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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NO. 0-28652
WASTE CONNECTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3858494
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION)
620 COOLIDGE DRIVE
SUITE 350
FOLSOM, CALIFORNIA 95630
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(916) 608-8200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(TITLE OF CLASS)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of voting stock held by non-affiliates of registrant
as of February 28, 2001: $851,533,151
Number of shares of Common Stock outstanding as of February 28, 2001:
26,590,870
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 2001 Annual
Meeting of Stockholders are incorporated by reference into Part III hereof.
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WASTE CONNECTIONS, INC.
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
Item 1. BUSINESS.................................................... 1
Item 2. PROPERTIES.................................................. 13
Item 3. LEGAL PROCEEDINGS........................................... 13
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 13
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 16
Item 6. SELECTED FINANCIAL DATA..................................... 17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 20
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK... 27
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 27
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 27
PART III 55
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K..... 55
SIGNATURES............................................................ 56
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS...................... 57
EXHIBIT INDEX......................................................... 58
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PART I
FORWARD-LOOKING STATEMENTS
Certain information contained in this Annual Report on Form 10-K,
including, without limitation, information appearing under Item 1, "Business,"
and Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," includes forward-looking statements that involve risks
and uncertainties These statements can be identified by the use of
forward-looking terminology such as "believes", "expects", "may", "will",
"should" or "anticipates" or the negative thereof or comparable terminology, or
by discussions of strategy. Our business and operations are subject to a variety
of risks and uncertainties and, consequently, actual results may materially
differ from those projected by any forward-looking statements in this Annual
Report on Form 10-K. Factors that could cause actual results to differ from
those projected include, but are not limited to the following: (1) competition
or unfavorable industry economic conditions could lead to a decrease in demand
for our services and to a decline in prices realized by us for our services, (2)
we may be required to pay increased prices for acquisitions, and we may
experience difficulty in integrating and deriving synergies from acquisitions,
(3) we cannot be certain that we will always have access to the additional
capital that we require for our growth strategy or that our cost of capital will
not increase, (4) governmental regulations may require increased capital
expenditures or otherwise affect our business, (5) companies that we acquire
could have undiscovered liabilities, and (6) we are highly dependent on the
services of senior management. These risks and uncertainties, as well as others,
are discussed in greater detail in our other filings with the Securities and
Exchange Commission. We make no commitment to revise or update any
forward-looking statements in order to reflect events or circumstances after the
date any such statement is made.
ITEM 1. BUSINESS
GENERAL
Waste Connections 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. We currently own and operate 64
collection operations, 21 transfer stations, 14 Subtitle D landfills and 16
recycling facilities and operate, but do not own, an additional nine transfer
stations and six Subtitle D landfills. As of December 31, 2001, we served more
than 700,000 commercial, industrial and residential customers in 15 states:
California, Colorado, Iowa, Kansas, Minnesota, Montana, Nebraska, New Mexico,
Oklahoma, Oregon, South Dakota, Texas, Utah, Washington, and Wyoming. Over 50%
of our revenues are derived from exclusive markets, the majority of which are
from exclusive arrangements, including franchise agreements, long-term municipal
contracts and governmental certificates.
We have targeted secondary markets of the Western U.S. because we believe
that: (1) there is greater opportunity to obtain a strong market share in those
markets through exclusive arrangements or competitive asset position; (2) these
markets have strong projected economic and population growth rates; (3) a large
number of independent solid waste services companies suitable for acquisition by
us are located in these markets; and (4) there is less competition in these
markets from larger, better-capitalized solid waste services companies. In
addition, our senior management team has extensive experience in acquiring,
integrating and operating solid waste services businesses in the Western U.S.
We have developed a two-pronged strategy tailored to the competitive and
regulatory factors that affect our markets. In the markets where waste
collection services are performed under exclusive arrangements, we generally
focus on controlling the solid waste stream by providing collection services
under such arrangements. In markets where we believe that competitive and
regulatory factors make owning landfills advantageous, we generally focus on
providing integrated services, from collection through disposal of solid waste
in landfills that we own or operate.
Acquisitions have been and are expected to continue to be an important
component of our growth strategy. From our initial public offering in May 1998
to December 31, 2001, we acquired 106 solid waste services businesses, including
103 collection operations (of which 55 were "tuck-in" acquisitions),
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20 Subtitle D landfills which we own or operate, 30 transfer stations which we
own or operate and 16 recycling facilities. These acquisitions took us into 17
new markets in 11 additional states: Colorado, Iowa, Kansas, Minnesota, Montana,
Nebraska, New Mexico, Oklahoma, Oregon, Texas and Utah. Generating internal
growth and securing additional exclusive arrangements are also important
components of our growth strategy.
