1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 1999 COMMISSION FILE NO. 0-23981 WASTE CONNECTIONS, INC. (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 94-3283464 (I.R.S. Employer Identification No.) 620 COOLIDGE DRIVE, SUITE 350, FOLSOM, CA 95630 (Address of principal executive offices, as of November 15, 1999) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (916) 608-8200 2260 DOUGLAS BOULEVARD, SUITE 280, ROSEVILLE, CA 95661 REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (916) 772-2221 (Address and telephone of principal executive offices, through November 15, 1999) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock: As of November 11, 1999: 20,937,851 shares of Common Stock 2 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Condensed Consolidated Balance Sheets - December 31, 1998 and September 30, 1999 Condensed Consolidated Statements of Income for the three and nine months ended September 30, 1998 and 1999 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1999 Notes to Condensed Consolidated Financial Statements Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations PART II - OTHER INFORMATION Item 1 - Legal Proceedings Item 2 - Changes in Securities Item 6 - Exhibits and Reports on Form 8-K Signatures 1 3 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements WASTE CONNECTIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) DECEMBER 31, 1998 SEPTEMBER 30, 1999 ----------------- ------------------ (RESTATED) ASSETS Current assets: Cash and equivalents $ 3,244 $ 8,775 Accounts receivable, less allowance for doubtful accounts of $544 at December 31, 1998 and $1,917 at September 30, 1999 14,858 25,580 Prepaid expenses and other current assets 2,355 3,197 --------- --------- Total current assets 20,457 37,552 Property and equipment, net 50,297 253,050 Intangible assets 101,560 204,576 Other assets 2,709 6,694 --------- --------- $ 175,023 $ 501,872 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long term debt $ -- $ 940 Short-term borrowings 1,500 -- Accounts payable 8,731 18,378 Advances from related party 571 -- Deferred revenue 3,174 4,165 Accrued liabilities 5,767 14,051 Current portion of notes payable 11,939 7,470 Other current liabilities 2,758 353 --------- --------- Total current liabilities 34,440 45,357 Long-term debt and notes payable, net 67,176 226,388 Other long-term liabilities 4,396 5,320 Deferred income taxes 2,339 13,985 --------- --------- Total liabilities 108,351 291,050 ========= ========= Commitments and contingencies Stockholders' equity: Preferred stock $.01 par value; 10,000,000 shares authorized; none issued and outstanding -- -- Common stock: $.01 par value; 50,000,000 shares authorized; 13,218,568 shares issued and outstanding at December 31, 1998, 20,935,007 shares issued and outstanding at September 30, 1999 132 209 Additional paid-in capital 66,557 207,121 Deferred stock compensation (428) (218) Retained earnings 411 3,710 --------- --------- Total stockholders' equity 66,672 210,822 --------- --------- $ 175,023 $ 501,872 ========= ========= See accompanying notes. 2 4 WASTE CONNECTIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------- ------------------------------- 1998 1999 1998 1999 ------------ ------------ ------------ ------------ (RESTATED) (RESTATED) Revenues $ 28,245 $ 48,610 $ 68,092 $ 121,423 Operating Expenses: Cost of operations 19,904 29,308 48,596 75,381 Selling, general and administrative 2,801 4,056 6,580 10,188 Depreciation and amortization 2,426 3,885 5,461 9,483 Stock compensation 120 70 561 210 Acquisition related expenses -- -- -- 8,805 ------------ ------------ ------------ ------------ Income from operations 2,994 11,291 6,894 17,356 Interest expense (987) (3,178) (2,230) (6,366) Other income (expense), net (100) (8) 79 (6) ------------ ------------ ------------ ------------ Income before income tax provision 1,907 8,105 4,743 10,984 Income tax provision (870) (3,186) (2,027) (7,227) ------------ ------------ ------------ ------------ Net income before extraordinary item 1,037 4,919 2,716 3,757 Extraordinary item - early extinguishment of debt, net of tax benefits of $165 -- -- (815) -- ------------ ------------ ------------ ------------ Net Income $ 1,037 $ 4,919 $ 1,901 $ 3,757 ============ ============ ============ ============ Redeemable convertible preferred stock accretion -- -- (917) -- ------------ ------------ ------------ ------------ Net income applicable to common Stockholders $ 1,037 $ 4,919 $ 984 $ 3,757 ============ ============ ============ ============ Basic earnings per common share: Income before extraordinary item $ 0.08 $ 0.26 $ 0.20 $ 0.21 Extraordinary item -- -- (0.09) -- ------------ ------------ ------------ ------------ Net income per common share $ 0.08 $ 0.26 $ 0.11 $ 0.21 ============ ============ ============ ============ Diluted earnings per common share: Income before extraordinary item $ 0.07 $ 0.24 $ 0.16 $ 0.20 Extraordinary item -- -- (0.07) -- ------------ ------------ ------------ ------------ Net income per common share $ 0.07 $ 0.24 $ 0.09 $ 0.20 ============ ============ ============ ============ Shares used in the per share calculations: Basic 12,680,095 19,078,869 9,258,411 17,640,924 ============ ============ ============ ============ Diluted 14,588,037 20,240,020 11,220,537 19,039,810 ============ ============ ============ ============ See accompanying notes. 