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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 June 30, 2008
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)
(Address of principal executive offices) (Zip Code)
(905) 319-1237
(Registrant’s telephone number, including area code)
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ
The number of shares of Common Stock, $0.01 par value, of the registrant outstanding at July 22, 2008 was 46,074,982 (assuming exchange of 6,288,637 exchangeable shares of Waste Services (CA) Inc. not owned by Capital Environmental Holdings Company for 2,096,212 shares of the registrant’s common stock).
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EX-10.1 Employment Agreement | ||||||||
EX-31.1 Section 302 CEO Certification | ||||||||
EX-31.2 Section 302 CFO Certification | ||||||||
EX-32.1 Section 906 CEO & CFO Certification |
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PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
WASTE SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
(In thousands, except share amounts)
June 30, 2008 | December 31, 2007 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 33,548 | $ | 20,706 | ||||
Accounts receivable (net of allowance for doubtful accounts of $638 and $985 as of June 30, 2008 and December 31, 2007, respectively) | 65,920 | 67,195 | ||||||
Prepaid expenses and other current assets | 8,480 | 11,338 | ||||||
Current assets of discontinued operations | — | 167 | ||||||
Total current assets | 107,948 | 99,406 | ||||||
Property and equipment, net | 190,375 | 192,598 | ||||||
Landfill sites, net | 190,176 | 190,451 | ||||||
Goodwill and other intangible assets, net | 391,410 | 397,766 | ||||||
Other assets | 19,647 | 17,741 | ||||||
Non-current assets of discontinued operations | — | 40,526 | ||||||
Total assets | $ | 899,556 | $ | 938,488 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 21,972 | $ | 26,641 | ||||
Accrued expenses and other current liabilities | 63,679 | 65,338 | ||||||
Short-term financing and current portion of long-term debt | 1,290 | 2,631 | ||||||
Current liabilities of discontinued operations | — | 765 | ||||||
Total current liabilities | 86,941 | 95,375 | ||||||
Long-term debt | 400,039 | 441,809 | ||||||
Accrued closure, post-closure, deferred income taxes and other obligations | 49,379 | 48,514 | ||||||
Non-current liabilities of discontinued operations | — | 2,195 | ||||||
Total liabilities | 536,359 | 587,893 | ||||||
Shareholders’ equity: | ||||||||
Common stock $0.01 par value: 166,666,666 shares authorized, 43,978,770 and 43,972,362 shares issued and outstanding as of June 30, 2008 and December 31, 2007, respectively | 439 | 439 | ||||||
Additional paid-in capital | 512,280 | 510,286 | ||||||
Accumulated other comprehensive income | 59,986 | 66,017 | ||||||
Accumulated deficit | (209,508 | ) | (226,147 | ) | ||||
Total shareholders’ equity | 363,197 | 350,595 | ||||||
Total liabilities and shareholders’ equity | $ | 899,556 | $ | 938,488 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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WASTE SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(In thousands, except per share data)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenue | $ | 128,282 | $ | 119,421 | $ | 244,890 | $ | 214,420 | ||||||||
Operating and other expenses: | ||||||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) | 83,605 | 78,499 | 160,149 | 141,266 | ||||||||||||
Selling, general and administrative expense (exclusive of depreciation, depletion and amortization) | 16,505 | 14,678 | 32,869 | 29,110 | ||||||||||||
Depreciation, depletion and amortization | 11,620 | 14,341 | 23,410 | 25,699 | ||||||||||||
Foreign exchange gain and other | (283 | ) | (164 | ) | (457 | ) | (587 | ) | ||||||||
Income from operations | 16,835 | 12,067 | 28,919 | 18,932 | ||||||||||||
Interest expense | 7,802 | 10,830 | 18,040 | 20,575 | ||||||||||||
Income (loss) from continuing operations before income taxes | 9,033 | 1,237 | 10,879 | (1,643 | ) | |||||||||||
Income tax provision | 5,003 | 4,407 | 1,570 | 6,144 | ||||||||||||
Net income (loss) from continuing operations | 4,030 | (3,170 | ) | 9,309 | (7,787 | ) | ||||||||||
Net income from discontinued operations, net of income tax provision of $301 for the six months ended June 30, 2008 and nil for all other periods | — | 957 | 461 | 963 | ||||||||||||
Gain (loss) on sale of discontinued operations, net of income tax provision (benefit) of $(64) and $4,485 for the three and six months ended June 30, 2008, respectively and nil for all other periods | (100 | ) | (12,192 | ) | 6,869 | (11,254 | ) | |||||||||
Net income (loss) | $ | 3,930 | $ | (14,405 | ) | $ | 16,639 | $ | (18,078 | ) | ||||||
Basic and diluted earnings (loss) per share: | ||||||||||||||||
Earnings (loss) per share — continuing operations | $ | 0.09 | $ | (0.07 | ) | $ | 0.20 | $ | (0.17 | ) | ||||||
Earnings (loss) per share — discontinued operations | — | (0.25 | ) | 0.16 | (0.22 | ) | ||||||||||
Basic and diluted earnings (loss) per share | $ | 0.09 | $ | (0.32 | ) | $ | 0.36 | $ | (0.39 | ) | ||||||
Weighted average common shares outstanding — basic | 46,075 | 45,973 | 46,075 | 45,973 | ||||||||||||
Weighted average common shares outstanding — diluted | 46,075 | 45,973 | 46,084 | 45,973 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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WASTE SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
For the Six Months Ended June 30, 2008
(In thousands)
For the Six Months Ended June 30, 2008
(In thousands)
Waste Services, Inc. | Accumulated Other | Total | ||||||||||||||||||||||
Common Stock | Additional | Comprehensive | Accumulated | Shareholders’ | ||||||||||||||||||||
Shares | Amount | Paid-in Capital | Income | Deficit | Equity | |||||||||||||||||||
Balance, December 31, 2007 | 43,972 | $ | 439 | $ | 510,286 | $ | 66,017 | $ | (226,147 | ) | $ | 350,595 | ||||||||||||
Stock-based compensation | — | — | 1,994 | — | — | 1,994 | ||||||||||||||||||
Conversion of exchangeable shares | 7 | — | — | — | — | — | ||||||||||||||||||
Foreign currency translation adjustment | — | — | — | (6,031 | ) | (6,031 | ) | |||||||||||||||||
Net income | — | — | — | — | 16,639 | 16,639 | ||||||||||||||||||
Balance, June 30, 2008 | 43,979 | $ | 439 | $ | 512,280 | $ | 59,986 | $ | (209,508 | ) | $ | 363,197 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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WASTE SERVICES, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended June 30, | ||||||||
2008 | 2007 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 16,639 | $ | (18,078 | ) | |||
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | ||||||||
Net loss (income) from discontinued operations | (7,330 | ) | 10,291 | |||||
Depreciation, depletion and amortization | 23,410 | 25,699 | ||||||
Amortization of debt issue costs | 1,516 | 1,315 | ||||||
Deferred income tax provision (benefit) | (3,745 | ) | 1,918 | |||||
Non-cash stock-based compensation expense | 1,994 | 973 | ||||||
Other non-cash items | (50 | ) | 125 | |||||
Changes in operating assets and liabilities (excluding the effects of acquisitions and dispositions): | ||||||||
Accounts receivable | 426 | (3,199 | ) | |||||
Prepaid expenses and other current assets | 1,929 | (825 | ) | |||||
Accounts payable | (4,434 | ) | (329 | ) | ||||
Accrued expenses and other current liabilities | (8,874 | ) | 2,486 | |||||
Net cash provided by continuing operations | 21,481 | 20,376 | ||||||
Net cash provided by discontinued operations | 1,163 | 4,438 | ||||||
Net cash provided by operating activities | 22,644 | 24,814 | ||||||
Cash flows from investing activities: | ||||||||
Cash used in business combinations and significant asset acquisitions, net of cash acquired | — | (31,888 | ) | |||||
Capital expenditures | (20,399 | ) | (21,858 | ) | ||||
Proceeds from sale of the Jacksonville, Florida operations | 56,685 | — | ||||||
Proceeds from asset sales | 882 | 16,091 | ||||||
Deposits for business acquisitions and other | (3,401 | ) | (9,528 | ) | ||||
Net cash provided by (used in) continuing operations | 33,767 | (47,183 | ) | |||||
Net cash used in discontinued operations | (43 | ) | (4,496 | ) | ||||
Net cash provided by (used in) investing activities | 33,724 | (51,679 | ) | |||||
Cash flows from financing activities: | ||||||||
Proceeds from issuance of debt and draw on revolving credit facility | — | 84,014 | ||||||
Principal repayments of debt and capital lease obligations | (43,225 | ) | (49,190 | ) | ||||
Proceeds from the exercise of options and warrants | — | 5 | ||||||
Fees paid for financing transactions | — | (1,191 | ) | |||||
Net cash provided by (used in) financing activities of continuing operations | (43,225 | ) | 33,638 | |||||
Effect of exchange rate changes on cash and cash equivalents | (301 | ) | 740 | |||||
Increase in cash and cash equivalents | 12,842 | 7,513 | ||||||
Cash and cash equivalents at the beginning of the period | 20,706 | 8,532 | ||||||
Cash and cash equivalents at the end of the period | $ | 33,548 | $ | 16,045 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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). We divested our Jacksonville, Florida operations in March 2008, our Texas operations in June 2007 and our Arizona operations in March 2007 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, 2007, 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, 2007. Income taxes during these interim periods have been provided based on our anticipated annual effective income tax rate for each respective tax jurisdiction. 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, revenue recognition, liabilities for potential litigation, valuation assumptions for share-based payments 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 or payables, denominated in U.S. dollars held by our Canadian operations are re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported currently as a component of net income (loss). Currently, we do not hedge our exposure to changes in foreign exchange rates.
Basic earnings (loss) per share is calculated by dividing income (loss) by the weighted average number of common shares outstanding for the period, 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. Restricted stock units will be included in the calculation of basic earnings per share when all contingencies surrounding the issuance of the shares are met and the shares are issued or issuable. Restricted stock units will be included in the calculation of dilutive earnings per share as of the beginning of the reporting period if, at the end of any given
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
reporting period, all contingencies surrounding the issuance of the shares are satisfied or would be satisfied if the end of the reporting period were the end of the contingency period. Due to the net losses from continuing operations for the three and six months ended June 30, 2007, basic and diluted loss per share were the same, as the effect of potentially dilutive securities would have been anti-dilutive. Potentially dilutive securities not included in the diluted loss per share calculation, due to the net loss from continuing operations for the three and six months ended June 30, 2007, are as follows (unaudited) (in thousands):
Three Months | Six Months | |||||||
Ended | Ended | |||||||
June 30, 2007 | June 30, 2007 | |||||||
Common Shares issuable under exercisable options | 50 | 36 | ||||||
Common Shares issuable under exercisable warrants | 610 | 603 | ||||||
Dilutive securities | 660 | 639 | ||||||
For purposes of computing net income (loss) per common share, the basic and diluted weighted average number of common shares outstanding for the three and six months ended June 30, 2008 includes the effect of 6,292,474 and 6,294,117 exchangeable shares of Waste Services (CA), respectively, (exchangeable for 2,097,491 and 2,098,039 shares of our common stock, respectively), as if they were shares of our outstanding common stock. For the three and six months ended June 30, 2007, the weighted average number of shares of common stock outstanding includes the effect of 6,307,862 and 6,306,771 exchangeable shares of Waste Services (CA), respectively, (exchangeable for 2,102,620 and 2,102,257 shares of our common stock, respectively), as if they were shares of our outstanding common stock.