Unless otherwise noted, all descriptions of our business in this Annual
Report on Form 10-K are as of December 31, 2001.
INDUSTRY BACKGROUND
We estimate that the U.S. solid waste services industry generated revenues
of $40.0 billion in 2000. The solid waste services industry has undergone
significant consolidation and integration since 1990. We believe that,
particularly in the Western U.S., the following factors have primarily caused
the consolidation and integration of the waste services industry:
- Increased Impact of Regulations. Stringent industry regulations, such as
the Subtitle D regulations, have caused operating and capital costs to
rise and have accelerated consolidation and acquisition activities in the
solid waste collection and disposal industry. Many smaller industry
participants have found these costs difficult to bear and have decided to
either close their operations or sell them to larger operators. In
addition, Subtitle D requires more stringent engineering of solid waste
landfills, and mandates liner systems, leachate collection, treatment and
monitoring systems and gas collection and monitoring systems. These
ongoing costs are combined with increased financial reserve requirements
for solid waste landfill operators relating to closure and post-closure
monitoring. As a result, the number of solid waste landfills is declining
while the average size is increasing.
- Increased Integration of Collection and Disposal Operations. In certain
markets, competitive pressures are forcing operators to become more
efficient by establishing an integrated network of solid waste collection
operations and transfer stations, through which they secure solid waste
streams for disposal. Operators have adopted a variety of disposal
strategies, including owning landfills, establishing strategic
relationships to secure access to landfills and to capture significant
waste stream volumes to gain leverage in negotiating lower landfill fees,
and securing long-term, most-favored-pricing contracts with high capacity
landfills.
- Pursuit of Economies of Scale. Larger operators achieve economies of
scale by vertically integrating their operations or by spreading their
facility, asset and management infrastructure over larger volumes. Larger
solid waste collection and disposal companies have become more
cost-effective and competitive by controlling a larger waste stream and
by gaining access to significant financial resources to make
acquisitions.
- Regulatory Framework in the Western U.S. In the Western U.S., waste
collection services are provided largely under three types of contractual
arrangements: certificates or permits, franchise agreements and municipal
contracts. Certificates or permits, such as governmental certificates
awarded to waste collection service providers in unincorporated areas and
electing municipalities of Washington by the Washington Utilities and
Transportation Commission (the "WUTC"), typically grant the certificate
holder the exclusive and perpetual right to provide specific residential,
commercial and industrial waste services in a territory at specified
rates. See "G certificates" below. Franchise agreements typically provide
an exclusive service period of five to ten years or longer and specify
the service territory, a broad range of services to be provided, and
rates for the services. They also often give the service provider a right
of first refusal to extend the term of the agreement. Municipal contracts
typically provide a shorter service period and a more limited scope of
services than franchise agreements and generally require competitive
bidding at the end of the contract term. Unless customers within the
areas covered by certain governmental certificates, franchise agreements
and municipal contracts elect not to receive any waste collection
services, they are required to pay collection fees to the company
providing these services in their area. These exclusive rights and
contractual arrangements create barriers to entry that can be overcome
primarily through acquisitions of companies with such exclusive rights or
contractual arrangements.
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Despite the ongoing consolidation, the solid waste services industry
remains primarily regional in nature and highly fragmented. Based on published
industry sources, approximately 20% of the total revenues of the U.S. solid
waste industry is accounted for by more than 5,000 private, predominantly small,
collection and disposal businesses. We expect the current consolidation trends
in the solid waste industry to continue, because many independent landfill and
collection operators lack the capital resources, management skills and technical
expertise necessary to comply with stringent environmental and other
governmental regulations and to compete with larger, more efficient, integrated
operators. In addition, many independent operators may wish to sell their
businesses to achieve liquidity in their personal finances or as part of their
estate planning. We believe that the fragmented nature of the industry offers
significant consolidation and growth opportunities, especially in secondary
markets of the Western U.S., for companies with disciplined acquisition
programs, decentralized operating strategies and access to financial resources.
STRATEGY
Our objective is to build a leading integrated solid waste services company
in secondary markets of the Western U.S. We have developed a two-pronged
strategy tailored to the competitive and regulatory factors that affect our
markets.