3 5 WASTE CONNECTIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 (IN THOUSANDS) (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 30, ------------------------- 1998 1999 --------- --------- (RESTATED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,901 $ 3,757 Adjustments to reconcile net income to net cash provided by operating activities: Gain on sale of assets (8) (15) Depreciation 4,405 6,719 Amortization of intangibles 1,055 2,764 Amortization of debt issuance costs, debt guarantee fees and accretion of discount on long-term debt 176 120 Stock issued for compensation and services 561 854 Extraordinary item - early extinguishment of debt 981 -- Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable, net (1,532) (3,102) Prepaid expenses and other current assets (137) 218 Accounts payable 905 5,895 Deferred revenue 634 878 Accrued liabilities (55) 1,150 Other liabilities 158 (2,738) --------- --------- Net cash provided by operating activities 9,044 16,500 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment 683 235 Payments for acquisitions, net of cash acquired (44,302) (142,363) Capital expenditures for property and equipment (5,388) (10,125) Net change in other assets 38 35 --------- --------- Net cash used in investing activities (48,969) (152,218) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 59,683 212,153 Principal payments on long-term debt and notes payable (41,063) (135,245) Proceeds from sale of common stock 24,126 65,041 Net change in short-term borrowings (1,008) -- Net change in advances from related party (66) -- Payment of dividends (536) (458) Proceeds from options and warrants -- 1,597 Debt issuance costs (600) (1,839) --------- --------- Net cash provided by financing activities 40,536 141,249 --------- --------- Net increase in cash and equivalents 611 5,531 Cash and equivalents at beginning of period 1,197 3,244 --------- --------- Cash and equivalents at end of period $ 1,808 $ 8,775 ========= ========= See accompanying notes. 4 6 WASTE CONNECTIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except share and per share amounts) 1. BASIS OF PRESENTATION AND SUMMARY The accompanying statements of income and cash flows relate to Waste Connections, Inc. and its subsidiaries (the "Company") for the three and nine month periods ended September 30, 1998 and 1999. The consolidated financial statements of the Company include the accounts of Waste Connections, Inc. and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Operating results for the three and nine month periods ended September 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. The Company's consolidated balance sheet as of September 30, 1999, the consolidated statements of income for the three and nine months ended September 30, 1999 and 1998, and the consolidated statements of cash flows for the nine months ended September 30, 1999 and 1998 are unaudited. In the opinion of management, such financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the Company's financial position, results of operations, and cash flows for the periods presented. The consolidated financial statements presented herein should be read in conjunction with the Company's annual report on Form 10-K and the Company's current report on Form 8-K dated September 15, 1999, which contains re-stated historical financial statements to reflect acquisitions consummated through September 30, 1999, accounted for as poolings-of-interests (Note 3). 2. LONG-TERM DEBT On March 30, 1999, the Company entered into a new revolving credit facility with a syndicate of banks for which BankBoston N.A. acts as agent (the "Credit Facility"). As of September 30, 1999, the maximum amount available under the Credit Facility is $315,000 (including stand-by letters of credit) and the borrowings bear interest at various fixed and/or variable rates at the Company's option (approximately 7.5% as of September 30, 1999). The Credit Facility replaced an existing revolving credit facility. The Credit Facility allows for the Company to issue up to $20,000 in stand-by letters of credit. The Credit Facility requires quarterly payments of interest and it matures in March 2004. Borrowings under the Credit Facility are secured by virtually all of the Company's assets. The Credit Facility requires the Company to pay an annual commitment fee equal to 0.5% of the unused portion of the Credit Facility. The Credit Facility places certain business, financial and operating restrictions on the Company relating to, among other things, the incurrance of additional indebtedness, investments, acquisitions, asset sales, mergers, dividends, distributions and repurchases and redemption of capital stock. The Credit Facility also requires that specified financial ratios and balances be maintained. 3. ACQUISITIONS During the nine months ended September 30, 1999, the Company acquired 34 solid waste services businesses that were accounted for using the purchase method of accounting. The aggregate consideration for these acquisitions was approximately $272,640 consisting of $142,363 in cash, $6,232 in assumed liabilities, $51,077 in seller notes, and $72,968 in stock. 