2.6 million. The growth in Canadian landfill volumes for the quarter was primarily due to the timing of special waste projects. The favorable effect of foreign exchange movements increased revenue by $3.6 million.
Revenue was $358.2 million and $291.7 million for the nine months ended September 30, 2007 and 2006, respectively, an increase of $66.5 million or 22.8%. The increase in revenue from our Florida operations for the nine months ended September 30, 2007 of $44.6 million or 29.1% was driven by price increases of $7.1 million, offset by decreases in fuel surcharges of $0.2 million, and acquisitions net of dispositions of $51.1 million. Offsetting these net increases were decreased collection, primarily in our industrial line of business, transfer station and third party landfill volumes of $7.6 million and other net decreases of $5.8 million, primarily related to the expiration or assignment of certain lower margin residential collection contracts.
The increase in revenue from our Canadian operations for the nine months ended September 30, 2007 of $21.9 million or 15.8% was due to price increases of $7.9 million, of which $0.7 million related to fuel surcharges, increased collection, transfer station and third party landfill volumes of $7.8 million and net gains on contract awards and other increases of $2.4 million. The favorable effect of foreign exchange movements increased revenue $3.8 million.
Cost of Operations
Cost of operations was $85.3 million and $70.3 million for the three months ended September 30, 2007 and 2006, respectively, an increase of $15.0 million or 21.4%. As a percentage of revenue, cost of operations was 65.3% and 67.8% for the three months ended September 30, 2007 and 2006, respectively.
The increase in cost of operations from our Florida operations for the three months ended September 30, 2007 of $10.6 million or 30.1% was due to acquisitions net of dispositions of $15.0 million. Offsetting this increase was lower costs for third party disposal due to increased internalization coupled with overall lower collection volumes of $2.5 million, lower labor costs, primarily due to our exiting certain lower margin residential collection contracts of $1.0 million, decreased insurance and support costs of $0.4 million, primarily due to favorable development in prior year workers’ compensation and auto and general liability insurance reserves as well as decreases in other operating costs of $0.5 million. As a percentage of revenue, cost of operations was 64.7% and 67.6% for the three months ended September 30, 2007 and 2006, respectively. The improvement in our domestic gross margin is primarily due to increased internalization and the expiration of certain lower margin residential collection contracts.
The increase in cost of operations from our Canadian operations for the three months ended September 30, 2007 of $4.4 million or 12.7% was due to increased labor costs of $1.1 million and increased disposal, vehicle repair and maintenance and other operating costs of $0.9 million. The unfavorable effect of foreign exchange movements was $2.4 million. Cost of operations as a percentage of revenue decreased to 66.1% from 67.9% for the three months ended September 30, 2007 and 2006, respectively, primarily due to increased landfill volumes.
Cost of operations was $235.5 million and $201.4 million for the nine months ended September 30, 2007 and 2006, respectively, an increase of $34.1 million or 16.9%. As a percentage of revenue, cost of operations was 65.7% and 69.0% for the nine months ended September 30, 2007 and 2006, respectively.
The increase in cost of operations from our Florida operations for the nine months ended September 30, 2007 of $22.2 million or 20.9% was due to acquisitions net of dispositions of $35.5 million. Offsetting this increase was lower costs for third party disposal due to increased internalization of $7.7 million, lower labor costs, primarily due to our exiting certain lower margin residential collection contracts of $2.6 million, decreased insurance and support costs of $1.3 million and decreases in other operating costs of $1.7 million. As a percentage of revenue, cost of operations was 65.0% and 69.4% for the nine months ended September 30, 2007 and 2006, respectively. The improvement in our domestic gross margin is primarily due to increased internalization and the expiration of certain lower margin residential collection contracts.
33
Table of Contents
The increase in cost of operations from our Canadian operations for the nine months ended September 30, 2007 of $11.9 million or 12.5% was due to increased labor costs of $4.8 million, increased disposal volumes and rates of $1.8 million, increased fuel costs of $0.6 million and increased vehicle repair and maintenance and other operating costs of $2.1 million. The unfavorable effect of foreign exchange movements was $2.6 million. Cost of operations as a percentage of revenue decreased to 66.7% from 68.6% for the nine months ended September 30, 2007 and 2006, respectively, which is primarily due to increased landfill volumes.