2. Recently Issued Accounting Pronouncements and Adopted Accounting
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. In February 2008, the FASB deferred the effective date of SFAS 157 by one year for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). On January 1, 2008, we adopted the provisions of SFAS 157, except as it applies to those nonfinancial assets and nonfinancial liabilities for which the effective date has been delayed by one year. The adoption of SFAS 157 did not have a material effect on our financial position or results of operations. The book values of cash and cash equivalents, accounts receivable and accounts payable approximate their respective fair values due to the short-term nature of these instruments. The fair value of the term loan facility under our Senior Secured Credit Facilities and our 91/2% Senior Subordinated Notes at June 30, 2008 is estimated at $230.3 million and $160.0 million, respectively, based on quoted market prices.
On January 1, 2008, we adopted the provisions of SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The fair value option: (i) may be applied instrument by instrument, with a few exceptions, such as investments accounted for by the equity method; (ii) is irrevocable (unless a new election date occurs); and (iii) is applied only to entire instruments and not to portions of instruments. We did not elect to report any additional assets or liabilities at fair value and accordingly, the adoption of SFAS 159 did not have a material effect on our financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes the principles and requirements for how an acquirer: (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is to be applied prospectively to business combinations consummated on or after the beginning of the first annual reporting period on or after December 15, 2008, with early adoption prohibited. We are currently evaluating the impact SFAS 141(R) will have upon adoption on our accounting for acquisitions. However, previously any changes in valuation allowances, as a result of income from acquisitions for certain deferred tax assets would serve to reduce goodwill whereas under the new standard any changes in the valuation allowance related to income from acquisitions currently or in prior periods will serve to reduce income taxes in the period in which the reserve is
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
reversed. Additionally, under SFAS 141(R) transaction related expenses, which were previously capitalized as “deal costs”, will be expensed as incurred.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards that require (i) noncontrolling interests to be reported as a component of equity, (ii) changes in a parent’s ownership interest while the parent retains its controlling interest to be accounted for as equity transactions, and (iii) any retained noncontrolling equity investment upon the deconsolidation of a subsidiary to be initially measured at fair value. SFAS 160 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008, with early adoption prohibited. We do not expect the adoption of SFAS 160 to have a material effect on our financial position or results of operations.
3. Share-Based Payments
Stock-based compensation expense was $1.1 million and $0.7 million, for the three months ended June 30, 2008 and 2007, respectively, and $2.0 million and $1.0 million, for the six months ended June 30, 2008 and 2007, respectively. During the six months ended June 30, 2008, we granted 742,500 restricted stock units to our employees and directors, which may vest in three equal tranches over each of the next three fiscal years and are contingent on the achievement of specific performance criteria. The fair value of the first tranche of restricted stock units of approximately $2.2 million, or $9.02 per unit, will be expensed based on the probability of achievement of the specific performance criteria on a straight-line basis over the requisite service period. Additionally, during the six months ended June 30, 2008, we granted options to purchase 230,000 shares of our common stock to certain employees, none of which were granted during the three months ended June 30, 2008. These options have a strike price of $9.50 per share and also vest one-third over each of the next three years. During the six months ended June 30, 2007, we granted options to purchase 819,500 shares of our common stock 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 $5.57 and $5.94, for the six months ended June 30, 2008 and 2007 respectively. The fair value of options granted is estimated using the Black-Scholes option pricing model using the following assumptions:
Three Months | ||||||||||||
Ended June 30, | Six Months Ended June 30, | |||||||||||
2007 | 2008 | 2007 | ||||||||||
Annual dividend yield | — | — | — | |||||||||
Weighted average expected life (years) | 3.0 | 7.0 | 3.0 | |||||||||
Risk-free interest rate | 4.5 | % | 3.2 | % | 4.5 | % | ||||||
Expected volatility | 92 | % | 61 | % | 92 | % |
Expected volatility is based primarily on historical volatility. Historical volatility was computed using daily pricing observations for recent periods that correspond to the expected life of the grant. 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 on 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 123(R) (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.
During the six months ended June 30, 2008, no employee options were exercised, 143,665 options were forfeited and 410,988 options expired. As of June 30, 2008, $2.2 million and $1.4 million of total unrecognized compensation cost related to employee stock options and restricted stock units is expected to be recognized over a weighted average period of approximately 1.4 years and 0.7 years, respectively.
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. Discontinued Operations
In March 2008, we sold our hauling and material recovery operations and a construction and demolition landfill site in the Jacksonville, Florida market, to an independent third party. The proceeds from this sale approximated $56.7 million of cash, including working capital. Should the construction and demolition landfill site not obtain certain permits relating to an expansion of at least 2.4 million cubic yards by the fourth anniversary of the closing, we shall refund to the buyer $10.0 million of purchase price and receive title to the expansion property free and clear of all liens. Accordingly, we have deferred this portion of the proceeds, net of our $3.0 million cost basis. Should these permits be obtained, we will recognize an additional gain on sale of $7.0 million. Should the property be returned to us, we will record the property at the lower of its cost or current fair market value on the date it is returned. Simultaneously with the closing of the sale transaction we entered into an operating lease with the buyer for certain land and buildings used in the Jacksonville, Florida operations, for a term of five years at $0.5 million per year. Commencing in April 2009, the lessee has the option to purchase the leased assets at a purchase price of $6.0 million. We utilized $42.5 million of the proceeds to make a prepayment of the term notes under the Credit Facilities. Accordingly, we expensed approximately $0.5 million of unamortized debt issue costs relating to this retirement.
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 at the time of closing was approximately $8.1 million.
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 including net working capital between the two operations and transaction costs.
We have presented the net assets and operations of our Jacksonville, Florida operations, Arizona operations and Texas operations as discontinued operations for all periods presented. Revenue from discontinued operations was nil and $9.5 million for the three months ended June 30, 2008 and 2007, respectively, and $4.7 million and $23.4 million for the six months ended June 30, 2008 and 2007, respectively. Pre-tax net income from discontinued operations was nil and $1.0 million for the three months ended June 30, 2008 and 2007, respectively, and $0.8 million and $1.0 million for the six months ended June 30, 2008 and 2007, respectively. During the six months ended June 30, 2008, we recognized a pre-tax gain on disposal of $11.4 million relative to the sale of the Jacksonville, Florida operations and an associated income tax provision of $4.5 million. In March 2007, we recognized a gain on disposal of $0.9 million relative to the sale of the Arizona operations, and in June 2007 we recognized a loss on disposal of $12.2 million relative to the sale of the Texas operations. No income tax provision or benefit has been attributed to the Arizona or Texas disposals. Included in the calculation of the gain on disposal for the Jacksonville, Florida operations and Arizona operations was approximately $23.6 million and $21.0 million of goodwill, respectively.
The following table summarizes our proceeds and the resulting gain (loss) on sale for the six months ended June 30, 2008 and 2007:
2008 | 2007 | |||||||||||||||
Jacksonville | Arizona | Texas | ||||||||||||||
Operations | Operations | Operations | Total | |||||||||||||
Fair value of operations received | $ | — | $ | 52,497 | $ | 18,471 | $ | 70,968 | ||||||||
Cash received, net of amounts deferred and promissory note issued relative to the Texas disposal | 46,685 | — | 15,690 | 15,690 | ||||||||||||
Less: | ||||||||||||||||
Carrying value of operations sold | 35,331 | 51,559 | 46,353 | 97,912 | ||||||||||||
Gain (loss) on disposition of discontinued operations | $ | 11,354 | $ | 938 | $ | (12,192 | ) | $ | (11,254 | ) | ||||||
Subsequent to the disposal of our Jacksonville, Florida operations, Arizona operations and Texas operations, we adjusted the gain (loss) on disposal for the settlement of working capital of approximately $0.2 million for each transaction.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net assets related to the Jacksonville, Florida operations as of December 31, 2007 are as follows (unaudited):
December 31, | ||||
2007 | ||||
Prepaid expenses and other current assets | $ | 167 | ||
Current assets of discontinued operations | 167 | |||
Property and equipment | 7,219 | |||
Landfill sites | 7,610 | |||
Goodwill and other intangible assets | 25,697 | |||
Non-current assets of discontinued operations | 40,526 | |||
Total assets of discontinued operations | $ | 40,693 | ||
Accrued expenses and other current liabilities | $ | 765 | ||
Current liabilities of discontinued operations | 765 | |||
Accrued closure, post closure and other obligations | 2,195 | |||
Non-current liabilities of discontinued operations | 2,195 | |||
Total liabilities of discontinued operations | $ | 2,960 | ||
Net assets of discontinued operations | $ | 37,733 | ||
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 hauling 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 hauling and transfer operation, a transfer station development project and a landfill development project in southwest Florida operated by 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. However, as all state operating permits have not been received, in June 2008 we paid an additional deposit of $1.0 million to extend the closing up to an additional six months to January 2009. To date we have advanced $9.5 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 SLD Landfill in southwest Florida. 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 SLD Landfill. The estimated fair value of the WCA assets acquired approximated $18.4 million.
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
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 on 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 six months ended June 30, 2007 as if acquisitions completed in 2007 had occurred as of January 1, 2007 (in thousands except per share amounts):
Three Months | Six Months | |||||||
Ended | Ended | |||||||
June 30, 2007 | June 30, 2007 | |||||||
Revenue | $ | 121,300 | $ | 236,062 | ||||
Net loss from continuing operations | $ | (3,188 | ) | $ | (6,924 | ) | ||
Basic and diluted loss per share — continuing operations | $ | (0.07 | ) | $ | (0.15 | ) | ||
Basic and diluted pro forma weighted average number of common shares outstanding | 45,973 | 45,973 | ||||||
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.
6. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (unaudited):
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Prepaid expenses | $ | 4,351 | $ | 5,808 | ||||
Parts and supplies | 2,264 | 2,192 | ||||||
Royalty receivable | — | 1,321 | ||||||
Other current assets | 1,865 | 2,017 | ||||||
$ | 8,480 | $ | 11,338 | |||||
7. Property and Equipment
Property and equipment consist of the following (unaudited):
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Land and buildings | $ | 69,201 | $ | 67,088 | ||||
Vehicles | 147,761 | 144,926 | ||||||
Containers, compactors and landfill and recycling equipment | 94,027 | 92,733 | ||||||
Furniture, fixtures, other office equipment and leasehold improvements | 12,541 | 12,449 | ||||||
Total property and equipment | 323,530 | 317,196 | ||||||
Less: Accumulated depreciation | (133,155 | ) | (124,598 | ) | ||||
Property and equipment, net | $ | 190,375 | $ | 192,598 | ||||
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
8. Landfill Sites, Accrued Closure, Post-Closure, Deferred Income Taxes and Other Obligations
Landfill Sites
Landfill sites consist of the following (unaudited):
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Landfill sites | $ | 257,247 | $ | 253,266 | ||||
Less: Accumulated depletion | (67,071 | ) | (62,815 | ) | ||||
Landfill sites, net | $ | 190,176 | $ | 190,451 | ||||
The changes in landfill sites for the six months ended June 30, 2008 and 2007 are as follows (unaudited):
Six Months Ended | ||||||||
June 30, | ||||||||
2008 | 2007 | |||||||
Balance at the beginning of the period | $ | 190,451 | $ | 187,796 | ||||
Landfill site construction costs | 4,505 | 6,852 | ||||||
Additional asset retirement obligations | 856 | 1,371 | ||||||
Depletion | (5,214 | ) | (8,068 | ) | ||||
Purchase price adjustments for prior acquisitions | 50 | — | ||||||
Reclassification to conservatory | — | (1,029 | ) | |||||
Effect of foreign exchange rate fluctuations | (472 | ) | 1,339 | |||||
Balance at the end of the period | $ | 190,176 | $ | 188,261 | ||||
Accrued Closure, Post-Closure, Deferred Income Taxes and Other Obligations
Accrued closure, post-closure, deferred income taxes and other obligations consist of the following (unaudited):
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Deferred income tax liability | $ | 29,987 | $ | 29,644 | ||||
Accrued closure and post-closure obligations | 15,691 | 14,678 | ||||||
Accrued severance | 1,945 | 2,181 | ||||||
Capital lease obligations | 746 | 867 | ||||||
Other obligations | 1,010 | 1,144 | ||||||
$ | 49,379 | $ | 48,514 | |||||
Our deferred income tax liability primarily relates to the deferred tax liabilities generated by our tax deductible goodwill and because we are required to establish a full valuation allowance against our net deferred tax assets and net operating loss carry-forwards.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 six months ended June 30, 2008 and 2007 are as follows (unaudited):
Six Months Ended June 30, | ||||||||
2008 | 2007 | |||||||
Current portion at the beginning of period | $ | 4,153 | $ | 5,570 | ||||
Long-term portion at the beginning of period | 14,678 | 8,360 | ||||||
Balance at the beginning of period | 18,831 | 13,930 | ||||||
Additional asset retirement obligations | 856 | 1,371 | ||||||
Other additions | 300 | — | ||||||
Accretion | 395 | 276 | ||||||
Payments | (152 | ) | (907 | ) | ||||
Effect of foreign exchange rate fluctuations | (260 | ) | 683 | |||||
Balance at the end of period | 19,970 | 15,353 | ||||||
Less: Current portion | (4,279 | ) | (2,636 | ) | ||||
Long-term portion | $ | 15,691 | $ | 12,717 | ||||
9. Goodwill and Other Intangible Assets
Goodwill and other intangible assets consist of the following (unaudited):
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Other intangible assets subject to amortization: | ||||||||
Customer relationships and contracts | $ | 51,823 | $ | 51,924 | ||||
Non-competition agreements and other | 5,898 | 6,011 | ||||||
57,721 | 57,935 | |||||||
Less: Accumulated amortization: | ||||||||
Customer relationships and contracts | (26,505 | ) | (23,714 | ) | ||||
Non-competition agreements and other | (1,889 | ) | (1,396 | ) | ||||
Other intangible assets subject to amortization, net | 29,327 | 32,825 | ||||||
Goodwill | 362,083 | 364,941 | ||||||
Goodwill and other intangible assets, net | $ | 391,410 | $ | 397,766 | ||||
The changes in goodwill for the six months ended June 30, 2008 and 2007 are as follows (unaudited):
Six Months Ended June 30, 2008 | ||||||||||||
Florida | Canada | Total | ||||||||||
Balance at the beginning of the period | $ | 262,338 | $ | 102,603 | $ | 364,941 | ||||||
Effect of foreign exchange rate fluctuations | — | (2,858 | ) | (2,858 | ) | |||||||
Balance at the end of the period | $ | 262,338 | $ | 99,745 | $ | 362,083 | ||||||
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Six Months Ended June 30, 2007 | ||||||||||||
Florida | Canada | Total | ||||||||||
Balance at the beginning of the period | $ | 211,482 | $ | 86,848 | $ | 298,330 | ||||||
Acquisitions | 29,494 | 386 | 29,880 | |||||||||
Purchase price allocation adjustments for prior acquisitions | 1,060 | 61 | 1,121 | |||||||||
Effect of foreign exchange rate fluctuations | — | 8,168 | 8,168 | |||||||||
Balance at the end of the period | $ | 242,036 | $ | 95,463 | $ | 337,499 | ||||||
10. Other Assets
Other assets consist of the following (unaudited):
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Debt issue costs, net of accumulated amortization of $6,403 and $5,787 as of June 30, 2008 and December 31, 2007, respectively | $ | 6,306 | $ | 7,822 | ||||
Acquisition deposits and deferred acquisition costs | 12,758 | 9,407 | ||||||
Other assets | 583 | 512 | ||||||
$ | 19,647 | $ | 17,741 | |||||
Included in acquisition deposits and deferred acquisition costs as of June 30, 2008 and December 31, 2007 are amounts advanced for the acquisition of our landfill development project in southwest Florida.
11. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following (unaudited):
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Deferred revenue | $ | 11,320 | $ | 11,613 | ||||
Accrued waste disposal and subcontractor costs | 8,535 | 7,379 | ||||||
Accrued compensation and benefits | 8,524 | 12,317 | ||||||
Accrued acquisition costs | 8,048 | 1,200 | ||||||
Accrued insurance | 6,596 | 6,055 | ||||||
Accrued closure and post-closure obligations | 4,279 | 4,153 | ||||||
Accrued interest | 4,061 | 4,588 | ||||||
Accrued royalties and franchise fees | 3,121 | 3,239 | ||||||
Accrued capital expenditures | 1,767 | 2,233 | ||||||
Accrued federal and provincial current taxes payable | 1,436 | 8,158 | ||||||
Accrued professional fees | 1,024 | 970 | ||||||
Current portion of capital lease obligations | 239 | 232 | ||||||
Other accrued expenses and current liabilities | 4,729 | 3,201 | ||||||
$ | 63,679 | $ | 65,338 | |||||
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
12. Debt
Debt consists of the following (unaudited):
June 30, | December 31, | |||||||
2008 | 2007 | |||||||
Senior Secured Credit Facilities: | ||||||||
Revolving credit facility | $ | — | $ | — | ||||
Term loan facility, floating interest rate at 5.2% and 7.4% as of June 30, 2008 and December 31, 2007, respectively, due $592 per quarter from September 2009 through March 2010 and $57,409 per quarter thereafter, due March 2011 | 231,410 | 273,910 | ||||||
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 2025 (net of discount of $1,835 and $2,126 at June 30, 2008 and December 31, 2007, respectively) | 7,421 | 7,932 | ||||||
Other subordinated notes payable, interest at 6.7%, due through 2017 | 2,498 | 2,598 | ||||||
401,329 | 444,440 | |||||||
Less: Current portion | (1,290 | ) | (2,631 | ) | ||||
Long-term portion | $ | 400,039 | $ | 441,809 | ||||
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 Credit Facilities. 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 to our Canadian operations, and a term loan facility in the amount of $231.4 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 on 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. Sixty-five percent of the common shares of Waste Services’ first tier foreign subsidiaries, including Waste Services (CA), are pledged to secure obligations under the Credit Facilities. In March 2008, we used $42.5 million of proceeds from the sale of our Jacksonville, Florida operations to reduce principal amounts outstanding under the term loan facility. As of June 30, 2008, there were no amounts outstanding on the revolving credit facility, while $13.2 million and $13.4 million of revolver capacity was used to support outstanding letters of credit in the U.S. and Canada, respectively.
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 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 June 30, 2008 approximates $7.2 million, and will accrete at 7.8%. The note is secured by the transfer station and related permit 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 semiannually 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
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
in the Indenture, we are required to offer to repurchase all the Senior Subordinated Notes at 101.0% of the principal amount, together with accrued interest and liquidated damages, if any, and obtain the consent of our senior lenders to such payment or repay indebtedness under our Credit Facilities.
The Senior Subordinated Notes are unsecured and are subordinate to our existing and future senior secured indebtedness, including our Credit Facilities, structurally subordinated to existing and future indebtedness of our non-guarantor subsidiaries, rank equally with any unsecured senior subordinated indebtedness and senior to our existing and future subordinated indebtedness. Our obligations with respect to the Senior 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 Senior 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.
Direct Financing Lease Facility
In January 2008, we entered into a direct financing lease facility to finance our fleet purchases in Florida. Availability under the facility is $6.0 million and the leases can extend for five or seven years. Vehicles purchased under the facility will be ineligible for tax depreciation deductions. Leases under the facility will be treated as capital leases and considered secured debt for purposes of our Credit Facilities. As of June 30, 2008 there were no amounts outstanding under the facility.
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. in the United States District Court in the Middle District of Florida (Orlando). The Complaint alleged 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 sought in excess of $25.0 million in damages against Waste Management. If we were successful in our suit under antitrust laws, Waste Management would have been liable for treble damages. On February 9, 2007, the Court granted summary judgment dismissing all of our claims. Our appeal of the dismissal by the United States Court of Appeals for the 11th Circuit was denied in May 2008.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
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 June 30, 2008 and December 31, 2007, we provided customers, our insurers and various regulatory authorities with such bonds and letters of credit amounting to approximately $84.9 million and $87.4 million, respectively, to collateralize our obligations.
Our domestic based workers’ compensation, automobile and general liability 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 June 30, 2008, and included in the $84.9 million of bonds and letters of credit previously discussed, we have posted a letter of credit with our U.S. insurer of approximately $10.2 million to secure the liability for losses within the deductible limit.
The changes in insurance reserves for our U.S. operations for the six months ended June 30, 2008 and 2007 are as follows (unaudited):
Six Months Ended June 30, | ||||||||
2008 | 2007 | |||||||
Balance at the beginning of the period | $ | 6,055 | $ | 5,327 | ||||
Provisions | 2,921 | 2,214 | ||||||
Payments | (2,742 | ) | (2,250 | ) | ||||
Unfavorable claim development for prior periods | 362 | 62 | ||||||
Balance at the end of the period | $ | 6,596 | $ | 5,353 | ||||
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 since 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 on 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.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14. Authorized Capital Stock and Migration Transaction
Total Shares
As of June 30 2008, we were authorized to issue a total of 171,666,666 shares of capital stock consisting of:
• | 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 100,000 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 June 30, 2008 and December 31, 2007, 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 29,219,011 common shares of Waste Services (CA) for 29,219,011 shares of our common stock; and (ii) the conversion of the remaining 3,076,558 common shares of Waste Services (CA) held by non-U.S. residents and who elected to receive exchangeable shares, into 9,229,676 exchangeable shares of Waste Services (CA) which are exchangeable for 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.
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
15. Comprehensive Income (Loss)
Comprehensive income (loss) includes the effects of foreign currency translation. Comprehensive income (loss) for the three and six months ended June 30, 2008 and 2007 is as follows (unaudited):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Net income (loss) | $ | 3,930 | $ | (14,405 | ) | $ | 16,639 | $ | (18,078 | ) | ||||||
Foreign currency translation adjustment | 1,270 | 14,505 | (6,031 | ) | 16,103 | |||||||||||
Comprehensive income (loss) | $ | 5,200 | $ | 100 | $ | 10,608 | $ | (1,975 | ) | |||||||
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 maker 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. For segment reporting, we define “Corporate” as overhead expenses, not specifically attributable to our Florida or Canadian operations, incurred both domestically and in Canada. As previously discussed, we have divested of our Jacksonville, Florida operations, Arizona operations and Texas operations and as such the results of these operations are presented as discontinued operations and are not included in the segment data presented.