5 7 WASTE CONNECTIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except share and per share amounts) The purchase prices have been allocated to the identified intangible assets and tangible assets acquired based on fair values at the dates of acquisition, with any residual amounts allocated to goodwill. During the nine months ended September 30, 1999, the Company merged with Roche and Sons Inc. ("Roche"), Murrey's Disposal Company, Inc., D.M. Disposal Co., Inc., American Disposal Company, Inc., and Tacoma Recycling, Inc. (collectively, the "Murrey Companies"), Ritter's Sanitary Service, Inc. ("Ritter"), Central Waste Disposal Inc. ("Central"), Omega Systems, Inc. ("Omega"), and The Garbage Company, Nebraska Ecology Systems and G&P Development, Inc (collectively, "G&P"). These transactions were accounted for as poolings-of-interests, whereby the Company issued an aggregate of 3,781,879 shares of its common stock for all of the outstanding shares of Roche, the Murrey Companies, Ritter, Central, Omega, and G&P. In connection with the mergers, the Company incurred transaction-related costs of approximately $8,805, which were charged to operations in the first nine months of 1999. The following pro forma information shows the results of the Company's operations as though the significant purchases that occurred during the nine months ended September 30, 1999, had occurred as of January 1, 1998: NINE MONTHS ENDED SEPTEMBER 30, ---------------------------- 1998 1999 ----------- ----------- Pro forma revenue $ 112,918 $ 148,224 Pro forma net income applicable to common stockholders $ 9,395 $ 3,504 Pro forma net income per share: Basic $ 0.80 $ 0.18 Diluted $ 0.68 $ 0.16 Shares used in the pro forma per share calculations: Basic 11,799,791 19,921,650 Diluted 13,761,917 21,320,536 The pro forma 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 January 1, 1998, or the results of future operations of the Company. 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. 4. STOCKHOLDERS' EQUITY Effective February 9, 1999, the Company sold approximately 4,000,000 shares of its common stock at $17.50 per share. As a result of that offering, the Company received approximately $65,041 in net proceeds and used the proceeds to pay down approximately $50,200 of its outstanding debt. 5. EARNINGS PER SHARE CALCULATION The following table sets forth the numerator and denominator used in the computation of earnings per share: 6 8 WASTE CONNECTIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except share and per share amounts) THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ------------------------------ ------------------------------- 1998 1999 1998 1999 ------------ ------------ ------------ ------------ Numerator: Income before extraordinary item $ 1,037 $ 4,919 $ 2,716 $ 3,757 Redeemable convertible preferred stock accretion -- -- (917) -- ------------ ------------ ------------ ------------ Income applicable to common stockholders Before extraordinary item 1,037 4,919 1,799 3,757 Extraordinary item -- -- (815) -- ------------ ------------ ------------ ------------ Net income applicable to common Stockholders $ 1,037 $ 4,919 $ 984 $ 3,757 ============ ============ ============ ============ Denominator: Basic shares outstanding 12,680,095 19,078,869 9,258,411 17,640,924 Dilutive effect of options and warrants 1,907,942 1,161,151 1,584,836 1,398,886 Redeemable Common Stock -- -- 377,290 -- ------------ ------------ ------------ ------------ Diluted shares outstanding 14,588,037 20,240,020 11,220,537 19,039,810 ============ ============ ============ ============ For the nine months ended September 30, 1999, 63,193 shares of common stock held in escrow, outstanding options to purchase 62,000 shares of common stock (with exercise prices ranging from $23.88 to $26.50) and outstanding warrants to purchase 47,000 shares of common stock (with exercise prices ranging from $23.88 to $30.50) could potentially further dilute earnings per share in the future and have not been included in the computation of diluted net income per share because to do so would have been anitdilutive. 7 9 WASTE CONNECTIONS, INC. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited financial statements and notes thereto included elsewhere herein. FORWARD LOOKING STATEMENTS Certain statements included in this Quarterly Report on Form 10-Q, including, without limitation, information appearing under Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," are forward-looking statements (within the meaning of Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934) that involve risks and uncertainties. Factors set forth herein and from time to time in our other filings with the Securities and Exchange Commission could affect our actual results and could cause our actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, Waste Connections in this Quarterly Report on Form 10-Q. OVERVIEW Waste Connections, Inc. is a regional, integrated solid waste services company that provides solid waste collection, transfer, disposal and recycling services in secondary markets of the Western U.S. As of September 30, 1999, we served more than 475,000 commercial, industrial and residential customers in California, Idaho, Iowa, Kansas, New Mexico, Minnesota, Nebraska, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington, and Wyoming. As of that date, we owned 51 collection operations and operated or owned 20 transfer stations, 12 Subtitle D landfills and 13 recycling facilities. We intend to pursue an acquisition-based growth strategy, and we acquired 89 businesses from our inception in September 