Selling, General and Administrative Expense
Selling, general and administrative expense, excluding severance and related costs, was $14.6 million and $14.8 million for the three months ended September 30, 2007 and 2006, respectively, a decrease of $0.2 million or 1.1%. As a percentage of revenue, selling, general and administrative expense was 11.2% and 14.2% for the three months ended September 30, 2007 and 2006, respectively. The overall decrease in selling, general and administrative expense is primarily due to decreased legal and professional fees of $2.3 million, which primarily relates to costs for our litigation with Waste Management that were incurred in 2006 and lower stock-based compensation expense of $0.8 million. Offsetting these decreases were increases for acquisitions net of dispositions of $2.0 million and increased labor and other overhead of $0.5 million. The unfavorable effect of foreign exchange movements was $0.4 million. In the third quarter of 2007 and 2006, and due to certain of our domestic operations not achieving their performance targets, we reversed $0.4 million of previously accrued bonus.
Selling, general and administrative expense, excluding severance and related costs, was $44.5 million and $44.1 million for the nine months ended September 30, 2007 and 2006, respectively, an increase of $0.4 million or 0.9%. As a percentage of revenue, selling, general and administrative expense was 12.4% and 15.1% for the nine months ended September 30, 2007 and 2006, respectively. The overall increase in selling, general and administrative expense is due to acquisitions net of dispositions of $4.1 million and increased labor and other overhead of $0.9 million. Offsetting these increases were decreases in legal and professional fees of $3.0 million, which primarily relates to costs for our litigation with Waste Management that were incurred in 2006, lower stock-based compensation expense of $1.4 million and costs related to our 2006 relocation of our corporate office of $0.7 million. The unfavorable effect of foreign exchange movements was $0.5 million.
Severance and Related Costs
Effective August 23, 2007, we entered into a separation agreement with Mr. Wilcox our former President and Chief Operating Officer. The agreement provides for salary continuation and benefits until December 31, 2010. In addition, we agreed that his outstanding stock options would remain outstanding until their original expiry date. Accordingly, for the quarter ended September 30, 2007, we recorded a charge for severance costs of $3.3 million and additional stock-based compensation of $0.7 million.
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.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization was $16.1 million and $10.6 million for the three months ended September 30, 2007 and 2006, respectively, an increase of $5.5 million or 52.3%. As a percentage of revenue, depreciation, depletion and amortization was 12.4% and 10.2% for the three months ended September 30, 2007 and 2006, respectively. The overall increase in depreciation, depletion and amortization is primarily attributable to increased landfill depletion of $1.6 million, which is primarily due to increased disposal volumes in part resulting from increased internalization at our domestic landfills, acquisitions net of dispositions of $1.2 million and an increase in our truck fleet depreciation. Amortization of intangible assets increased $1.6 million. The unfavorable effect of foreign exchange rate movements was $0.3 million. Landfill depletion rates for our U.S. landfills ranged from $3.55 to $7.81 per ton and $4.77 to $7.68 per ton during the three months ended September 30, 2007 and 2006, respectively. Landfill depletion rates for our Canadian landfills ranged from C$3.12 to C$9.25 per tonne and C$2.70 to C$11.82 per tonne during the three months ended September 30, 2007 and 2006, respectively.
34
Table of Contents
Depreciation, depletion and amortization was $43.2 million and $29.7 million for the nine months ended September 30, 2007 and 2006, respectively, an increase of $13.5 million or 45.6%. As a percentage of revenue, depreciation, depletion and amortization was 12.1% and 10.2% for the nine months ended September 30, 2007 and 2006, respectively. The overall increase in depreciation, depletion and amortization is primarily attributable to increased landfill depletion of $2.3 million, which is primarily due to increased disposal volumes in part resulting from increased internalization at our domestic landfills, acquisitions net of dispositions of $6.0 million and an increase in our truck fleet depreciation. Amortization of intangible assets increased $3.6 million. The unfavorable effect of foreign exchange rate movements was $0.3 million. Landfill depletion rates for our U.S. landfills ranged from $3.55 to $7.81 per ton and $4.77 to $7.68 per ton during the nine months ended September 30, 2007 and 2006, respectively. Landfill depletion rates for our Canadian landfills ranged from C$3.12 to C$9.25 per tonne and C$2.70 to C$11.82 per tonne during the nine months ended September 30, 2007 and 2006, respectively.