First, in markets where waste collection services are provided under
exclusive arrangements, or where waste disposal is municipally funded or
available from multiple municipal sources, we believe that controlling the waste
stream by providing collection services under exclusive arrangements is often
more important to our growth and profitability than owning or operating
landfills. In addition, regulations in some Western U.S. markets dictate the
disposal facility to be used. The large size of many western states increases
the cost of interstate and long haul disposal, heightening the effects of
regulations that direct waste disposal, which may make it more difficult for a
landfill to obtain the disposal volume necessary to operate profitably. In
markets with these characteristics, we believe that landfill ownership or
vertical integration is not critical to our success.
Second, in markets where we believe that owning landfills is a strategic
element to a collection operation because of competitive and regulatory factors,
we generally focus on providing integrated services, from collection through
disposal of solid waste in landfills that we own or operate.
GROWTH STRATEGY
- Internal Growth. To generate continued internal growth, we will focus on
increasing market penetration in our current and adjacent markets,
soliciting new commercial, industrial, and residential customers in
markets where such customers may elect whether or not to receive waste
collection services, marketing upgraded or additional services (such as
compaction or automated collection) to existing customers and, where
appropriate, raising prices. Where possible, we intend to leverage our
franchise-based platforms to expand our customer base beyond our
exclusive market territories. As customers are added in existing markets,
our revenue per routed truck increases, which generally increases our
collection efficiencies and profitability. In markets in which we have
exclusive contracts, franchises and certificates, we expect internal
volume growth generally to track population and business growth.
- Transfer stations are also an important part of our internal growth
strategy. They extend our direct-haul reach and link disparate collection
operations with disposal capacity that we own, operate or contract. We
currently own and/or operate 30 transfer stations. By operating transfer
stations, we also engage in direct communications with municipalities and
private operators that deliver waste to our transfer stations. This
positions us to gain additional business in our markets if a municipality
privatizes any solid waste operations it owns or rebids existing
contracts, and it increases our opportunities to acquire other private
collection operations that use the transfer stations.
- Exclusive Arrangements. We derive a significant portion of our revenues
from arrangements, including franchise agreements, municipal contracts
and governmental certificates, under which we are the exclusive service
provider in a specified market. We intend to devote significant resources
to securing additional franchise agreements and municipal contracts
through competitive bidding and additional governmental certificates by
acquiring other companies. In bidding for franchises and municipal
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contracts and evaluating acquisition candidates holding governmental
certificates, our management team draws on its experience in the waste
industry and its knowledge of local service areas in existing and target
markets. Our district managers maintain relationships with local
governmental officials within their service areas, and sales
representatives may be assigned to cover specific municipalities. These
personnel focus on maintaining, renewing and renegotiating existing
franchise agreements and municipal contracts and on securing additional
agreements and contracts.
- Expansion Through Acquisitions. We intend to expand the scope of our
operations by continuing to acquire solid waste operations in new markets
and in existing or adjacent markets that are combined with or "tucked in"
to existing operations. We focus our acquisition efforts on markets which
we believe provide significant growth opportunities for a
well-capitalized market entrant and where we can create economic and
operational barriers to entry by new competitors. We believe that our
experienced management, decentralized operating strategy, financial
strength, size and public company status make us an attractive buyer to
certain solid waste collection and disposal acquisition candidates. We
have developed an acquisition discipline based on a set of financial,
geographic and management criteria to evaluate opportunities. Once
closed, we seek to integrate each acquired business promptly and to
minimize disruption to the ongoing operations of both Waste Connections
and the acquired business.
We intend to expand into new geographic regions through acquisitions. We
use an initial acquisition in a new market as an operating base. Then we
seek to strengthen the acquired operation's presence in that market by
providing additional services, adding new customers and making "tuck-in"
acquisitions. We next seek to broaden our regional presence by adding
additional operations in markets adjacent to the new location.
We believe that many new market "tuck-in" acquisition opportunities exist
within our current and targeted market areas. For example, we have
identified more than 480 independent entities that provide collection and
disposal services in the states where we currently operate. We believe
that throughout the Western U.S., many independent entities are suitable
for acquisition by Waste Connections and provide opportunities to increase
our market share and route density.
OPERATING STRATEGY
- Decentralized Operations. We manage our operations on a decentralized
basis. This places decision-making authority close to the customer,
enabling us to identify customers' needs quickly and to address those
needs in a cost-effective manner. We believe that decentralization
provides a low-overhead, highly efficient operational structure that
allows us to expand into geographically contiguous markets and operate in
relatively small communities that larger competitors may not find
attractive. We believe that this structure gives us a strategic
competitive advantage, given the relatively rural nature of much of the
Western U.S., and makes us an attractive buyer to many potential
acquisition candidates.