1997 through September 30, 1999. The results of operations of these acquired businesses have been included in our financial statements only from the respective dates of acquisition, except for 11 acquisitions accounted for under the poolings-of-interests method of accounting, which are included for all periods presented. We anticipate that a substantial part of our future growth will come from acquiring additional solid waste collection, transfer and disposal businesses and, as a consequence, additional acquisitions could continue to affect period-to-period comparisons of the our operating results. GENERAL Our revenues consist mainly of fees we charge customers for solid waste collection, transfer, disposal and recycling services. A large part of our collection revenues come from providing commercial, industrial and residential services. We frequently perform these services under service agreements or franchise agreements with counties or municipal contracts. County franchise agreements and municipal contracts generally last from one to ten years. Our existing franchise agreements and all of our existing municipal contracts give Waste Connections the exclusive right to provide specified waste services in the specified territory during the contract term. These exclusive arrangements are awarded, at least initially, on a competitive bid basis and subsequently on a bid or negotiated basis. We also provide residential collection services on a subscription basis with individual households. Approximately 65% of our revenues for the three months ended September 30, 1999 were derived from services provided under exclusive franchise agreements, long term municipal contracts and governmental certificates. Governmental certificates grant Waste Connections perpetual and exclusive collection rights in the covered areas. Contracts with counties and municipalities and governmental certificates provide relatively consistent cash flow during the terms of the contracts. Because we bill most residential customers on a periodic basis, subscription agreements provide a stable source of revenues for Waste Connections. Our collection business also generates revenues from the sale of recyclable commodities. 8 10 We charge transfer station and landfill customers a tipping fee on a per ton basis for disposing of their solid waste at the transfer stations and the landfill facilities we own and operate. Most of our transfer and landfill customers have entered into one to ten year disposal contracts with us, most of which provide for annual cost of living increases. We typically determine the prices for our solid waste services by the collection frequency and level of service, route density, volume, weight and type of waste collected, type of equipment and containers furnished, the distance to the disposal or processing facility, the cost of disposal or processing, and prices charged by competitors for similar services. The terms of our contracts sometimes limit our ability to pass on price increases. Long-term solid waste collection contracts typically contain a formula, generally based on a published price index that automatically adjusts fees to cover increases in some, but not all, operating costs. Costs of operations include labor, fuel, equipment maintenance and tipping fees paid to third party disposal facilities, worker's compensation and vehicle insurance, the cost of materials we purchase for recycling, third party transportation expense, district and state taxes and host community fees and royalties. As of September 30, 1999, Waste Connections owned and/or operated 20 transfer stations, which reduce our costs by allowing us to use collection personnel and equipment more efficiently and by consolidating waste to gain more favorable disposal rates that may be available for larger quantities of waste. Selling, general and administrative ("SG&A") expenses include management, clerical and administrative compensation overhead costs associated with our marketing and sales force, professional services and community relations expense. Depreciation and amortization expense includes depreciation of fixed assets over their estimated useful lives using the straight-line method and amortization of goodwill and other intangible assets using the straight-line method. Waste Connections capitalizes some third-party expenditures related to pending acquisitions or development projects, such as legal and engineering expenses. We expense indirect acquisition costs, such as executive and corporate overhead, public relations and other corporate services, as we incur them. We charge against net income any unamortized capitalized expenditures and advances (net of any portion that we believe we may recover, through sale or otherwise) that relate to any operation that is permanently shut down and any pending acquisition or landfill development project that is not completed. We routinely evaluate all capitalized costs, and expense those related to projects that we believe are not likely to succeed. As of September 30, 1999, Waste Connections had no capitalized expenditures relating to landfill development projects and approximately $273,000 in capitalized expenditures relating to pending acquisitions. We accrue for estimated landfill closure and post-closure maintenance costs at the landfills we own. Under applicable regulations, Waste Connections and Madera County, as