We believe our Canadian operating 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 operation-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 six months ended June 30, 2008 and 2007 is as follows (unaudited):
Three Months Ended June 30, 2008 | ||||||||||||||||
Florida | Canada | Corporate | Total | |||||||||||||
Revenue | $ | 60,774 | $ | 67,508 | $ | — | $ | 128,282 | ||||||||
Depreciation, depletion and amortization | 6,610 | 4,671 | 339 | 11,620 | ||||||||||||
Income (loss) from operations | 10,099 | 13,509 | (6,773 | ) | 16,835 | |||||||||||
Capital expenditures | 5,819 | 3,879 | 294 | 9,992 |
Three Months Ended June 30, 2007 | ||||||||||||||||
Florida | Canada | Corporate | Total | |||||||||||||
Revenue | $ | 63,563 | $ | 55,858 | $ | — | $ | 119,421 | ||||||||
Depreciation, depletion and amortization | 9,356 | 4,652 | 333 | 14,341 | ||||||||||||
Income (loss) from operations | 7,797 | 10,418 | (6,148 | ) | 12,067 | |||||||||||
Capital expenditures | 10,503 | 3,628 | 324 | 14,455 |
Six Months Ended June 30, 2008 | ||||||||||||||||
Florida | Canada | Corporate | Total | |||||||||||||
Revenue | $ | 120,862 | $ | 124,028 | $ | — | $ | 244,890 | ||||||||
Depreciation, depletion and amortization | 13,433 | 9,282 | 695 | 23,410 | ||||||||||||
Income (loss) from operations | 20,214 | 22,851 | (14,146 | ) | 28,919 | |||||||||||
Capital expenditures | 7,501 | 12,492 | 406 | 20,399 |
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Six Months Ended June 30, 2007 | ||||||||||||||||
Florida | Canada | Corporate | Total | |||||||||||||
Revenue | $ | 113,760 | $ | 100,660 | $ | — | $ | 214,420 | ||||||||
Depreciation, depletion and amortization | 16,732 | 8,315 | 652 | 25,699 | ||||||||||||
Income (loss) from operations | 15,441 | 16,709 | (13,218 | ) | 18,932 | |||||||||||
Capital expenditures | 13,738 | 7,272 | 848 | 21,858 |
17. Condensed Consolidating Financial Statements
Waste Services is the primary obligor under the Senior Subordinated Notes, however Waste Services has no independent operating assets or operations, and the guarantees of our domestic subsidiaries, which are all wholly owned subsidiaries, are full and unconditional and joint and several with respect to the Senior Subordinated Notes, including principal, interest, premium, if any, and liquidated damages, if any. Presented below are our Unaudited Condensed Consolidating Balance Sheets as of June 30, 2008 and December 31, 2007 and the related Unaudited Condensed Consolidating Statements of Operations for the three and six months ended June 30, 2008 and 2007 and the Unaudited Condensed Consolidating Statements of Cash Flows for the six months ended June 30, 2008 and 2007 of Waste Services, Inc. (the “Parent”), our U.S. guarantor subsidiaries (“Guarantors”) and the non-guarantor Canadian subsidiaries (“Non-guarantors”):
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
June 30, 2008 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 22,287 | $ | 199 | $ | 11,062 | $ | — | $ | 33,548 | ||||||||||
Accounts receivable, net | — | 28,858 | 37,062 | — | 65,920 | |||||||||||||||
Prepaid expenses and other current assets | 613 | 2,268 | 5,599 | — | 8,480 | |||||||||||||||
Total current assets | 22,900 | 31,325 | 53,723 | — | 107,948 | |||||||||||||||
Property and equipment, net | 205 | 97,795 | 92,375 | — | 190,375 | |||||||||||||||
Landfill sites, net | — | 173,387 | 16,789 | — | 190,176 | |||||||||||||||
Goodwill and other intangible assets, net | — | 290,773 | 100,637 | — | 391,410 | |||||||||||||||
Other assets | 19,485 | 162 | — | — | 19,647 | |||||||||||||||
Due from affiliates | 1,867 | — | — | (1,867 | ) | — | ||||||||||||||
Investment in subsidiary | 775,143 | — | — | (775,143 | ) | — | ||||||||||||||
Total assets | $ | 819,600 | $ | 593,442 | $ | 263,524 | $ | (777,010 | ) | $ | 899,556 | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Accounts payable | $ | 8,734 | $ | 1,754 | $ | 11,484 | $ | — | $ | 21,972 | ||||||||||
Accrued expenses and other current liabilities | 23,637 | 23,027 | 17,015 | — | 63,679 | |||||||||||||||
Short-term financing and current portion of long-term debt | 1,081 | 209 | — | — | 1,290 | |||||||||||||||
Total current liabilities | 33,452 | 24,990 | 28,499 | — | 86,941 | |||||||||||||||
Long-term debt | 397,751 | 2,288 | — | — | 400,039 | |||||||||||||||
Accrued closure, post-closure, deferred income taxes and other obligations | 25,200 | 7,114 | 17,065 | — | 49,379 | |||||||||||||||
Due to affiliates | — | — | 1,867 | (1,867 | ) | — | ||||||||||||||
Total liabilities | 456,403 | 34,392 | 47,431 | (1,867 | ) | 536,359 | ||||||||||||||
Shareholders’ equity: | ||||||||||||||||||||
Common stock of Waste Services, Inc | 439 | — | — | — | 439 | |||||||||||||||
Other equity | 362,758 | 559,050 | 216,093 | (775,143 | ) | 362,758 | ||||||||||||||
Total shareholders’ equity | 363,197 | 559,050 | 216,093 | (775,143 | ) | 363,197 | ||||||||||||||
Total liabilities and shareholders’ equity | $ | 819,600 | $ | 593,442 | $ | 263,524 | $ | (777,010 | ) | $ | 899,556 | |||||||||
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2007 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
ASSETS | ||||||||||||||||||||
Current assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 9,080 | $ | 239 | $ | 11,387 | $ | — | $ | 20,706 | ||||||||||
Accounts receivable, net | — | 30,902 | 36,293 | — | 67,195 | |||||||||||||||
Prepaid expenses and other current assets | 37 | 2,449 | 8,852 | — | 11,338 | |||||||||||||||
Current assets of discontinued operations | — | 167 | — | — | 167 | |||||||||||||||
Total current assets | 9,117 | 33,757 | 56,532 | — | 99,406 | |||||||||||||||
Property and equipment, net | 235 | 99,541 | 92,822 | — | 192,598 | |||||||||||||||
Landfill sites, net | — | 173,803 | 16,648 | — | 190,451 | |||||||||||||||
Goodwill and other intangible assets, net | — | 294,056 | 103,710 | — | 397,766 | |||||||||||||||
Other assets | 17,550 | 191 | — | — | 17,741 | |||||||||||||||
Due from affiliates | 1,021 | — | — | (1,021 | ) | — | ||||||||||||||
Investment in subsidiary | 816,054 | — | — | (816,054 | ) | — | ||||||||||||||
Non-current assets of discontinued operations | — | 40,526 | — | — | 40,526 | |||||||||||||||
Total assets | $ | 843,977 | $ | 641,874 | $ | 269,712 | $ | (817,075 | ) | $ | 938,488 | |||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
Current liabilities: | ||||||||||||||||||||
Accounts payable | $ | 9,480 | $ | 2,903 | $ | 14,258 | $ | — | $ | 26,641 | ||||||||||
Accrued expenses and other current liabilities | 17,571 | 21,973 | 25,794 | — | 65,338 | |||||||||||||||
Short-term financing and current portion of long-term debt | 2,428 | 203 | — | — | 2,631 | |||||||||||||||
Current liabilities of discontinued operations | — | 765 | — | — | 765 | |||||||||||||||
Total current liabilities | 29,479 | 25,844 | 40,052 | — | 95,375 | |||||||||||||||
Long-term debt | 439,415 | 2,394 | — | — | 441,809 | |||||||||||||||
Accrued closure, post-closure, deferred income taxes and other obligations | 24,488 | 6,134 | 17,892 | — | 48,514 | |||||||||||||||
Due to affiliates | — | — | 1,021 | (1,021 | ) | — | ||||||||||||||
Non-current liabilities of discontinued operations | — | 2,195 | — | — | 2,195 | |||||||||||||||
Total liabilities | 493,382 | 36,567 | 58,965 | (1,021 | ) | 587,893 | ||||||||||||||
Shareholders’ equity: | ||||||||||||||||||||
Common stock of Waste Services, Inc | 439 | — | — | — | 439 | |||||||||||||||
Other equity | 350,156 | 605,307 | 210,747 | (816,054 | ) | 350,156 | ||||||||||||||
Total shareholders’ equity | 350,595 | 605,307 | 210,747 | (816,054 | ) | 350,595 | ||||||||||||||
Total liabilities and shareholders’ equity | $ | 843,977 | $ | 641,874 | $ | 269,712 | $ | (817,075 | ) | $ | 938,488 | |||||||||
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Three Months Ended June 30, 2008 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Revenue | $ | — | $ | 60,774 | $ | 67,508 | $ | — | $ | 128,282 | ||||||||||
Operating and other expenses: | ||||||||||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) | — | 39,468 | 44,137 | — | 83,605 | |||||||||||||||
Selling, general and administrative expense (exclusive of depreciation, depletion and amortization) | 3,430 | 4,879 | 8,196 | — | 16,505 | |||||||||||||||
Depreciation, depletion and amortization | 25 | 6,610 | 4,985 | — | 11,620 | |||||||||||||||
Foreign exchange gain and other | — | (282 | ) | (1 | ) | — | (283 | ) | ||||||||||||
Equity earnings in investees, net of tax | (15,063 | ) | — | — | 15,063 | — | ||||||||||||||
Income from operations | 11,608 | 10,099 | 10,191 | (15,063 | ) | 16,835 | ||||||||||||||
Interest expense | 7,678 | 42 | 82 | — | 7,802 | |||||||||||||||
Income from continuing operations before income taxes | 3,930 | 10,057 | 10,109 | (15,063 | ) | 9,033 | ||||||||||||||
Income tax provision | — | 1,804 | 3,199 | — | 5,003 | |||||||||||||||
Net income from continuing operations | 3,930 | 8,253 | 6,910 | (15,063 | ) | 4,030 | ||||||||||||||
Loss on sale of discontinued operations, net of income tax benefit of $64 | — | (100 | ) | — | — | (100 | ) | |||||||||||||
Net income | $ | 3,930 | $ | 8,153 | $ | 6,910 | $ | (15,063 | ) | $ | 3,930 | |||||||||
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Three Months Ended June 30, 2007 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Revenue | $ | — | $ | 63,563 | $ | 55,858 | $ | — | $ | 119,421 | ||||||||||
Operating and other expenses: | ||||||||||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) | — | 41,901 | 36,598 | — | 78,499 | |||||||||||||||
Selling, general and administrative expense (exclusive of depreciation, depletion and amortization) | 3,417 | 4,632 | 6,629 | — | 14,678 | |||||||||||||||
Depreciation, depletion and amortization | 17 | 9,356 | 4,968 | — | 14,341 | |||||||||||||||
Foreign exchange loss (gain) and other | 3 | (123 | ) | (44 | ) | — | (164 | ) | ||||||||||||
Equity earnings in investees, net of tax | 264 | — | — | (264 | ) | — | ||||||||||||||
Income (loss) from operations | (3,701 | ) | 7,797 | 7,707 | 264 | 12,067 | ||||||||||||||
Interest expense | 10,704 | 43 | 83 | — | 10,830 | |||||||||||||||
Income (loss) from continuing operations before income taxes | (14,405 | ) | 7,754 | 7,624 | 264 | 1,237 | ||||||||||||||
Income tax provision | — | 1,692 | 2,715 | — | 4,407 | |||||||||||||||
Net income (loss) from continuing operations | (14,405 | ) | 6,062 | 4,909 | 264 | (3,170 | ) | |||||||||||||
Net income from discontinued operations, net of tax of nil | — | 957 | — | — | 957 | |||||||||||||||
Loss on sale of discontinued operations, net of tax of nil | — | (12,192 | ) | — | — | (12,192 | ) | |||||||||||||
Net income (loss) | $ | (14,405 | ) | $ | (5,173 | ) | $ | 4,909 | $ | 264 | $ | (14,405 | ) | |||||||
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Six Months Ended June 30, 2008 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Revenue | $ | — | $ | 120,862 | $ | 124,028 | $ | — | $ | 244,890 | ||||||||||
Operating and other expenses: | ||||||||||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) | — | 78,384 | 81,765 | — | 160,149 | |||||||||||||||
Selling, general and administrative expense (exclusive of depreciation, depletion and amortization) | 7,094 | 9,314 | 16,461 | — | 32,869 | |||||||||||||||
Depreciation, depletion and amortization | 49 | 13,433 | 9,928 | — | 23,410 | |||||||||||||||
Foreign exchange loss (gain) and other | 1 | (483 | ) | 25 | — | (457 | ) | |||||||||||||
Equity earnings in investees, net of tax | (41,606 | ) | — | — | 41,606 | — | ||||||||||||||
Income from operations | 34,462 | 20,214 | 15,849 | (41,606 | ) | 28,919 | ||||||||||||||
Interest expense | 17,823 | 93 | 124 | — | 18,040 | |||||||||||||||
Income from continuing operations before income taxes | 16,639 | 20,121 | 15,725 | (41,606 | ) | 10,879 | ||||||||||||||
Income tax provision (benefit) | — | (3,717 | ) | 5,287 | — | 1,570 | ||||||||||||||
Net income from continuing operations | 16,639 | 23,838 | 10,438 | (41,606 | ) | 9,309 | ||||||||||||||
Net income from discontinued operations, net of income tax provision of $301 | — | 461 | — | — | 461 | |||||||||||||||