Foreign Exchange Gain and Other
Foreign exchange loss (gain) and other was $0.6 million and $(0.1) million for the three months ended September 30, 2007 and 2006, respectively. The foreign exchange gain (loss) relates to the re-measuring of U.S. dollar denominated monetary accounts into Canadian dollars. Other items primarily relate to losses (gains) on sales of equipment of $0.7 million and $(0.1) million for the three months ended September 30, 2007 and 2006, respectively.
Foreign exchange loss (gain) and other was $0.1 million and $2.0 million for the nine months ended September 30, 2007 and 2006, respectively. The foreign exchange gain relates to the re-measuring of U.S. dollar denominated monetary accounts into Canadian dollars. The decrease in loss is primarily due to the prior year increase in a U.S. monetary note receivable due from our U.S. parent to our Canadian subsidiary. Other items primarily relate to losses (gains) on sales of equipment of $0.5 million and $(0.1) million for the nine months ended September 30, 2007 and 2006, respectively.
Interest Expense
The components of interest expense, including cumulative mandatorily redeemable preferred stock dividends and amortization of issue costs, for the three and nine months ended September 30, 2007 and 2006 are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Credit Facility and Senior Subordinated Note interest | $ | 9,248 | $ | 7,217 | $ | 27,771 | $ | 20,337 | ||||||||
Amortization of debt issue costs | 522 | 396 | 1,837 | 1,172 | ||||||||||||
Preferred Stock dividends and amortization of issue costs | — | 4,256 | — | 14,793 | ||||||||||||
Other interest expense | 473 | 383 | 1,210 | 1,367 | ||||||||||||
$ | 10,243 | $ | 12,252 | $ | 30,818 | $ | 37,669 | |||||||||
Interest expense was $10.2 million and $12.3 million for the three months ended September 30, 2007 and 2006, respectively, a decrease of $2.1 million or 16.4%. Interest expense on the Credit Facility and the Senior Subordinated Notes increased $2.0 million for the three months ended September 30, 2007 due primarily to higher overall balances outstanding offset by lower average rates. The weighted average interest rate on Credit Facility borrowings was 7.9% and 8.8% for the three months ended September 30, 2007 and 2006, respectively. In December 2006, we redeemed and exchanged the outstanding shares of Preferred Stock through the proceeds of a private placement of our common stock.
Interest expense was $30.8 million and $37.7 million for the nine months ended September 30, 2007 and 2006, respectively, a decrease of $6.9 million or 18.2%. Interest expense on the Credit Facility and the Senior Subordinated Notes increased $7.4 million for the nine months ended September 30, 2007 due primarily to higher overall balances outstanding. Additionally, in June 2007, we made an optional prepayment of $20.0 million of our term notes under the Credit Facility. As such, in the second quarter we expensed $0.3 million of unamortized debt issue costs relating to the retirement. The weighted average interest rate on Credit Facility borrowings was 8.0% and 8.4% for the nine months ended September 30, 2007 and 2006, respectively.
35
Table of Contents
Income Tax Provision
The provision for income taxes from continuing operations was $4.5 million and $4.0 million for the three months ended September 30, 2007 and 2006, respectively and $10.6 million and $8.4 million for the nine months ended September 30, 2007 and 2006, respectively. The year to date provision for 2007, as compared to 2006, is lower than would be expected as the sale of our Arizona operations generated a reversal of excess deferred tax liabilities of approximately $1.8 million. Due to the lack of taxable income relative to our U.S. operations, we have provided a valuation allowance for our net operating loss carry-forwards generated in the U.S. We have also provided deferred tax liabilities generated by our tax deductible goodwill. The effect of not benefiting our domestic net operating loss carry-forwards and separately providing deferred tax liabilities for our tax deductible goodwill is to increase our domestic effective rate above the amount otherwise expected. We do not foresee a decrease in our domestic effective rate in the coming 12 months. Additionally, we recognize a provision for foreign taxes on our Canadian income including taxes for stock-based compensation, which is a non-deductible item for income tax reporting in Canada. Due to changes in enacted federal rates in Canada, we reduced the rates at which we provide deferred taxes, which resulted in the recognition of a deferred benefit of approximately $0.5 million during the three months ended September 30, 2007. For the nine months ended September 30, 2007 we have paid C$3.4 million in cash relative to our actual 2006 and estimated 2007 tax liabilities in Canada. We expect the majority of our remaining 2007 tax liability to be paid in the first quarter of 2008.