- We currently deliver our services from approximately 64 operating
locations which are grouped into three regions: Pacific Northwest,
Western and Central. We reorganized our business into these three regions
in May 2000, balancing them on the basis of their respective geographic
characteristics, interstate waste flow, revenue base, employee base,
regulatory structure and acquisition opportunities. Each region has a
Regional Vice President, reporting directly to the corporate management,
who is responsible for operations in that region and who supervises a
regional controller and regional business development staff.
- Our regions serve a total of 20 market areas, divided into 64 districts.
Our district managers have autonomous service and decision-making
authority for their districts and are responsible for maintaining service
quality, promoting safety in the operations, implementing marketing
programs, and overseeing day-to-day operations, including contract
administration. District managers also help identify acquisition
candidates and are responsible for integrating them into our operations
and obtaining the permits and other governmental approvals required for
us to operate the acquired business.
- Operating Enhancements. We develop company-wide operating standards,
which are tailored for each of our markets based on industry standards
and local conditions. Using these standards, we track
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collection and disposal routing efficiency and equipment utilization. We
also implement cost controls and employee training and safety procedures,
and establish a sales and marketing plan for each market. We have
installed a wide area network, implemented advanced management
information systems and financial controls, and consolidated accounting,
insurance and employee benefit functions, customer service, productivity
reporting and dispatching systems. While regional management operates
with a high degree of autonomy, our senior officers monitor regional and
district operations and require adherence to our accounting, purchasing,
marketing and internal control policies, particularly with respect to
financial matters. Our executive officers regularly review the
performance of district managers and operations. We believe that by
establishing operating standards, closely monitoring performance and
streamlining certain administrative functions, we can improve the
profitability of existing operations.
To improve an acquired business' operational productivity, administrative
efficiency and profitability, we apply the same operating standards,
information systems and financial controls to acquired businesses as our
existing operations employ. Moreover, if we can internalize the waste
stream of acquired operations, we can further increase operating
efficiencies and improve capital utilization. Where not restricted by
exclusive agreements, contracts, permits or certificates, we also solicit
new commercial, industrial and residential customers in areas within and
surrounding the markets served by acquired collection operations, to
further improve operating efficiencies and increase the volume of solid
waste collected by the acquired operations.
SERVICES
Commercial, Industrial and Residential Waste Services
We serve more than 700,000 commercial, industrial and residential
customers. Our services are generally provided under one of the following: a)
governmental certificates, b) exclusive franchise agreements, c) exclusive
municipal contracts, d) commercial and industrial service agreements, e)
residential subscriptions and f) residential contracts.
Governmental certificates, exclusive franchise agreements and exclusive
municipal contracts grant us rights to provide services within specified areas
at established rates. Governmental certificates are generally perpetual in
duration. Our exclusive franchise agreements have remaining terms from 10 to 41
years, and our exclusive municipal contracts generally have shorter contract
terms.
We provide commercial and industrial services, other than those we perform
under governmental certificates, franchise agreements or municipal contracts,
under agreements ranging from one to seven years. We determine fees under these
agreements by such factors as 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 in our markets for similar
service. Collection of larger volumes associated with commercial and industrial
waste streams generally helps improve our operating efficiencies, and
consolidation of these volumes allows us to negotiate more favorable disposal
prices. Our commercial and industrial customers use portable containers for
storage, enabling us to service many customers with fewer collection vehicles.
Commercial and industrial collection vehicles normally require one operator. We
provide one to eight cubic yard containers to commercial customers, 10 to 50
cubic yard containers to industrial customers, and 30 to 96 gallon carts to
residential customers. For an additional fee, we install stationary compactors
that compact waste prior to collection on the premises of a substantial number
of large volume customers.
We provide residential waste services under contracts with homeowners'
associations, apartment owners or mobile home park operators, or on subscription
basis with individual households. We base residential fees on a contract basis
primarily on route density, the frequency and level of service, the distance to
the disposal or processing facility, weight and type of waste collected, type of
equipment and containers furnished, the cost of disposal or processing and
prices charged in that market for similar services. Collection fees are paid
either by the municipalities from tax revenues or directly by the residents
receiving the services.