operator and owner, respectively, are jointly liable for closure and post-closure liabilities with respect to the Fairmead Landfill. We have not accrued for such liabilities because Madera County, as required by state law, has established a special fund into which it deposits a portion of tipping fee surcharges to pay such liabilities. Consequently, we do not believe that the Company had any financial obligation for closure and post-closure costs for the Fairmead Landfill as of September 30, 1999. We will have additional material financial obligations relating to closure and post-closure costs of the other disposal facilities that we currently own or operate and that we may own or operate in the future. Waste Connections accrues and will accrue for those obligations, based on engineering estimates of consumption of permitted landfill airspace over the useful life of such landfills. RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 The following table sets forth items in Waste Connections' consolidated statement of operations as a percentage of revenues for the periods indicated. 9 11 THREE MONTHS ENDED SEPTEMBER 30, --------------------- 1998 1999 ----- ----- Revenues 100.0% 100.0% Cost of operations 70.5 60.3 Selling, general and administrative expenses 9.9 8.3 Depreciation and amortization expense 8.6 8.0 Stock compensation 0.4 0.2 ----- ----- Operating income 10.6 23.2 Interest expense, net (3.5) (6.5) Other income (expense), net (0.3) -- Income tax expense (3.1) (6.6) ----- ----- Net income 3.7% 10.1% ===== ===== EBITDA margin(1) 19.6% 31.4% ===== ===== (1) EBITDA margin represents EBITDA expressed as a percentage of revenues. EBITDA represents earnings presented above before interest, income taxes, depreciation and amortization expense, acquisition related expenses, and stock compensation expense. EBITDA is not a measure of cash flow, operating results or liquidity, as determined in accordance with generally accepted accounting principles. Revenues. Total revenues increased $20.4 million, or 72.1%, to $48.6 million for the three months ended September 30, 1999, from $28.2 million for the three months ended September 30, 1998. Revenues for the nine months ended September 30, 1999 increased $53.3 million, or 78.3%, to $121.4 million from $68.1 million for the nine months ended September 30, 1998. The increase was primarily attributable to the inclusion of the acquisitions closed during the last year and selective price increases, with a nominal contribution from growth in the existing businesses. Cost of Operations. Total cost of operations increased $9.4 million, or 47.2%, to $29.3 million for the three months ended September 30, 1999, from $19.9 million for the three months ended September 30, 1998. Cost of operations for the nine months ended September 30, 1999, increased $26.8 million, or 55.1%, to $75.4 million from $48.6 million for the nine months ended September 30, 1998. The increase was primarily attributable to cost of the acquisitions closed during the year, offset by greater integration of collection volumes into landfills we own or operate. Cost of operations as a percentage of revenues decreased 10.2%, to 60.3% for the three months ended September 30, 1999, from 70.5% for the three months ended September 30, 1998. Cost of operations as a percentage of revenues for the nine months ended September 30, 1999 decreased 9.3% to 62.1% from 71.4% for the nine months ended September 30, 1998. The decrease as a percentage of revenues was primarily attributable to the effect of tuck-in acquisitions closed since the beginning of 1999, economies of scale from the greater revenue base, greater integration of collection volumes into landfills we own or operate and selective price increases. SG&A. SG&A expenses increased $1.3 million, or 44.8%, to $4.1 million for the three months ended September 30, 1999, from $2.8 million for the three months ended September 30, 1998. SG&A for the nine months ended September 30, 1999 increased $3.6 million, or 54.8%, to $10.2 million from $6.6 million for the nine months ended September 30, 1998. Our SG&A increased as a result of additional personnel from companies acquired and some additional corporate overhead to accommodate our growth. SG&A as a percentage of revenues declined 1.6% to 8.3% for the three months ended September 30, 1999, from 9.9% for the three months ended September 30, 1998. SG&A as a percentage of revenues for the nine months ended September 30, 1999 decreased 1.3% to 8.4% from 9.7% for the nine months ended September 30, 1998. The decline in SG&A as a percentage of revenues was a result of spreading of overhead expenses over a larger base of revenue from the acquisitions completed in 1999, offset by increases in corporate overhead and the costs associated with becoming a public company in May 1998. Depreciation and Amortization. Depreciation and amortization expense increased $1.5 million, or 60.1%, to $3.9 million for the three months ended September 30, 1999 from $2.4 million for the three months ended September 30, 1998. Depreciation and amortization for the nine months ended September 30, 1999 10 12 increased $4.0 million, or 73.6%, to $9.5 million from $5.5 million for the nine months ended September 30, 1998. The increase resulted primarily from the acquisitions completed during the year and the inclusion of the depreciation and amortization of the businesses