Liquidity and Capital Resources
Our principal capital requirements are to fund capital expenditures, and to fund debt service and asset acquisitions. Significant sources of liquidity are cash on hand, working capital, borrowings from our Credit Facilities and proceeds from debt and/or equity issuances. The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto included elsewhere herein.
Senior Secured Credit Facilities
Our Senior Secured Credit Facilities (the “Credit Facilities”) are governed by our Second Amended and Restated Credit Agreement, entered into on December 28, 2006, as amended, with Lehman Brothers Inc. as Arranger and the other lenders named in the agreement. The Credit Facilities consist of a revolving credit facility in the amount of $65.0 million, of which $45.0 million is available to our U.S. operations and $20.0 million is available to our Canadian operations, and a term loan facility in the amount of $273.9 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. 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 September 30, 2007, there were no amounts outstanding on the revolving credit facility, while $13.2 million and $13.4 million of revolver capacity were used to support outstanding letters of credit in the U.S. and Canada, respectively. As of October 30, 2007, there were no amounts outstanding on the revolving credit facility, while $26.6 million of revolver capacity was used to support outstanding letters of credit.
In April 2007, we entered into an amendment that increased the term loans outstanding by an additional $50.0 million to $294.6 million in total, reduced the current interest rate on the term loans by 25 basis points to LIBOR plus 2.50% and provided for certain other modifications. In August 2007, we increased revolver capacity available to our Canadian operations by $5.0 million to the current $20.0 million of capacity.
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.
Other Secured Notes Payable
Included in our other secured notes payable is a $10.5 million non-interest bearing promissory note with payments of $125,000 per month until June 2014. The note was issued as part of our transactions with WCA to acquire certain of their assets in Florida and sell our Texas operations. The net present value of the remaining payments due under the note as of September 30, 2007 approximates $7.8 million, and will accrete interest at 7.8%. The note is secured by the materials recovery facility acquired from WCA.
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. 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.
36
Table of Contents
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 dividends and repurchases of stock; (iii) the issuance of preferred stock and the issuance of stock of our subsidiaries; (iv) certain investments; (v) transactions with affiliates; and (vi) certain sales of assets.
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 29,219,011 shares of our common stock; and (ii) the conversion of the remaining 9,229,676 common shares of Waste Services (CA) held by non-U.S. residents who elected to receive exchangeable shares into 9,229,676 exchangeable shares of Waste Services (CA) which are exchangeable into 3,076,558 shares of our common stock. 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, Letters of Credit and Insurance
Municipal solid waste services contracts and permits and licenses to operate transfer stations, landfills and recycling facilities may require performance or surety bonds, letters of credit or other means of financial assurance to secure contractual performance. As of September 30, 2007, we had provided customers, our insurers and various regulatory authorities with such bonds and letters of credit amounting to approximately $88.3 million to collateralize our obligations. The majority of these obligations are renewed on an annual basis.
Our U.S.-based automobile, general liability and workers’ compensation insurance coverage is subject to certain deductible limits. We retain up to $0.5 million and $0.25 million of risk per claim, plus claims handling expense under our workers’ compensation and our auto and general liability insurance programs, respectively. Claims in excess of such deductible levels are fully insured subject to our policy limits. However, we have a limited claims history for our U.S. operations and it is reasonably possible that recorded reserves may not be adequate to cover future payments of claims. Adjustments, if any, to our reserves will be reflected in the period in which the adjustments are known. As of September 30, 2007 and included in the $88.3 million of bonds and letters of credit discussed previously, we have posted a letter of credit with our U.S. insurer of approximately $9.8 million to secure the liability for losses within the deductible limit.
37
Table of Contents
Cash Flows
The following discussion relates to the major components of the changes in cash flows for the nine months ended September 30, 2007 and 2006.