Gain on sale of discontinued operations, net of income tax provision of $4,485 | — | 6,869 | — | — | 6,869 | |||||||||||||||
Net income | $ | 16,639 | $ | 31,168 | $ | 10,438 | $ | (41,606 | ) | $ | 16,639 | |||||||||
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Six Months Ended June 30, 2007 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Revenue | $ | — | $ | 113,760 | $ | 100,660 | $ | — | $ | 214,420 | ||||||||||
Operating and other expenses: | ||||||||||||||||||||
Cost of operations (exclusive of depreciation, depletion and amortization) | — | 73,837 | 67,429 | — | 141,266 | |||||||||||||||
Selling, general and administrative expense (exclusive of depreciation, depletion and amortization) | 8,272 | 7,907 | 12,931 | — | 29,110 | |||||||||||||||
Depreciation, depletion and amortization | 31 | 16,732 | 8,936 | — | 25,699 | |||||||||||||||
Foreign exchange gain and other | (175 | ) | (157 | ) | (255 | ) | — | (587 | ) | |||||||||||
Equity earnings in investees, net of tax | (10,386 | ) | — | — | 10,386 | — | ||||||||||||||
Income from operations | 2,258 | 15,441 | 11,619 | (10,386 | ) | 18,932 | ||||||||||||||
Interest expense | 20,336 | 101 | 138 | — | 20,575 | |||||||||||||||
Income (loss) from continuing operations before income taxes | (18,078 | ) | 15,340 | 11,481 | (10,386 | ) | (1,643 | ) | ||||||||||||
Income tax provision | — | 1,788 | 4,356 | — | 6,144 | |||||||||||||||
Net income (loss) from continuing operations | (18,078 | ) | 13,552 | 7,125 | (10,386 | ) | (7,787 | ) | ||||||||||||
Net income from discontinued operations, net of tax of nil | — | 963 | — | — | 963 | |||||||||||||||
Loss on sale of discontinued operations, net of tax of nil | — | (11,254 | ) | — | — | (11,254 | ) | |||||||||||||
Net income (loss) | $ | (18,078 | ) | $ | 3,261 | $ | 7,125 | $ | (10,386 | ) | $ | (18,078 | ) | |||||||
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Six Months Ended June 30, 2008 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net cash provided by (used in) operating activities | $ | (20,397 | ) | $ | 31,008 | $ | 12,033 | $ | — | $ | 22,644 | |||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Capital expenditures | (29 | ) | (7,501 | ) | (12,869 | ) | — | (20,399 | ) | |||||||||||
Proceeds from sale of the Jacksonville, Florida operations | — | 56,685 | — | — | 56,685 | |||||||||||||||
Proceeds from asset sales and business divestitures | 10 | 773 | 99 | — | 882 | |||||||||||||||
Deposits for business acquisitions and other | (3,351 | ) | — | (50 | ) | — | (3,401 | ) | ||||||||||||
Intercompany | 80,100 | — | — | (80,100 | ) | — | ||||||||||||||
Net cash provided by (used in) continuing operations | 76,730 | 49,957 | (12,820 | ) | (80,100 | ) | 33,767 | |||||||||||||
Net cash used in discontinued operations | — | (43 | ) | — | — | (43 | ) | |||||||||||||
Net cash used in investing activities | 76,730 | 49,914 | (12,820 | ) | (80,100 | ) | 33,724 | |||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Principal repayments of debt and capital lease obligations | (43,126 | ) | (99 | ) | — | — | (43,225 | ) | ||||||||||||
Intercompany | — | (80,863 | ) | 763 | 80,100 | — | ||||||||||||||
Net cash provided by financing activities — continuing operations | (43,126 | ) | (80,962 | ) | 763 | 80,100 | (43,225 | ) | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | (301 | ) | — | (301 | ) | |||||||||||||
Increase (decrease) in cash and cash equivalents | 13,207 | (40 | ) | (325 | ) | — | 12,842 | |||||||||||||
Cash and cash equivalents at the beginning of the period | 9,080 | 239 | 11,387 | — | 20,706 | |||||||||||||||
Cash and cash equivalents at the end of the period | $ | 22,287 | $ | 199 | $ | 11,062 | $ | — | $ | 33,548 | ||||||||||
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WASTE SERVICES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Six Months Ended June 30, 2007 | ||||||||||||||||||||
Non- | ||||||||||||||||||||
Parent | Guarantors | Guarantors | Eliminations | Consolidated | ||||||||||||||||
Net cash provided by (used in) operating activities | $ | (24,048 | ) | $ | 34,639 | $ | 14,223 | $ | — | $ | 24,814 | |||||||||
Cash flows from investing activities: | ||||||||||||||||||||
Cash used in business combinations and significant asset acquisitions, net of cash acquired | — | (30,491 | ) | (1,397 | ) | — | (31,888 | ) | ||||||||||||
Capital expenditures | (104 | ) | (13,738 | ) | (8,016 | ) | — | (21,858 | ) | |||||||||||
Proceeds from asset sales | — | 16,050 | 41 | — | 16,091 | |||||||||||||||
Deposits for business acquisitions and other | (7,919 | ) | (54 | ) | (1,555 | ) | — | (9,528 | ) | |||||||||||
Intercompany | 3,056 | — | — | (3,056 | ) | — | ||||||||||||||
Net cash used in continuing operations | (4,967 | ) | (28,233 | ) | (10,927 | ) | (3,056 | ) | (47,183 | ) | ||||||||||
Net cash used in discontinued operations | — | (4,496 | ) | — | — | (4,496 | ) | |||||||||||||
Net cash used in investing activities | (4,967 | ) | (32,729 | ) | (10,927 | ) | (3,056 | ) | (51,679 | ) | ||||||||||
Cash flows from financing activities: | ||||||||||||||||||||
Proceeds from issuance of debt and draws on revolving credit facility | 84,014 | — | — | — | 84,014 | |||||||||||||||
Principal repayments of debt and capital lease obligations | (49,033 | ) | (157 | ) | — | — | (49,190 | ) | ||||||||||||
Proceeds from the exercise of options and warrants | 5 | — | — | — | 5 | |||||||||||||||
Fees paid for financing costs | (1,191 | ) | — | — | — | (1,191 | ) | |||||||||||||
Intercompany | — | (1,770 | ) | (1,286 | ) | 3,056 | — | |||||||||||||
Net cash provided by financing activities — continuing operations | 33,795 | (1,927 | ) | (1,286 | ) | 3,056 | 33,638 | |||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | 740 | — | 740 | |||||||||||||||
Increase (decrease) in cash and cash equivalents | 4,780 | (17 | ) | 2,750 | — | 7,513 | ||||||||||||||
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 | $ | 6,970 | $ | 546 | $ | 8,529 | $ | — | $ | 16,045 | ||||||||||
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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto included elsewhere herein as well as our annual report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission, including the factors set forth in the section titled “Cautionary Statement 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). We divested our Jacksonville, Florida operations in March 2008, our Texas operations in June 2007 and our Arizona operations in March 2007 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 homeowner associations or through subscription arrangements with individual homeowners. Our contracts with municipalities are typically for a term of three to ten years and contain a formula, generally based on a predetermined published price index, for adjustments to fees to cover increases in some, but not all, of our operating costs. Certain of our contracts with municipalities contain renewal provisions. The fees we charge for residential solid waste collection services provided on a subscription basis are based primarily on route density, the frequency and level of service, the distance to the disposal or processing facility, the cost of disposal or processing and prices we charge in the market for similar services.
We charge our landfill and transfer station customers a tipping fee on a per ton or per cubic yard basis for disposing of their solid waste at our transfer stations and landfills. We generally base our landfill tipping fees on market factors and the type and weight of, or volume of the waste deposited. We generally base our transfer station tipping fees on market factors and the cost of processing the waste deposited at the transfer station, the cost of transporting the waste to a disposal facility and the cost of disposal.
Material recovery facilities generate revenue from the sale of recyclable commodities. In an effort to reduce our exposure to commodity price fluctuations on recycled materials, where competitive pressures permit, we charge collection or processing fees for recycling volume collected from our customers. We may also manage our exposure to commodity price fluctuations through the use of commodity brokers who will arrange for the sale of recyclable materials from our collection operations to third-party purchasers.
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Expense Structure
Our cost of operations primarily includes tipping fees and related disposal costs, labor and related benefit costs, equipment maintenance, fuel, vehicle, liability and workers’ compensation insurance and landfill capping, closure and post-closure costs. Our strategy is to create vertically integrated operations where possible, using transfer stations to link collection operations with our landfills to increase internalization of our waste volume. Internalization lowers our disposal costs by allowing us to eliminate tipping fees otherwise paid to third-party landfill or transfer station operators. We believe that internalization provides us with a competitive advantage by allowing us to be a low cost provider in our markets. We expect that our internalization will gradually increase over time as we develop our network of transfer stations and maximize delivery of collection volumes to our landfill sites.
In markets where we do not have our own landfills, we seek to secure disposal arrangements with municipalities or private owners of landfills or transfer stations. In these markets, our ability to maintain competitive prices for our collection services is generally dependent upon our ability to secure competitive disposal pricing. If owners of third-party disposal sites discontinue our arrangements, we would have to seek alternative disposal sites which could impact our profitability and cash flow. In addition, if third-party disposal sites increase their tipping fees and we are unable to pass these increases on to our collection customers, our profitability and cash flow would be negatively impacted.
We believe that the age and condition of our vehicle fleet has a significant impact on operating costs, including, but not limited to, repairs and maintenance, insurance and driver training and retention costs. Through capital investment, we seek to maintain an average fleet age of approximately six to seven 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.
Acquisitions and Dispositions
In March 2008, we sold our hauling and material recovery operations and a construction and demolition landfill site in the Jacksonville, Florida market, to an independent third party. The proceeds from this sale approximated $56.7 million of cash, including working capital. Should the construction and demolition landfill site not obtain certain permits relating to an expansion of at least 2.4 million cubic yards by the fourth anniversary of the closing, we shall refund to the buyer $10.0 million of purchase price and receive title to the expansion property free and clear of all liens. Accordingly, we have deferred this portion of the proceeds, net of our $3.0 million cost basis. Should these permits be obtained, we will recognize an additional gain on sale of $7.0 million. Should the property be returned to us, we will record the property at the lower of its cost or current fair market value on the date it is returned. Simultaneously with the closing of the sale transaction we entered into an operating lease with the buyer for certain land and buildings used in the Jacksonville, Florida operations, for a term of five years at $0.5 million per year. Commencing in April 2009, the lessee has the option to purchase the leased assets at a purchase price of $6.0 million. We utilized $42.5 million of the proceeds to make a prepayment of the term notes under the Credit Facilities. Accordingly, we expensed approximately $0.5 million of unamortized debt issue costs relating to this retirement.
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 $18.4 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 at the time of closing was approximately $8.1 million.