acquired as well as the amortization of goodwill associated with such acquisitions. Depreciation and amortization as a percentage of revenues decreased 0.6% to 8.0% for the three months ended September 30, 1999, from 8.6% for the three months ended September 30, 1998. Depreciation and amortization as a percentage of revenues for the nine months ended September 30, 1999 decreased 0.2% to 7.8% from 8.0% for the nine months ended September 30, 1998. The decrease in depreciation and amortization as a percentage of revenues was primarily a result of accounting for eleven acquisitions in 1999 using the pooling-of-interests method, for which no goodwill and related amortization is recognized, offset by a higher proportion of landfill revenues, which have associated higher depreciation and amortization costs. Stock Compensation Expense. Stock compensation expense decreased $50,000, or 41.7%, to $70,000 for the three months ended September 30, 1999, from $120,000 for the three months ended September 30, 1998. Stock compensation expense for the nine months ended September 30, 1999 decreased $351,000 or 62.6%, to $210,000 from $561,000 for the nine months ended September 30, 1998. Our stock compensation expense is attributable to the valuation of common stock options and warrants with exercise prices less than the estimated fair value of our common stock on the date of the grant and relates solely to stock options granted prior to the initial public offering in May 1998. Our stock compensation expense in 1999 consists of continued amortization of deferred stock compensation recorded in 1998 at the time of the initial public offering. The decrease in the amortization of deferred stock compensation for the three and nine months ended September 30, 1999, compared to the three and nine months ended September 30, 1998, was due to the amortization of the deferred stock compensation over the vesting periods of the related options using the multiple option approach prescribed by SFAS No. 123. Acquisition Related Expenses. Acquisition related expenses for the nine months ended September 30, 1999 were $8.8 million, and related primarily to commissions, professional fees, and other direct costs resulting from the eleven acquisitions that were accounted for using the pooling-of-interests method. Operating Income. Operating income increased $8.3 million, or 277.1%, to $11.3 million for the three months ended September 30, 1999, from $3.0 million for the three months ended September 30, 1998. The increase was primarily attributable to the inclusion of acquisitions closed in the last year, economies of scale from a greater revenue base, greater integration of collection volumes into landfills we own or operate and selective price increases. This was offset by higher depreciation and amortization and SG&A expenses. Operating income for the nine months ended September 30, 1999 increased $10.5 million, or 151.8%, to $17.4 million from $6.9 million for the nine months ended September 30, 1998. That increase was attributable to the same factors as the increase for the three months ended September 30, 1999, offset by higher acquisition related expenses, without which operating income would have increased to $26.2 million, an increase of 279.5%. Operating income as a percentage of revenues increased 12.6% to 23.2% for the three months ended September 30, 1999 from 10.6% for the three months ended September 30, 1998. The increase was attributable to the improvement in gross margins coupled with declines in SG&A expenses and depreciation and amortization as percentages of revenue. Operating income as a percentage of revenues for the nine months ended September 30, 1999 increased 4.2% to 14.3% from 10.1% for the nine months ended September 30, 1998. The increase was attributable to the same factors as the increase for the three months ended September 30, 1999, offset by acquisition related expenses. Interest Expense. Interest expense increased $2.2 million, or 222.0%, to $3.2 million for the three months ended September 30, 1999, from $987,000 for the three months ended September 30, 1998. Interest expense for the nine months ended September 30, 1999 increased $4.2 million, to $6.4 million from $2.2 million for the nine months ended September 30, 1998. The increases were primarily attributable to higher debt levels incurred to fund certain of our acquisitions. Provision for Income Taxes. Income taxes increased $2.3 million, or 266.2%, to $3.2 million for the three months ended September 30, 1999, from $870,000 for the three months ended September 30, 1998. Income taxes increased $5.2 million, or 256.5%, to $7.2 million for the nine months ended September 30, 1999, from $2.0 million for the nine month periods ended September 30, 1998. The effective income tax rate for both the three and nine months ended September 30, 1999, before acquisition related and stock compensation expenses, was 39.0%, which is above the federal statutory rate of 35.0% as the result of state and local taxes and non-deductible goodwill associated with certain acquisitions. 