Cash Flows from Operating Activities
Cash provided by operating activities of our continuing operations was $45.8 million and $24.7 million for the nine months ended September 30, 2007 and 2006, 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 domestically and in Canada. Working capital improvements also provided $0.9 million in cash for the nine months ended September 30, 2007, compared to a working capital decrement of $2.7 million for the nine months ended September 30, 2006.
Cash Flows from Investing Activities
Cash used in investing activities of our continuing operations was $72.9 million and $62.0 million for the nine months ended September 30, 2007 and 2006, respectively. The increase in cash used in investing activities is primarily due to increased levels of capital expenditures, which primarily relate to investments in vehicles, equipment and construction projects at our landfill and transfer station sites, as well as deposits for a future landfill development project. Company-wide capital expenditures from continuing operations were $48.6 million and $37.0 million for the nine months ended September 30, 2007 and 2006, respectively. Offsetting these cash uses were net proceeds from the disposition of our Texas operations of $15.6 million.
Cash Flows from Financing Activities
Cash provided by financing activities of our continuing operations was $34.0 million and $28.6 million for the nine months ended September 30, 2007 and 2006, respectively. For the nine months ended September 30, 2007 the proceeds from the issuance of debt is primarily comprised of the issuance of $50.0 million of term notes under the Credit Facility, $26.0 million of draws on our revolving credit facility and the $8.1 million issuance of a secured note payable to WCA. For the nine months ended September 30, 2007 the repayments of debt are primarily comprised of $26.0 million of payments on our revolving credit facility, an optional prepayment of term notes under the Credit Facility of $20.0 million and $3.5 million of other scheduled principal payments.
Cash Flow from Discontinued Operations
Cash flows from our discontinued operations are disclosed separately on the Unaudited Condensed Consolidated Statements of Cash Flows included elsewhere in this report. Having consummated the sale of our Arizona and Texas operations, we will cease to be impacted by these cash flows, and we do not anticipate any subsequent adverse affect on our future liquidity or financial covenants.
Off-Balance Sheet Financing
We have no off-balance sheet debt or similar obligations, other than our letters of credit and performance and surety bonds discussed previously, which are not debt. We have no transactions or obligations with related parties that are not disclosed, consolidated into or reflected in our reported results of operations or financial position. We do not guarantee any third party debt. We have entered into a put or pay disposal agreement with RCI Environment Inc., Centres de Transbordement et de Valorisation Nord Sud Inc., RCM Environnement Inc. (collectively the “RCI Companies”) and Intersan Inc. pursuant to which we have posted a letter of credit for C$4.0 million to secure our obligations and those of the RCI Companies to Intersan Inc. Concurrently with the put or pay disposal agreement with the RCI Companies, we entered into a three year agreement with Waste Management of Canada Corporation (formerly Canadian Waste Services Inc.) to allow us to deliver non-hazardous solid waste to their landfill in Michigan, which has expired. 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 ours and/or individuals related to that director. Details of these agreements are further described in our annual financial statements for the year ended December 31, 2006, as filed on Form 10-K.
38
Table of Contents
Landfill Sites
The following table summarizes the changes in our operating landfill capacity at our continuing operations for the nine months ended September 30, 2007 (in thousands of cubic yards):
Balance, | Changes in | Balance, | ||||||||||||||
Beginning | Airspace | Engineering | End | |||||||||||||
of Period | Consumed | Estimates | of Period | |||||||||||||
United States | ||||||||||||||||
Permitted capacity | 54,992 | (2,251 | ) | — | 52,741 | |||||||||||
Probable expansion capacity | 18,300 | — | — | 18,300 | ||||||||||||
Total available airspace | 73,292 | (2,251 | ) | — | 71,041 | |||||||||||
Number of sites | 4 | — | — | 4 | ||||||||||||
Canada | ||||||||||||||||
Permitted capacity | 11,644 | (552 | ) | — | 11,092 | |||||||||||
Probable expansion capacity | 4,970 | — | (262 | ) | 4,708 | |||||||||||
Total available airspace | 16,614 | (552 | ) | (262 | ) | 15,800 | ||||||||||
Number of sites | 3 | — | — | 3 | ||||||||||||
Total | ||||||||||||||||
Permitted capacity | 66,636 | (2,803 | ) | — | 63,833 | |||||||||||
Probable expansion capacity | 23,270 | — | (262 | ) | 23,008 | |||||||||||
Total available airspace | 89,906 | (2,803 | ) | (262 | ) | 86,841 | ||||||||||
Number of sites | 7 | — | — | 7 |
Trend Information
Seasonality
We expect the results of our Canadian operations to vary seasonally, with revenue typically lowest in the first quarter of the year, higher in the second and third quarters, and lower in the fourth quarter than in the third quarter. The seasonality is attributable to a number of factors. First, less solid waste is generated during the late fall, winter and early spring because of decreased construction and demolition activity. Second, certain operating costs are higher in the winter months because winter weather conditions slow waste collection activities, resulting in higher labor costs, and rain and snow increase the weight of collected waste, resulting in higher disposal costs, which are calculated on a per ton basis. Also, during the summer months, there are more tourists and part-time residents in some of our service areas, resulting in more residential and commercial collection. Consequently, we expect operating income to be generally lower during the winter. The effect of seasonality on our results of operations from our U.S. operations, which are located in warmer climates than our Canadian operations, is less significant than that of our Canadian operations.