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Transfer Station Services
We have an active program to acquire, develop, own and operate transfer
stations in markets proximate to our operations. Currently, we own and operate
transfer stations in California, Colorado, Nebraska, Oklahoma, Oregon and
Washington and we are constructing a transfer station in Kansas. In addition, we
operate, but do not own, transfer stations in California, Nebraska, Oregon and
Washington. These transfer stations receive, compact, and transfer solid waste
to be transported by larger vehicles to landfills. We believe that the transfer
stations benefit us by:
- concentrating the waste stream from a wider area, which increases the
volume of disposal at landfills that we operate and gives us greater
leverage in negotiating for more favorable disposal rates at other
landfills;
- improving utilization of collection personnel and equipment; and
- building relationships with municipalities and private operators that
deliver waste, which can lead to additional growth opportunities.
Landfills
We seek to identify solid waste landfill acquisition candidates to achieve
vertical integration in markets where the economic and regulatory environment
makes such acquisitions attractive. We believe that in some markets, acquiring
landfills provides opportunities to vertically integrate our collection,
transfer and disposal operations while improving operating margins. We evaluate
landfill candidates by determining, among other things, the amount of waste that
could be diverted to the landfill in question, whether access to the landfill is
economically feasible from our existing market areas either directly or through
transfer stations, the expected life of the landfill, the potential for
expanding the landfill, and current disposal costs compared to the cost of
acquiring the landfill. Where the acquisition of a landfill is not attractive,
we pursue long term disposal contracts with facilities, which are typically
municipally controlled.
Currently, we own and operate landfills in Colorado, Kansas, Minnesota,
Nebraska, New Mexico, Oklahoma and Oregon. In addition, we operate, but do not
own, landfills in California, Nebraska and New Mexico. All landfills that we own
or operate are Subtitle D landfills.
We monitor the available permitted in-place disposal capacity of our
landfills on an ongoing basis and evaluate whether to seek to expand this
capacity. In making this evaluation, we consider various factors, including the
volume of waste projected to be disposed of at the landfill, the size of the
unpermitted acreage included in the landfill, the likelihood that we will be
able to obtain the necessary approvals and permits required for the expansion
and the costs that would be involved in developing the additional capacity. We
also regularly consider whether it is advisable, in light of changing market
conditions and/or regulatory requirements, to seek to expand or change the
permitted waste streams or to seek other permit modifications.
Recycling Services
We offer municipal, commercial, industrial and residential customers
recycling services for a variety of recyclable materials, including cardboard,
office paper, plastic containers, glass bottles and ferrous and aluminum metals.
We own and operate 16 recycling processing facilities and sell other collected
recyclable materials to third parties for processing before resale. We often
share the profits from our resale of recycled materials with other parties to
our recycling contracts. For example, certain of our municipal recycling
contracts in Washington, negotiated before we acquired those businesses, specify
certain benchmark resale prices for recycled commodities. To the extent the
prices we actually receive for the processed recycled commodities collected
under the contract exceed the prices specified in the contract, we share the
excess with the municipality, after recovering any previous shortfalls resulting
from actual market prices falling below the prices specified in the contract. To
reduce our exposure to commodity price risk with respect to recycled materials,
we have adopted a pricing strategy of charging collection and processing fees
for recycling volume collected from third parties. We believe that recycling
will continue to be an important component of local and
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state solid waste management plans due to the public's increasing environmental
awareness and expanding regulations that mandate or encourage recycling.
G Certificates
A substantial portion of our Washington collection business is performed
under governmental certificates (referred to as "G certificates") awarded by the
WUTC. G certificates apply only to unincorporated areas of Washington and
municipalities that have elected to have their solid waste collection overseen
by the WUTC. G certificates generally grant the holder the exclusive and
perpetual right to provide certain solid waste collection and transportation
services in a specified territory. The WUTC has repeatedly determined that, in
enacting the statute authorizing G certificates, the Washington Legislature
intended to favor grants of exclusive, rather than overlapping, service rights
for conventional solid waste services. Accordingly, most G certificates
currently grant exclusive solid waste collection and transportation rights for
conventional solid waste services in their specified territories.
The WUTC and the Washington Legislature have generally construed G
certificates as conferring vested property rights that may be defeated,
diminished or cancelled only upon the occurrence of specified events of default,
the demonstrated lack of fitness of the certificate holder, or municipalities'
annexation of territory covered by a certificate. Thus, a certificate holder is
entitled to due process in challenging any action that affects its rights. In
addition, legislation passed in 1997 requires a municipality that annexes
territory covered by a G certificate either to grant the certificate holder an
exclusive franchise, generally with a minimum term of seven years, to continue
to provide services in the affected area, or to negotiate with the certificate
holder some other compensation for the collection rights in the affected area.