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Prior to the WCA transaction, we had significant operations in the construction and demolition market in Fort Myers. We believed that by acquiring WCA’s Southwest Florida operations, we could create greater long-term shareholder value by removing a market competitor, increasing our density and internalizing construction and demolition waste volume to our southwest Florida construction and demolition landfill site. Conversely, our Texas Class I landfill site required significant capital investment for cell construction and new equipment within the next two years. While both markets are extremely competitive, our lack of dedicated collection or hauling assets in Texas meant that in order to realize the full potential of the Texas marketplace earlier in the site life, we would need to acquire additional hauling company assets rather than building them organically over time. Hence we believed that the WCA assets, which were immediately integrated into existing operations, would yield higher future returns than that of the developing Texas market.
In April 2007, we completed the acquisition of a hauling and transfer operation, a transfer station development project and a landfill development project in southwest Florida operated by 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. However, as all state operating permits have not been received, in June 2008 we paid an additional deposit of $1.0 million to extend the closing up to an additional six months to January 2009. To date, we have advanced $9.5 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 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 including net working capital between the two operations and transaction costs.
We have presented the net assets and operations of our Jacksonville, Florida operations, Arizona operations and Texas operations as discontinued operations for all periods presented. Revenue from discontinued operations was nil and $9.5 million for the three months ended June 30, 2008 and 2007, respectively, and $4.7 million and $23.4 million for the six months ended June 30, 2008 and 2007, respectively. Pre-tax net income from discontinued operations was nil and $1.0 million for the three months ended June 30, 2008 and 2007, respectively, and $0.8 million and $1.0 million for the six months ended June 30, 2008 and 2007, respectively. During the six months ended June 30, 2008, we recognized a pre-tax gain on disposal of $11.4 million relative to the sale of the Jacksonville, Florida operations and an associated income tax provision of $4.5 million. In March 2007, we recognized a gain on disposal of $0.9 million relative to the sale of the Arizona operations, and in June 2007, we recognized a loss on disposal of $12.2 million relative to the sale of the Texas operations. No income tax provision or benefit has been attributed to the Arizona or Texas disposals. Included in the calculation of the gain on disposal for the Jacksonville, Florida operations and Arizona operations was approximately $23.6 million and $21.0 million of goodwill, respectively. The decrease in pre-tax net income from discontinued operations for 2008 compared to 2007 relates primarily to the exclusion of our Jacksonville, Florida operations for the second quarter of 2008.
Results of Operations for the Three and Six Months Ended June 30, 2008 and 2007
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 or payables, denominated in U.S. dollars held by our Canadian operations are re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported currently as a component of net income (loss). Currently, we do not hedge our exposure to changes in foreign exchange rates.
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Our consolidated results of operations for the three and six months ended June 30, 2008 and 2007 are as follows (in thousands):
Three Months Ended June 30, 2008 | ||||||||||||||||||||||||
Florida | Canada | Total | ||||||||||||||||||||||
Revenue | $ | 60,774 | 100.0 | % | $ | 67,508 | 100.0 | % | $ | 128,282 | 100.0 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of operations | 39,468 | 64.9 | % | 44,137 | 65.4 | % | 83,605 | 65.2 | % | |||||||||||||||
Selling, general and administrative expense | 8,309 | 13.7 | % | 8,196 | 12.1 | % | 16,505 | 12.9 | % | |||||||||||||||
Depreciation, depletion and amortization | 6,635 | 10.9 | % | 4,985 | 7.4 | % | 11,620 | 9.1 | % | |||||||||||||||
Foreign exchange gain and other | (282 | ) | -0.4 | % | (1 | ) | 0.0 | % | (283 | ) | -0.3 | % | ||||||||||||
Income from operations | $ | 6,644 | 10.9 | % | $ | 10,191 | 15.1 | % | $ | 16,835 | 13.1 | % | ||||||||||||
Three Months Ended June 30, 2007 | ||||||||||||||||||||||||
Florida | Canada | Total | ||||||||||||||||||||||
Revenue | $ | 63,563 | 100.0 | % | $ | 55,858 | 100.0 | % | $ | 119,421 | 100.0 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of operations | 41,901 | 65.9 | % | 36,598 | 65.5 | % | 78,499 | 65.7 | % | |||||||||||||||
Selling, general and administrative expense | 8,049 | 12.7 | % | 6,629 | 11.9 | % | 14,678 | 12.3 | % | |||||||||||||||
Depreciation, depletion and amortization | 9,373 | 14.7 | % | 4,968 | 8.9 | % | 14,341 | 12.0 | % | |||||||||||||||
Foreign exchange gain and other | (120 | ) | -0.2 | % | (44 | ) | -0.1 | % | (164 | ) | -0.1 | % | ||||||||||||
Income from operations | $ | 4,360 | 6.9 | % | $ | 7,707 | 13.8 | % | $ | 12,067 | 10.1 | % | ||||||||||||
Six Months Ended June 30, 2008 | ||||||||||||||||||||||||
Florida | Canada | Total | ||||||||||||||||||||||
Revenue | $ | 120,862 | 100.0 | % | $ | 124,028 | 100.0 | % | $ | 244,890 | 100.0 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of operations | 78,384 | 64.9 | % | 81,765 | 65.9 | % | 160,149 | 65.4 | % | |||||||||||||||
Selling, general and administrative expense | 16,408 | 13.6 | % | 16,461 | 13.3 | % | 32,869 | 13.4 | % | |||||||||||||||
Depreciation, depletion and amortization | 13,482 | 11.2 | % | 9,928 | 8.0 | % | 23,410 | 9.6 | % | |||||||||||||||
Foreign exchange loss (gain) and other | (482 | ) | -0.5 | % | 25 | 0.0 | % | (457 | ) | -0.2 | % | |||||||||||||
Income from operations | $ | 13,070 | 10.8 | % | $ | 15,849 | 12.8 | % | $ | 28,919 | 11.8 | % | ||||||||||||
Six Months Ended June 30, 2007 | ||||||||||||||||||||||||
Florida | Canada | Total | ||||||||||||||||||||||
Revenue | $ | 113,760 | 100.0 | % | $ | 100,660 | 100.0 | % | $ | 214,420 | 100.0 | % | ||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of operations | 73,837 | 64.9 | % | 67,429 | 67.0 | % | 141,266 | 65.9 | % | |||||||||||||||
Selling, general and administrative expense | 16,179 | 14.2 | % | 12,931 | 12.8 | % | 29,110 | 13.6 | % | |||||||||||||||
Depreciation, depletion and amortization | 16,763 | 14.7 | % | 8,936 | 8.9 | % | 25,699 | 12.0 | % | |||||||||||||||
Foreign exchange gain and other | (332 | ) | -0.2 | % | (255 | ) | -0.2 | % | (587 | ) | -0.3 | % | ||||||||||||
Income from operations | $ | 7,313 | 6.4 | % | $ | 11,619 | 11.5 | % | $ | 18,932 | 8.8 | % | ||||||||||||
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Revenue
A summary of our revenue is as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||||||||||||||||||
Collection | $ | 104,865 | 74.0 | % | $ | 98,430 | 74.3 | % | $ | 201,370 | 74.4 | % | $ | 174,195 | 73.0 | % | ||||||||||||||||
Landfill disposal | 12,757 | 9.0 | % | 13,770 | 10.4 | % | 24,586 | 9.1 | % | 27,336 | 11.5 | % | ||||||||||||||||||||
Transfer station | 17,896 | 12.6 | % | 15,480 | 11.7 | % | 32,567 | 12.0 | % | 29,267 | 12.3 | % | ||||||||||||||||||||
Material recovery facilities | 5,607 | 4.0 | % | 4,483 | 3.4 | % | 11,393 | 4.2 | % | 7,405 | 3.1 | % | ||||||||||||||||||||
Other specialized services | 633 | 0.4 | % | 369 | 0.2 | % | 824 | 0.3 | % | 509 | 0.1 | % | ||||||||||||||||||||
141,758 | 100.0 | % | 132,532 | 100.0 | % | 270,740 | 100.0 | % | 238,712 | 100.0 | % | |||||||||||||||||||||
Intercompany elimination | (13,476 | ) | (13,111 | ) | (25,850 | ) | (24,292 | ) | ||||||||||||||||||||||||
$ | 128,282 | $ | 119,421 | $ | 244,890 | $ | 214,420 | |||||||||||||||||||||||||
Revenue was $128.3 million and $119.4 million for the three months ended June 30, 2008 and 2007, respectively, an increase of $8.9 million or 7.4%. The decrease in revenue from our Florida operations for the three months ended June 30, 2008 of $2.7 million or 4.4% was driven by decreased collection, primarily in our industrial and commercial lines of business, third-party transfer station and landfill volumes of $6.1 million and other net decreases of $2.0 million, primarily related to the expiration or assignment of certain lower margin residential and commercial collection contracts. Offsetting these decreases were price increases of $4.4 million, of which $2.4 million related to fuel and environmental surcharges, and acquisitions net of dispositions of $1.0 million.
The increase in revenue from our Canadian operations for the three months ended June 30, 2008 of $11.6 million or 20.8% was due to price increases of $4.9 million, of which $2.0 million related to fuel and environmental surcharges and organic volume growth of $2.1 million. Offsetting these increases were decreases of $1.2 million, primarily related to the loss of residential contracts. The favorable effect of foreign exchange movements increased revenue by $5.8 million.
Revenue was $244.9 million and $214.4 million for the six months ended June 30, 2008 and 2007, respectively, an increase of $30.5 million or 14.2%. The increase in revenue from our Florida operations for the six months ended June 30, 2008 of $7.2 million or 6.2% was driven by acquisitions net of dispositions of $19.2 million and price increases of $6.8 million, of which $3.2 million related to fuel and environmental surcharges. Offsetting these net increases were decreased collection, primarily in our industrial and commercial lines of business, third-party transfer station and landfill volumes of $12.4 million and other net decreases of $6.4 million, primarily related to the expiration or assignment of certain lower margin residential and commercial collection contracts.
The increase in revenue from our Canadian operations for the six months ended June 30, 2008 of $23.3 million or 23.1% was due to price increases of $7.9 million, of which $2.9 million related to fuel and environmental surcharges and organic volume growth of $3.6 million. Offsetting these increases were decreases of $2.1 million, primarily related to the loss of residential contracts. The favorable effect of foreign exchange movements increased revenue by $13.9 million.
Cost of Operations
Cost of operations was $83.6 million and $78.5 million for the three months ended June 30, 2008 and 2007, respectively, an increase of $5.1 million or 6.5%. As a percentage of revenue, cost of operations was 65.2% and 65.7% for the three months ended June 30, 2008 and 2007, respectively.
The decrease in cost of operations from our Florida operations for the three months ended June 30, 2008 of $2.4 million or 5.8% was due to lower costs for third-party disposal due to overall lower collection volumes of $2.3 million, lower variable labor costs of $1.1 million and decreased insurance and support costs of $0.1 million. Offsetting these decreases were increased fuel costs of $1.0 million and increases in other operating costs of $0.1 million. As a percentage of revenue, cost of operations was 64.9% and 65.9% for the three months ended June 30, 2008 and 2007, respectively. The improvement in our domestic gross margin is primarily due to cost control measures as well as pricing initiatives.
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The increase in cost of operations from our Canadian operations for the three months ended June 30, 2008 of $7.5 million or 20.5% was due to increased disposal volumes and costs of $1.8 million, increased fuel costs of $1.3 million and increased labor costs of $0.6 million. The unfavorable effect of foreign exchange movements was $3.8 million. Cost of operations as a percentage of revenue remained consistent at 65.4% and 65.5% for the three months ended June 30, 2008 and 2007, respectively as pricing initiatives were offset by higher operating costs and a lower relative mix of landfill revenue.