11 13 Net Income before Extraordinary Item. Net income before extraordinary item increased by $3.9 million, or 374.3%, to $4.9 million for the three months ended September 30, 1999, from net income of $1.0 million for the three months ended September 30, 1998. The increase was primarily attributable to the inclusion of acquisitions closed during the year, economies of scale from the greater revenue base, greater integration of collection volumes into landfills we own or operate, the effect of tuck-in acquisitions closed since the beginning of 1999 and selective price increases. This was offset by higher depreciation and amortization and interest expenses. Net income before extraordinary item for the nine months ended September 30, 1999 increased $1.1 million, or 38.3%, to $3.8 million from $2.7 million for the nine months ended September 30, 1998. The increase was attributable to the same factors as the increase for the three months ended September 30, 1999, offset by acquisition related expenses in the first and second quarters of 1999, a significant portion of which were not tax deductible. Excluding the acquisition related expenses on a tax adjusted basis, net income before extraordinary item would have increased to $12.0 million, an increase of 341.2%. Net income before extraordinary item as a percentage of revenue increased 6.4% to 10.1% for the three months ended September 30, 1999, from 3.7% for the three months ended September 30, 1998. The increase was attributable to improvement in gross margins and declines in SG&A expenses and depreciation and amortization as percentages of revenue, offset by higher interest expenses. Net income before extraordinary item as a percentage of revenue for the nine months ended September 30, 1999 decreased 0.9% to 3.1% from 4.0% for the nine months ended September 30, 1998. The decline was attributable to acquisition related expenses in the first and second quarters of 1999 and higher interest expenses, offset by improvement in gross margins and declines in SG&A expense and depreciation and amortization as percentages of revenue. In the quarter ended September 30, 1998, we recognized an extraordinary charge related to the early extinguishment of debt when we refinanced our credit facility. LIQUIDITY AND CAPITAL RESOURCES As of September 30, 1999, we had a working capital deficit of $7.8 million, including cash and cash equivalents of $8.8 million. Subsequent to September 30, 1999, cash and debt were reduced by $6.2 million, through the closing of various acquisitions. Our strategy in managing our working capital is generally to apply the cash generated from our operations that remains available after satisfying our working capital and capital expenditure requirements to reduce our indebtedness under our bank revolving credit facility and to minimize our cash balances. We have a $315 million revolving credit facility with a syndicate of banks for which BankBoston, N.A. acts as agent, which is secured by virtually all assets of Waste Connections, including our interest in the equity securities of our subsidiaries. The credit facility matures in 2004 and bears interest at a rate per annum equal to, at our discretion, either: (i) the BankBoston Base Rate; or (ii) the Eurodollar Rate plus, in each case, applicable margin. The credit facility requires us to maintain certain financial ratios and satisfy other predetermined requirements, such as minimum net worth, net income and limits on capital expenditures. It also requires the lenders' approval of acquisitions in certain circumstances. As of September 30, 1999, an aggregate of approximately $210.7 million was outstanding under our credit facility, and the interest rate on outstanding borrowings under the credit facility was approximately 7.5%. We expect to incur additional borrowings to fund acquisitions during the fourth quarter of 1999. For the nine months ended September 30, 1999, net cash provided by operations was approximately $16.5 million, of which $23.2 million was provided by operating results for the period exclusive of acquisition related and non-cash stock compensation expenses. Acquisition related expenses were $8.2 million, net of income taxes. $2.3 million of net cash provided by operations was provided by a decrease in working capital (net of acquisitions) for the period. For the nine months ended September 30, 1999, net cash used by investing activities was $151.2 million. Of this, $142.4 million was used to fund the cash portion of acquisitions. Cash used for capital expenditures was $10.1 million, which was primarily for investments in fixed assets, consisting primarily of trucks, containers and other equipment. For the nine months ended September 30, 1999, net cash provided by financing activities was $141.3 million, which was provided by net borrowings under our various debt arrangements and approximately $65 million in proceeds from the sale of 3,999,307 shares of common stock in a secondary public offering. 