The statute expressly permits the certificate holder to sue the annexing
municipality for measurable damages that exceed the value of a seven-year
franchise agreement to provide services in the affected area. Under one of the
contracts with a municipality in Washington acquired by a predecessor of Waste
Connections, the predecessor purported to waive its rights to compensation or
damages under the statute in return for the right to service any current or
prospectively annexed areas formerly covered by its G certificate.
In addition to awarding G certificates, the WUTC is required by statute to
establish just, reasonable and compensatory rates to customers of regulated
solid waste collection companies. The WUTC is charged with balancing the needs
of service providers to earn fair and sufficient returns on their investments in
plant and equipment against the needs of commercial and residential customers to
receive adequate and reasonably priced services. Over the past decade, the WUTC
has used a rate-making methodology known as the "Lurito-Gallagher" method. This
method calculates rates based on the income statements and balance sheets of
each service provider, with the goal of establishing rates that reflect the
costs of providing service and that motivate service providers to invest in
equipment that improves operating efficiency in a cost-effective manner. The
Lurito-Gallagher rate-setting methodology was adjusted in the early 1990's to
better reflect the costs of providing recycling services, by accounting for
providers' increasing use of automated equipment and adjusting for the
cyclicality of the secondary recyclables markets. This has often resulted in
more frequent rate adjustments in response to material cost shifts.
Sales and Marketing
In many of our existing markets, we provide waste collection, transfer and
disposal services to municipalities and governmental authorities under exclusive
franchise agreements, municipal contracts and G certificates; service providers
do not contract directly with individual customers. In addition, because we have
grown to date primarily through acquisitions, we have generally assumed existing
franchise agreements, municipal contracts and G certificates from the acquired
companies, rather than obtaining new contracts. For these reasons, our sales and
marketing efforts to date have been narrowly focused. We have added sales and
marketing personnel as necessary to solicit new customers in markets where we
are not the exclusive provider of solid waste services, expand our presence into
areas adjacent to or contiguous with our existing markets, and market additional
services to existing customers.
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Competition
The solid waste services industry is highly competitive and fragmented and
requires substantial labor and capital resources. The industry presently
includes three large national waste companies: Allied Waste Industries, Inc.,
Republic Services, Inc., and Waste Management, Inc. Casella Waste Systems, Inc.,
and Waste Industries, Inc. are other public companies with a regional focus and
annual revenues in excess of $100 million. Certain of the markets in which we
compete or will likely compete are served by one or more large, national solid
waste companies, as well as by numerous privately held regional and local solid
waste companies of varying sizes and resources, some of which have accumulated
substantial goodwill in their markets. We also compete with operators of
alternative disposal facilities, including incinerators, and with counties,
municipalities, and solid waste districts that maintain their own waste
collection and disposal operations. Public sector operations may have financial
advantages over Waste Connections, because of their access to user fees and
similar charges, tax revenues and tax-exempt financing.
We compete for collection, transfer and disposal volume based primarily on
the price and quality of our services. From time to time, competitors may reduce
the price of their services in an effort to expand their market shares or
service areas or to win competitively bid municipal contracts. These practices
may cause us to reduce the price of our services or, if we elect not to do so,
to lose business. We provide a substantial portion of our residential,
commercial and industrial collection services under exclusive franchise and
municipal contracts and certificates, some of which are subject to periodic
competitive bidding. We provide the balance of our services under subscription
agreements with individual households and one to five year service contracts
with commercial and industrial customers.
The solid waste collection and disposal industry is currently undergoing
significant consolidation, and we encounter competition in our efforts to
acquire landfills, transfer and collection operations. Intense competition
exists not only for collection, transfer and disposal volume, but also for
acquisition candidates. We generally compete for acquisition candidates with
publicly owned regional and large national waste management companies.
Competition in the disposal industry may also be affected by the increasing
national emphasis on recycling and other waste reduction programs, which may
reduce the volume of waste deposited in landfills. Accordingly, it may become
uneconomical for us to make further acquisitions or we may be unable to locate
or acquire suitable acquisition candidates at price levels and on terms and
conditions that we consider appropriate, particularly in markets we do not
already serve.