Cost of operations was $160.1 million and $141.3 million for the six months ended June 30, 2008 and 2007, respectively, an increase of $18.8 million or 13.4%. As a percentage of revenue, cost of operations was 65.4% and 65.9% for the six months ended June 30, 2008 and 2007, respectively.
The increase in cost of operations from our Florida operations for the six months ended June 30, 2008 of $4.5 million or 6.2% was due to acquisitions of $10.7 million and increased fuel costs of $1.3 million. Offsetting these increases were lower costs for disposal due to overall lower collection volumes of $4.3 million, lower variable labor costs of $2.2 million, lower insurance and support costs of $0.4 million and decreases in other operating costs of $0.6 million. Cost of operations as a percentage of revenue remained consistent at 64.9% for the six months ended June 30, 2008 and 2007 as pricing initiatives were offset by a lower relative mix of landfill revenue.
The increase in cost of operations from our Canadian operations for the six months ended June 30, 2008 of $14.3 million or 21.3% was due to increased disposal volumes and costs of $2.1 million, increased fuel costs of $2.0 million and increased labor costs of $1.4 million. These increases were offset by decreases in vehicle repair and maintenance and other operating costs of $0.4 million. The unfavorable effect of foreign exchange movements was $9.2 million. Cost of operations as a percentage of revenue decreased to 65.9% from 67.0% for the six months ended June 30, 2008 and 2007, respectively, primarily due to pricing initiatives.
Selling, General and Administrative Expense
Selling, general and administrative expense was $16.5 million and $14.7 million for the three months ended June 30, 2008 and 2007, respectively, an increase of $1.8 million or 12.4%. As a percentage of revenue, selling, general and administrative expense was 12.9% and 12.3% for the three months ended June 30, 2008 and 2007, respectively. The overall increase in selling, general and administrative expense is primarily due to increased labor costs of $1.2 million, of which $0.5 million relates to increased stock-based compensation expense. These increased costs were offset by other reductions in general and administrative costs of $0.1 million. The unfavorable effect of foreign exchange movements was $0.7 million.
Selling, general and administrative expense was $32.9 million and $29.1 million for the six months ended June 30, 2008 and 2007, respectively, an increase of $3.8 million or 12.9%. As a percentage of revenue, selling, general and administrative expense was 13.4% and 13.6% for the six months ended June 30, 2008 and 2007, respectively. The overall increase in selling, general and administrative expense is primarily due to acquisitions net of dispositions of $1.3 million and increased labor costs of $2.0 million, of which $1.0 million relates to increased stock-based compensation expense. These increased costs were offset by reductions in other general and administrative costs of $1.3 million, primarily related to decreased legal and other professional fees related to our litigation with Waste Management, which is more fully described in the notes to the Unaudited Condensed Consolidated Financial Statements included elsewhere in this filing. The unfavorable effect of foreign exchange movements was $1.8 million.
Depreciation, Depletion and Amortization
Depreciation, depletion and amortization was $11.6 million and $14.3 million for the three months ended June 30, 2008 and 2007, respectively, a decrease of $2.7 million or 19.0%. As a percentage of revenue, depreciation, depletion and amortization was 9.1% and 12.0% for the three months ended June 30, 2008 and 2007, respectively. This decrease primarily relates to decreased landfill depletion of $1.6 million, which is primarily due to decreased third-party and internal disposal volumes at our domestic and Canadian landfills. Additionally, a permitted expansion at one of our disposal sites lowered our domestic depletion rate. Amortization of intangible assets decreased $1.4 million primarily due to the expiration of a certain collection agreement. Foreign exchange rate movements had an unfavorable effect of $0.4 million. Landfill depletion rates for our U.S. landfills ranged from $4.35 to $6.16 per ton and $3.55 to $7.81 per ton during the three months ended June 30, 2008 and 2007, respectively. Landfill depletion rates for our Canadian landfills ranged from C$2.99 to C$7.28 per tonne and C$3.12 to C$9.25 per tonne during the three months ended June 30, 2008 and 2007, respectively.
Depreciation, depletion and amortization was $23.4 million and $25.7 million for the six months ended June 30, 2008 and 2007, respectively, a decrease of $2.3 million or 8.9%. As a percentage of revenue, depreciation, depletion and amortization was 9.6% and 12.0% for the six months ended June 30, 2008 and 2007, respectively. Acquisitions net of dispositions accounted for an increase in
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depreciation, depletion and amortization of $0.9 million. This increase was offset by an overall decrease in landfill depletion of $3.0 million, which is primarily due to decreased third-party and internal disposal volumes at our domestic and Canadian landfills. Additionally, a permitted expansion at one of our disposal sites lowered our domestic depletion rate. Amortization of intangible assets decreased $1.0 million primarily due to the expiration of a certain collection agreement. Foreign exchange rate movements had an unfavorable effect of $1.1 million. Landfill depletion rates for our U.S. landfills ranged from $4.02 to $6.16 per ton and $3.55 to $7.81 per ton during the six months ended June 30, 2008 and 2007, respectively. Landfill depletion rates for our Canadian landfills ranged from C$2.99 to C$7.28 per tonne and C$3.12 to C$9.25 per tonne during the six months ended June 30, 2008 and 2007, respectively.
Foreign Exchange Gain and Other
Foreign exchange gain and other was $0.3 million and $0.2 million for the three months ended June 30, 2008 and 2007, respectively, and $0.5 million and $0.6 million for the six months ended June 30, 2008 and 2007, respectively. The foreign exchange gain relates to the re-measuring of U.S. dollar denominated monetary accounts held by our Canadian operations into Canadian dollars. Other items primarily relate to gains on sales of equipment.
Interest Expense
The components of interest expense for the three and six months ended June 30, 2008 and 2007 are as follows (in thousands):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Credit Facility and Senior Subordinated Note interest | $ | 6,827 | $ | 9,589 | $ | 15,535 | $ | 18,524 | ||||||||
Amortization of debt issue costs | 478 | 831 | 1,516 | 1,315 | ||||||||||||
Other interest expense | 497 | 410 | 989 | 736 | ||||||||||||
$ | 7,802 | $ | 10,830 | $ | 18,040 | $ | 20,575 | |||||||||
Interest expense was $7.8 million and $10.8 million for the three months ended June 30, 2008 and 2007, respectively, a decrease of $3.0 million or 28.0%. Interest expense on the Credit Facilities and the Senior Subordinated Notes decreased $2.8 million for the three months ended June 30, 2008 due primarily to lower average rates on our Credit Facilities and lower overall balances outstanding during the period. The weighted average interest rate on borrowings under the Credit Facilities was 5.2% and 8.1% for the three months ended June 30, 2008 and 2007, respectively.
Interest expense was $18.0 million and $20.6 million for the six months ended June 30, 2008 and 2007, respectively, a decrease of $2.6 million or 12.3%. Interest expense on the Credit Facilities and the Senior Subordinated Notes decreased $3.0 million for the six months ended June 30, 2008 due primarily to lower average rates on our Credit Facilities and lower overall balances outstanding during the period. The weighted average interest rate on borrowings under the Credit Facilities was 6.2% and 8.2% for the six months ended June 30, 2008 and 2007, respectively.
In March 2008 we used $42.5 million of proceeds from the sale of our Jacksonville, Florida operations to reduce principal amounts outstanding under the term loan facility. As such we expensed $0.5 million of unamortized debt issue cost related to the retirement.
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Income Tax Provision (Benefit)
The provision for income taxes from continuing operations for the three months ended June 30, 2008 was $5.0 million, which was comprised of a $1.8 million provision for our U.S. operations and parent company and a $3.2 million provision for our Canadian operations. The provision for income taxes from continuing operations for the six months ended June 30, 2008 was $1.6 million, which was comprised of a $3.7 million benefit for our U.S. operations and parent company and a $5.3 million provision for our Canadian operations. Due to the start-up nature of our U.S. operations, we provide a 100% valuation allowance for our net operating loss carry-forwards generated in the United States. However, as a result of the gain on sale of our Jacksonville, Florida operations we have benefited $4.8 million of our previously fully reserved net operating loss carry-forwards and reversed $2.6 million of excess deferred tax liabilities related to goodwill. In addition to the valuation allowance recorded for our net operating loss carry-forwards generated in the U.S., we also provide 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 tax rate above the statutory amount that would otherwise be expected. For the three and six months ended June 30, 2008, the portion of our domestic deferred provision related to goodwill approximated $1.7 million and $3.6 million, respectively. We expect that during the remainder of 2008 our domestic provision for deferred tax liabilities for goodwill will approximate $1.7 million per quarter. Should we continue to generate taxable income domestically, we expect our deferred tax liabilities generated from goodwill will offset other deferred tax assets and we will not provide for them separately. However, we currently do not foresee a decrease in our domestic effective rate for the remainder of 2008. We have not paid any domestic cash income taxes during the periods presented nor do we expect to pay any during the remainder of 2008.
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. Since stock-based compensation is a non-deductible expense and a permanent difference, our future effective rate in Canada is affected by the level of stock-based compensation incurred in a particular period. We expect that during the remainder of 2008 our Canadian statutory rate will approximate 32.5%, however as a result of stock-based compensation our effective rate is expected to approximate 33.0% to 35.0%. For the three and six months ended June 30, 2008, we paid C$3.0 million and C$12.5 million respectively in cash relative to our actual 2007 and estimated 2008 tax liabilities in Canada. We expect our remaining 2008 estimated tax payments to approximate $3.0 million per quarter.
The income tax provision from discontinued operations for the six months ended June 30, 2008 was 0.3 million. The income tax provision for the gain on sale of the Jacksonville, Florida operations was $4.5 million for the six months ended June 30, 2008. No tax provision was attributable to discontinued operations for the three and six months ended June 30, 2007 and a benefit of $0.1 million was allocated for the three months ended June 30, 2008. The income tax provision for discontinued operations is based on our expected effective tax rate for those operations.
The income tax provision from continuing operations for the three months ended June 30, 2007 was $4.4 million, which was comprised of a $1.7 million provision for our U.S. operations and parent company and a $2.7 million provision for our Canadian operations. The income tax provision from continuing operations for the six months ended June 30, 2007 was $6.1 million, which was comprised of a $1.8 million provision for our U.S. operations and parent company and a $4.3 million provision for our Canadian operations. The domestic provision was lower than would be expected as the sale of our Arizona operations during the first quarter of 2007 generated a reversal of excess deferred tax liabilities of approximately $1.8 million.
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 Credit Facilities. 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 to our Canadian operations, and a term loan facility in the amount of $231.4 million. The revolver commitments terminate on April 30, 2009 and the term loans mature in specified quarterly installments through
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March 31, 2011. The Credit Facilities bear interest based on 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. Sixty-five percent 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 June 30, 2008, there were no amounts outstanding on the revolving credit facility, while $13.2 million and $13.4 million of revolver capacity was used to support outstanding letters of credit in the U.S. and Canada, respectively. In March 2008 we used $42.5 million of proceeds from the sale of our Jacksonville, Florida operations to reduce principal amounts outstanding under the term loan facility. As of July 22, 2008, 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.