New Accounting Pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No.109” (“FIN 48”). FIN 48 clarifies the accounting for income taxes by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of FIN 48 has not had a material effect on our consolidated results of operations, cash flows or financial position.
39
Table of Contents
Disclosure Regarding Forward-Looking Statements and Factors Affecting Future Results
This Form 10-Q contains certain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. Some of these forward-looking statements include forward-looking phrases such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “foresees,” “intends,” “may,” “should” or “will continue,” or similar expressions or the negatives thereof or other variations on these expressions, or similar terminology, or discussions of strategy, plans or intentions.
Such statements reflect our current views regarding future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause our 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 our annual report on Form 10-K, as filed with the Securities and Exchange Commission for the year ended December 31, 2006, included under Item 1A. of the annual report, “Risk Factors”. If one or more of these risks or uncertainties affects future events and circumstances, or if underlying assumptions do not materialize, actual results may vary materially from those described in this Form 10-Q and our annual report as anticipated, believed, estimated or expected, and this could have a material adverse effect on our business, financial condition and the results of our operations. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.
40
Table of Contents
Item 3.Quantitative and Qualitative Disclosures About Market Risk
A portion of our operations are domiciled in Canada; as such, we translate the results of our operations and financial condition of our Canadian operations into U.S. dollars. Therefore, the reported results of our operations and financial condition are subject to changes in the exchange relationship between the two currencies. For example, as the relationship of the Canadian dollar strengthens against the U.S. dollar our revenue is favorably affected and conversely our expenses are unfavorably affected. Assets and liabilities of Canadian operations are translated from Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet date, and revenue and expenses of Canadian operations are translated from Canadian dollars into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and losses on translation of the Canadian operations into U.S. dollars are reported as a separate component of shareholders’ equity and are included in comprehensive income or loss. 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 nine months ended September 30, 2007, we estimate that a 5.0% increase or decrease in the relationship of the Canadian dollar to the U.S. dollar would increase or decrease operating profit from our Canadian operations by approximately $1.0 million.
As of September 30, 2007, we were exposed to variable interest rates under our Credit Facilities, as amended. The interest rates payable on our revolving and term facilities are based on a spread over base rate or Eurodollar loans as defined. A 25 basis point increase in base interest rates would increase cash interest expense by approximately $0.5 million for the nine months ended September 30, 2007.
Item 4.Controls and Procedures
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 Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (pursuant to Exchange Act Rule 13a-15). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. The conclusions of the Chief Executive Officer and Chief Financial Officer from this evaluation were communicated to the Audit Committee.
Changes in Internal Controls Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1.Legal Proceedings
Information regarding our legal proceedings may be found under the “Legal Proceedings” section of Note 13, “Commitments and Contingencies” to our Unaudited Condensed Consolidated Financial Statements contained herein.
Item 1A.Risk Factors
There have been no material changes in risk factors previously disclosed in our Form 10-K for the year ended December 31, 2006.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3.Defaults upon Senior Securities
41
Table of Contents
None
Item 4.Submission of Matters to a Vote of Security Holders
None
Item 5.Other Information
We issued a press release on August 23, 2007 announcing that William P. Hulligan, age 64, would become our Executive Vice President, U.S. Operations. Mr. Hulligan has been employed by us in various executive capacities since June 1, 2003. He was a consultant for Waste Management, Inc. from 1997 to May 2003.