REGULATION
Introduction
Our landfill operations and non-landfill operations, including waste
transportation, transfer stations, vehicle maintenance shops and fueling
facilities, are all subject to extensive and evolving federal, state and local
environmental laws and regulations, the enforcement of which has become
increasingly stringent in recent years. The environmental regulations that
affect us are administered by the EPA and other federal, state and local
environmental, zoning, health and safety agencies. The WUTC regulates the
portion of our collection business in Washington performed under G certificates,
which generally grant us perpetual and exclusive collection rights in certain
areas. We are currently in substantial compliance with applicable federal, state
and local environmental laws, permits, orders and regulations. We do not
currently anticipate any material environmental costs necessary to bring our
operations into compliance (although there can be no assurance in this regard).
We anticipate that regulation, legislation and regulatory enforcement actions
related to the solid waste services industry will continue to increase. We
attempt to anticipate future regulatory requirements and to plan in advance as
necessary to comply with them.
The principal federal, state and local statutes and regulations that apply
to our operations are described below. All of the federal statutes described
below contain provisions that authorize, under certain circumstances, lawsuits
by private citizens to enforce the provisions of the statutes. In addition to a
penalty award by the United States, some of those statutes authorize an award of
attorneys' fees to parties that successfully bring such an action. Enforcement
actions under these statutes may include both civil and criminal penalties, as
well as injunctive relief in some instances.
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The Resource Conservation and Recovery Act of 1976 ("RCRA")
RCRA regulates the generation, treatment, storage, handling, transportation
and disposal of solid waste and requires states to develop programs to ensure
the safe disposal of solid waste. RCRA divides solid waste into two groups,
hazardous and nonhazardous. Wastes are generally classified as hazardous if they
either (i) are specifically included on a list of hazardous wastes, or (ii)
exhibit certain characteristics defined as hazardous. Household wastes are
specifically designated as nonhazardous. Wastes classified as hazardous under
RCRA are subject to much stricter regulation than wastes classified as
nonhazardous, and businesses that deal with hazardous waste are subject to
regulatory obligations in addition to those imposed on handlers of nonhazardous
waste.
The EPA regulations issued under Subtitle C of RCRA impose a comprehensive
"cradle to grave" system for tracking the generation, transportation, treatment,
storage and disposal of hazardous wastes. The Subtitle C Regulations impose
obligations on generators, transporters and disposers of hazardous wastes, and
require permits that are costly to obtain and maintain for sites where such
material is treated, stored or disposed. Subtitle C requirements include
detailed operating, inspection, training and emergency preparedness and response
standards, as well as requirements for manifesting, record keeping and
reporting, corrective action, facility closure, post-closure and financial
responsibility. Most states have promulgated regulations modeled on some or all
of the Subtitle C provisions issued by the EPA. Some state regulations impose
different, additional and more stringent obligations, and may regulate certain
materials as hazardous wastes that are not so regulated under the federal
Subtitle C Regulations. From the date of inception through December 31, 2001, we
did not, to our knowledge, transport hazardous wastes under circumstances that
would subject us to hazardous waste regulations under RCRA. Some of our
ancillary operations (e.g., vehicle maintenance operations) may generate
hazardous wastes. We manage these wastes in substantial compliance with
applicable laws.
In October 1991, the EPA adopted the Subtitle D Regulations governing solid
waste landfills. The Subtitle D Regulations, which generally became effective in
October 1993, include location restrictions, facility design standards,
operating criteria, closure and post-closure requirements, financial assurance
requirements, groundwater monitoring requirements, groundwater remediation
standards and corrective action requirements. In addition, the Subtitle D
Regulations require that new landfill sites meet more stringent liner design
criteria (typically, composite soil and synthetic liners or two or more
synthetic liners) intended to keep leachate out of groundwater and have
extensive collection systems to carry away leachate for treatment prior to
disposal. Groundwater monitoring wells must also be installed at virtually all
landfills to monitor groundwater quality and, indirectly, the effectiveness of
the leachate collection system. The Subtitle D Regulations also require, where
certain regulatory thresholds are exceeded, that facility owners or operators
control emissions of methane gas generated at landfills in a manner intended to
protect human health and the environment. Each state is required to revise its
landfill regulations to meet these requirements or such requirements will be
automatically imposed by the EPA on landfill owners and operators in that state.
Each state is also required to adopt and implement a permit program or other
appropriate system to ensure that landfills in the state comply with the
Subtitle D Regulations. Various states in which we operate or in which we may
operate in the future have adopted regulations or programs as stringent as, or
more stringent than, the Subtitle D Regulations.