12 14 Capital expenditures relating to existing businesses for the remainder of 1999 are currently expected to be approximately $5.7 million. We intend to fund our remaining planned 1999 capital expenditures principally through internally generated funds, and borrowings under our existing credit facility. We intend to fund our future acquisitions and capital requirements through additional borrowings under our credit facility and funds raised from sale of our equity securities under appropriate market conditions. We believe that the credit facility, and the funds expected to be generated from operations, will provide adequate cash to fund our working capital and other cash needs for the foreseeable future. However, increased use of debt to fund our capital requirements will increase our interest expense. It may also raise our debt-to-equity ratio, which could hinder our ability to obtain additional credit. If we are unable to obtain additional debt financing or to sell additional equity securities in the future, we may be unable to fund future acquisitions, which could cause a decline in the growth rate of our revenues. YEAR 2000 We will need to modify or replace portions of our software so that our computer systems will function properly with respect to dates in the year 2000 ("Year 2000") and afterwards. We have completed Year 2000 conversions at substantially all of our locations at a total cost of approximately $125,0000, and expect to have completed Year 2000 conversions at the remaining locations before December 31, 1999. Additional acquisitions in the future may require additional Year 2000 conversions, at additional cost. Because our operations rely primarily on mechanical systems such as trucks to collect solid waste, we do not expect our operations to be significantly affected by Year 2000 issues. Our customers may need to make Year 2000 modifications to software and hardware that they use to generate records, bills and payments relating to Waste Connections. We do not rely on vendors on a routine basis except for providers of disposal services. We take waste to a site and are normally billed based on tonnage disposed. We believe that if our disposal vendors encounter Year 2000 problems, they will convert to manual billing based on scale recordings until they resolve those issues. In assessing our exposure to Year 2000 issues, we believe our biggest areas of exposure are as follows: Year 2000 issues at our banks, large (typically municipal) customers and acquired businesses between the time we acquire them and the time we implement our own systems. We are obtaining Year 2000 compliance certifications from our vendors, banks and customers. If Waste Connections and our vendors, banks and customers do not complete required Year 2000 modifications on time, the Year 2000 issue could materially affect our operations. We believe, however, that in the most reasonably likely worst case, the effects of Year 2000 issues on our operations would be brief and small relative to our overall operations. We have not made a contingency plan to minimize operational problems if Waste Connections or our vendors, banks and customers do not timely complete all required Year 2000 modifications. 13 15 WASTE CONNECTIONS, INC. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There is no current proceeding or litigation involving Waste Connections that we believe will have a material adverse impact on our business, financial condition, results of operations or cash flows. ITEM 2. CHANGES IN SECURITIES Sales of Unregistered Securities On July 12, 1999, we issued 2,000 shares of Common Stock to the shareholders of L&L Sanitation, Inc. at a price of $22.85 per share in connection with our acquisition of the stock of that company. Such shares were issued pursuant to Regulation D under the Securities Act of 1933. 14 16 WASTE CONNECTIONS, INC. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 27. Financial Data Schedule (b) Reports on Form 8-K: On July 15, 1999, we filed a Form 8-K/A further amending our Form 8-K filed on April 12, 1999, to include certain additional pro forma financial data of Waste Connections, Inc. On August 5, 1999, we filed a Form 8-K amending our historical audited financial statements for each of the three years in the period ended December 31, 1998, to include financial information of certain companies acquired during the first quarter of 1999 in transactions that were accounted for as poolings-of-interests. On August 25, 1999, we filed a Form 8-K reporting the execution on August 11, 1999 of an agreement pursuant to which International Environmental Industries, Inc., a Nevada corporation ("IEII"), would merge with and into WCI Acquisition Corporation I, a wholly owned subsidiary of Waste Connections. On August 31, 1999, we filed a Form 8-K reporting certain financial results covering 30 days of combined operations of Waste Connections and six companies acquired in June 1999. This information was reported because of rules pertaining to pooling-of-interests accounting under Securities and Exchange Commission Accounting Series Release 135. On September 2, 1999, we filed a Form 8-K/A amending the Form 8-K filed on August 25, 1999, to include the financial statements and pro forma financial information relating to our acquisition of IEII. On September 15, 1999, we filed a Form 8-K amending our historical audited financial statements for each of the three years in the period ended December 31, 1998, to include financial information of certain companies acquired during the six months ended June 30, 1999 in transactions that were accounted for as poolings-of-interests. 15 17 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. WASTE CONNECTIONS, INC. BY: /s/ Ronald J. Mittelstaedt Date: November 12, 1999 -------------------------------------- Ron J. Mittelstaedt, President and Chief Executive Officer BY: /s/ Steven F. Bouck Date: November 12, 1999 -------------------------------------- Steven F. Bouck, Vice President and Chief Financial Officer 16 18 EXHIBIT INDEX Exhibits Description - -------- ----------- 27. Financial Data Schedule