We entered into an employment agreement with Mr. Hulligan dated as of August 23, 2007. On October 30, 2007, our Board of Directors confirmed the appointment of Mr. Hulligan as our Executive Vice President, U.S. Operations. The agreement continues until terminated and provides for a base salary of $300,000, subject to annual review and eligibility for a performance based cash bonus with a target of 100% of his base salary. By the terms of the agreement, if we terminate Mr. Hulligan’s employment other than for “cause”, death or disability or if he terminates his employment with us for “good reason” (as such terms are defined in the employment agreement), he is entitled to continuance of his base salary for a period of two years and to receive two times his average bonus in the prior two fiscal years (“Bonus Average”) in equal installments over 24 months and all options then outstanding will vest and continue to be exercisable in accordance with the terms of the stock option plan pursuant to which such options were granted, as then in effect. If a change of control has occurred within two years preceding or one year after the effective date of termination of his employment by us without “cause” or by Mr. Hulligan for “good reason”, then Mr. Hulligan is entitled to be paid a lump sum of two times the sum of his base salary and Bonus Average. On termination by reason of death or disability, Mr. Hulligan’s entitlement is to be paid two times his base salary and his Bonus Average in equal installments over 24 months and all of his options then outstanding vest and continue to be exercisable in accordance with the terms of the plan pursuant to which the options were granted, as then in effect. Mr. Hulligan’s employment agreement also provides for benefits and perquisites, some of which will continue after his termination, and prohibits Mr. Hulligan from competing against us during the term of his employment and for a specified period of time following his termination.
Mr. Hulligan does not have any family relationship with any other of our Executive Officers or Directors, or with any person selected to become an officer or a director. Neither Mr. Hulligan nor any member of his immediate family is party to any transaction or proposed transaction with the Company.
Item 6.Exhibits
Exhibit 4.1 | Supplemental Indenture, dated as of June 29, 2007, among Southwest Dumpster Inc., Waste Services, Inc., the other guarantors and Wells Fargo Bank, National Association, as Trustee. | |
Exhibit 4.2 | Lender Addendum, dated as of August 14, 2007, by and among Bank of America, N.A., Waste Services (CA) Inc., Waste Services, Inc., Lehman Commercial Paper Inc., as administrative agent, and Canadian Imperial Bank of Commerce, as Canadian agent. | |
Exhibit 10.1 | Employment Agreement dated as of August 23, 2007 between Waste Services, Inc. and William P. Hulligan. | |
Exhibit 31.1 | Section 302 Certification of David Sutherland-Yoest, Chief Executive Officer | |
Exhibit 31.2 | Section 302 Certification of Edwin D. Johnson, Chief Financial Officer | |
Exhibit 32.1 | Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer |
42
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Waste Services, Inc. | ||||
Date: November 1, 2007 | ||||
By: | /s/ DAVID SUTHERLAND-YOEST | |||
David Sutherland-Yoest | ||||
Chairman of the Board, President and Chief Executive Officer | ||||
By: | /s/ EDWIN D. JOHNSON | |||
Edwin D. Johnson | ||||
Executive Vice President, Chief Financial Officer |
43
Table of Contents
EXHIBIT INDEX
Exhibit No | Description | |
Exhibit 4.1 | Supplemental Indenture, dated as of June 29, 2007, among Southwest Dumpster Inc., Waste Services, Inc., the other guarantors and Wells Fargo Bank, National Association, as Trustee. | |
Exhibit 4.2 | Lender Addendum, dated as of August 14, 2007, by and among Bank of America, N.A., Waste Services (CA) Inc., Waste Services, Inc., Lehman Commercial Paper Inc., as administrative agent, and Canadian Imperial Bank of Commerce, as Canadian agent. | |
Exhibit 10.1 | Employment Agreement dated as of August 23, 2007 between Waste Services, Inc. and William P. Hulligan. | |
Exhibit 31.1 | Section 302 Certification of David Sutherland-Yoest, Chief Executive Officer | |
Exhibit 31.2 | Section 302 Certification of Edwin D. Johnson, Chief Financial Officer | |
Exhibit 32.1 | Section 1350 Certification of the Chief Executive Officer and Principal Financial Officer |
44