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) maximum total leverage; (ii) maximum senior secured leverage; and (iii) minimum consolidated interest coverage. The covenants and restrictions limit the manner in which we conduct our operations and could adversely affect our ability to raise additional capital. The following table sets forth our financial covenant levels for the current and each of the following four quarters:
Maximum | Maximum | Minimum | ||||||||||
Consolidated | Consolidated | Consolidated | ||||||||||
Leverage | Senior Secured | Interest | ||||||||||
Ratio | Leverage Ratio | Coverage Ratio | ||||||||||
Second quarter — 2008 | 4.00 : 1.00 | 2.50 : 1.00 | 2.50 : 1.00 | |||||||||
Third quarter — 2008 | 4.00 : 1.00 | 2.50 : 1.00 | 2.50 : 1.00 | |||||||||
Fourth quarter — 2008 | 4.00 : 1.00 | 2.00 : 1.00 | 2.50 : 1.00 | |||||||||
First quarter — 2009 | 4.00 : 1.00 | N/A | 2.50 : 1.00 | |||||||||
Second quarter — 2009 | 4.00 : 1.00 | N/A | 2.50 : 1.00 |
As of June 30, 2008, we are in compliance with the financial covenants, as amended, and we expect to continue to be in compliance in future periods. However, our Maximum Consolidated Senior Secured Leverage Ratio becomes more restrictive during the latter part of 2008. If we do not achieve our expected levels of profitability or fail to make planned payments to reduce our secured debt we may not be in compliance with our covenants. We expect to refinance our Credit Facilities in late 2008 or early 2009. However, there can be no assurance that we will be successful in obtaining sufficient replacement financing or that any refinancing will be obtainable on terms that are favorable to us. As such, we may incur greater interest expense and financing costs in future periods. If we are unable to refinance our Credit Facilities or obtain alternative sources of funding, we may be required to sell additional debt, equity or assets in order to meet our repayment obligations, which may not be possible. Should we refinance these facilities before their scheduled maturity, we may incur an additional interest charge relative to our unamortized debt issue costs. As of June 30, 2008 there was $2.8 million of unamortized debt issue costs relative to these Credit Facilities.
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 June 30, 2008 approximates $7.2 million, and will accrete interest at 7.8%. The note is secured by the transfer station and related permit 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.
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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 Senior 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 Senior 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.
Direct Financing Lease Facility
In January 2008, we entered into a direct financing lease facility to finance our fleet purchases in Florida. Availability under the facility is $6.0 million and the leases can extend for five or seven years. Vehicles purchased under the facility will be ineligible for tax depreciation deductions. Leases under the facility will be treated as capital leases and considered secured debt for purposes of our Credit Facilities. As of June 30, 2008 and July 22, 2008, the facility was undrawn.
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 June 30, 2008, we provided customers, our insurers and various regulatory authorities with such bonds and letters of credit amounting to approximately $84.9 million to collateralize our obligations. The majority of these obligations are renewed on an annual basis.
Our domestic based workers’ compensation, automobile and general liability 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 June 30, 2008 and included in the $84.9 million of bonds and letters of credit discussed previously, we have posted a letter of credit with our U.S. insurer of approximately $10.2 million to secure the liability for losses within the deductible limit.
Cash Flows
The following discussion relates to the major components of the changes in cash flows for the six months ended June 30, 2008 and 2007.
Cash Flows from Operating Activities
Cash provided by operating activities of our continuing operations was $21.5 million and $20.4 million for the six months ended June 30, 2008 and 2007, respectively. The increase in cash provided by operating activities is primarily due to increased cash from operations before working capital changes of $10.2 million, which primarily relates to increased profitability of our operations. This increase was offset by investments in working capital, which were $11.0 million and $1.9 million for the six months ended June 30, 2008 and 2007, respectively. The primary component of the working capital decrement during the six months ended June 30, 2008 relates to taxes paid for our Canadian operations.
Cash Flows from Investing Activities
Cash provided by (used in) investing activities of our continuing operations was $33.8 million and $(47.2) million for the six months ended June 30, 2008 and 2007, respectively. For the six months ended June 30, 2008, cash provided by investing activities relates to the disposal of our Jacksonville, Florida operations, which was offset by capital expenditures and deposits for business acquisitions. Capital expenditures for continuing operations were $20.4 million and $21.9 million for the six months ended June 30, 2008 and 2007, respectively. Other cash uses during the six months ended June 30, 2007 related to the acquisition of Allied Waste’s
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South Florida operations and other acquisition related deposits, offset by proceeds from the disposal of our Texas operations.
Cash Flows from Financing Activities
Cash provided by (used in) financing activities of our continuing operations was $(43.2) million and $33.6 million for the six months ended June 30, 2008 and 2007, respectively. Cash used in financing activities for the six months ended June 30, 2008 primarily relates to a prepayment of our Credit Facilities from a portion of the proceeds from the sale of our Jacksonville, Florida operations. Cash provided by financing activities for the six months ended June 30, 2007 primarily relates to draws on our Credit Facilities to finance the acquisition of Allied Waste’s South Florida operations and other acquisition related deposits.
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 Jacksonville, Florida operations, Arizona operations 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 Unaudited Condensed 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, 2007, as filed on Form 10-K.
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Landfill Sites
The following table reflects landfill capacity activity for the six months ended June 30, 2008 for permitted landfills owned by us, which are part of our continuing operations. This table is exclusive of our construction and demolition landfill site that was divested as part of the sale of our Jacksonville, Florida operations in March 2008 (in thousands of cubic yards):
Balance, | Balance, | |||||||||||||||
Beginning | Landfills | Airspace | End | |||||||||||||
of Period | Expanded | Consumed | of Period | |||||||||||||
United States | ||||||||||||||||
Permitted capacity | 51,255 | 29,577 | (1,151 | ) | 79,681 | |||||||||||
Probable expansion capacity | 29,577 | (29,577 | ) | — | — | |||||||||||
Total available airspace | 80,832 | — | (1,151 | ) | 79,681 | |||||||||||
Number of sites | 3 | — | — | 3 | ||||||||||||
Canada | ||||||||||||||||
Permitted capacity | 11,564 | — | (196 | ) | 11,368 | |||||||||||
Probable expansion capacity | 4,709 | — | — | 4,709 | ||||||||||||
Total available airspace | 16,273 | — | (196 | ) | 16,077 | |||||||||||
Number of sites | 3 | — | — | 3 | ||||||||||||
Total | ||||||||||||||||
Permitted capacity | 62,819 | 29,577 | (1,347 | ) | 91,049 | |||||||||||
Probable expansion capacity | 34,286 | (29,577 | ) | — | 4,709 | |||||||||||
Total available airspace | 97,105 | — | (1,347 | ) | 95,758 | |||||||||||
Number of sites | 6 | — | — | 6 |
During April 2008, 29.6 million cubic yards of domestic expansion capacity was formally permitted and as such we have reclassified it to permitted capacity.
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 September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. In February 2008, the FASB deferred the effective date of SFAS 157 by one year for certain non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). On January 1, 2008, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 157 “Fair Value Measurements” (“SFAS 157”), except as it applies to those nonfinancial assets and nonfinancial liabilities for which the effective date has been delayed by one year. The adoption of SFAS 157 did not have a material effect on our financial position or results of operations. The book values of cash and cash equivalents, accounts receivable
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and accounts payable approximate their respective fair values due to the short-term nature of these instruments. The fair value of the term loan facility under our Senior Secured Credit Facilities and our 91/2% Senior Subordinated Notes at June 30, 2008 is estimated at $230.3 million and $160.0 million, respectively, based on quoted market prices.
On January 1, 2008, we adopted the provisions of SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 provides companies with an option to report selected financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The fair value option: (i) may be applied instrument by instrument, with a few exceptions, such as investments accounted for by the equity method; (ii) is irrevocable (unless a new election date occurs); and (iii) is applied only to entire instruments and not to portions of instruments. We did not elect to report any additional assets or liabilities at fair value and accordingly, the adoption of SFAS 159 did not have a material effect on our financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes the principles and requirements for how an acquirer: (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree; (ii) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is to be applied prospectively to business combinations consummated on or after the beginning of the first annual reporting period on or after December 15, 2008, with early adoption prohibited. We are currently evaluating the impact SFAS 141(R) will have upon adoption on our accounting for acquisitions. Previously any changes in valuation allowances, as a result of income from acquisitions, for certain deferred tax assets would serve to reduce goodwill whereas under the new standard any changes in the valuation allowance related to income from acquisitions currently or in prior periods will serve to reduce income taxes in the period in which the reserve is reversed. Additionally, under SFAS 141(R) transaction related expenses, which were previously capitalized as “deal costs”, will be expensed as incurred.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards that require (i) noncontrolling interests to be reported as a component of equity, (ii) changes in a parent’s ownership interest while the parent retains its controlling interest to be accounted for as equity transactions, and (iii) any retained noncontrolling equity investment upon the deconsolidation of a subsidiary to be initially measured at fair value. SFAS 160 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008, with early adoption prohibited. We do not expect the adoption of SFAS 160 to have a material effect on our financial position or results of operations.
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 ability to refinance our existing debt obligations to pay principal amounts due at maturity; | ||
• | 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; |
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• | 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 domestic operations are concentrated in Florida, which may be subject to specific economic conditions that vary from those nationally as well as weather related events that may impact our operations; | ||
• | construction, equipment delivery or permitting delays for our transfer stations or landfills; | ||
• | 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; and | ||
• | changes in general business and economic conditions, exchange rates and the financial markets and accounting standards or pronouncements. |
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, 2007, 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.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
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. For the six months ended June 30, 2008, we estimate that a 5.0% increase or decrease in the relationship of the Canadian dollar to the U.S. dollar would increase or decrease operating profit from our Canadian operations by approximately $0.8 million.
As of June 30, 2008, 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 $0.3 million for the six months ended June 30, 2008.
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
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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 on 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, 2007.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3.Defaults Upon Senior Securities
None
Item 4.Submission of Matters to a Vote of Security Holders
On June 12, 2008, we held our annual meeting. At the annual meeting, Michael B. Lazar, Lucien Rémillard and Jack E. Short were re-elected as directors to hold office until the 2011 annual meeting.
The following table sets forth the number of votes cast for or withheld for each director nominee:
Number of | ||||||||
Number of | Votes | |||||||
Director | Votes For | Withheld | ||||||
Michael B. Lazar | 37,664,797 | 3,372,652 | ||||||
Lucien Rémillard | 36,606,976 | 4,430,473 | ||||||
Jack E. Short | 37,617,710 | 3,419,739 |
The directors whose terms of office continued after the meeting were: Charles E. McCarthy, Wallace L. Timmeny, Michael J. Verrochi (holding office until the 2009 annual meeting) and Gary W. DeGroote, George E. Matelich and David Sutherland-Yoest (holding office until the 2010 annual meeting).
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Item 5.Other Information
Brian A. Goebel, age 41, was appointed our Senior Vice President, Controller and Chief Accounting Officer, effective July 22, 2008, and has been our Vice President, Controller and Chief Accounting Officer since October 1, 2003 and served as our Acting Chief Financial Officer from September 1, 2006 until March 12, 2007. Prior to joining us, Mr. Goebel was the Assistant Controller, ANC Rental Corporation.
We entered into an employment agreement with Mr. Goebel dated as of July 22, 2008. The agreement continues until terminated and provides for a base salary of $236,900, subject to annual review and eligibility for a performance based cash bonus with a target of 60% of his base salary. By the terms of the agreement, if we terminate Mr. Goebel’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. Goebel for “good reason”, then Mr. Goebel 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. Goebel’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. Goebel’s employment agreement also provides for benefits and perquisites, some of which will continue after his termination, and prohibits Mr. Goebel from competing against us during the term of his employment and for a specified period of time following his termination.
Mr. Goebel 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. Goebel nor any member of his immediate family is party to any transaction or proposed transaction with the Company.
Item 6.Exhibits
Exhibit 10.1 | Employment Agreement dated as of July 22, 2008 between Waste Services, Inc. and Brian A. Goebel. | |
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. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WASTE SERVICES, INC. | ||||
Date: July 25, 2008 | ||||
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 | ||||
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EXHIBIT INDEX
Exhibit No | Description | |
Exhibit 10.1 | Employment Agreement dated as of July 22, 2008 between Waste Services, Inc. and Brian A. Goebel. | |
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. |
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