RCRA also regulates underground storage of petroleum and other regulated
materials. RCRA requires registration, compliance with technical standards for
tanks, release detection and reporting, and corrective action, among other
things. Certain of Waste Connections' facilities and operations are subject to
these requirements.
The Federal Water Pollution Control Act of 1972, as Amended (the "Clean Water
Act")
The Clean Water Act regulates the discharge of pollutants from a variety of
sources, including solid waste disposal sites and transfer stations, into waters
of the United States. If run-off from our transfer stations or run-off or
collected leachate from our owned or operated landfills is discharged into
streams, rivers or other surface waters, the Clean Water Act would require us to
apply for and obtain a discharge permit, conduct
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sampling and monitoring and, under certain circumstances, reduce the quantity of
pollutants in such discharge. Also, virtually all landfills are required to
comply with the EPA's storm water regulations issued in November 1990, which are
designed to prevent contaminated landfill storm water runoff from flowing into
surface waters. We believe that our facilities comply in all material respects
with the Clean Water Act requirements. Various states in which we operate or in
which we may operate in the future have been delegated authority to implement
the Clean Water Act permitting requirements, and some of these states have
adopted regulations that are more stringent than the federal requirements. For
example, states often require permits for discharges to ground water as well as
surface water.
The Comprehensive Environmental Response, Compensation, and Liability Act of
1980 ("CERCLA")
CERCLA established a regulatory and remedial program intended to provide
for the investigation and cleanup of facilities where or from which a release of
any hazardous substance into the environment has occurred or is threatened.
CERCLA's primary mechanism for remedying such problems is to impose strict joint
and several liability for cleanup of facilities on current owners and operators
of the site, former owners and operators of the site at the time of the disposal
of the hazardous substances, any person who arranges for the transportation,
disposal or treatment of the hazardous substances, and the transporters who
select the disposal and treatment facilities. CERCLA also imposes liability for
the cost of evaluating and remedying any damage to natural resources. The costs
of CERCLA investigation and cleanup can be very substantial. Liability under
CERCLA does not depend on the existence or disposal of "hazardous waste" as
defined by RCRA; it can also be based on the existence of even very small
amounts of the more than 700 "hazardous substances" listed by the EPA, many of
which can be found in household waste. In addition, the definition of "hazardous
substances" in CERCLA incorporates substances designated as hazardous or toxic
under the federal Clean Water Act, Clear Air Act and Toxic Substances Control
Act. If we were found to be a responsible party for a CERCLA cleanup, the
enforcing agency could hold us, or any other generator, transporter or the owner
or operator of the contaminated facility, responsible for all investigative and
remedial costs, even if others were also liable. CERCLA also authorizes the
imposition of a lien in favor of the United States on all real property subject
to, or affected by, a remedial action for all costs for which a party is liable.
CERCLA gives a responsible party the right to bring a contribution action
against other responsible parties for their allocable shares of investigative
and remedial costs. Our ability to obtain reimbursement from others for their
allocable shares of such costs would be limited by our ability to find other
responsible parties and prove the extent of their responsibility and by the
financial resources of such other parties. Various state laws also impose
liability for investigation, cleanup and other damages associated with hazardous
substance releases.
The Clean Air Act
The Clean Air Act generally, through state implementation of federal
requirements, regulates emissions of air pollutants from certain landfills based
on factors such as the date of the landfill construction and tons per year of
emissions of regulated pollutants. Larger landfills and landfills located in
areas where the ambient air does not meet certain requirements of the Clean Air
Act may be subject to even more extensive air pollution controls and emission
limitations. In addition, the EPA has issued standards regulating the disposal
of asbestos-containing materials. Air permits to construct may be required for
gas collection and flaring systems, and operating permits may be required,
depending on the potential air emissions. State air regulatory programs may
implement the federal requirements but may impose additional restrictions. For
example, some state air programs uniquely regulate odor and the emission of
toxic air pollutants.
The Occupational Safety and Health act of 1970 (the "OSH ACT")
The OSH Act is administered by the Occupational Safety and Health
Administration ("OSHA"), and in many states by state agencies whose programs
have been approved by OSHA. The OSH Act establishes employer responsibilities
for worker health and safety, including the obligation to maintain a workplace
free of recognized hazards likely to cause death or serious injury, to comply
with adopted worker protection standards, to maintain certain records, to
provide workers with required disclosures and to implement certain health and
safety training programs. Various OSHA standards may apply to Waste Connections'
operations, including
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standards concerning notices of hazards, safety in excavation and demolition
work, the handling of asbestos and asbestos-containing materials, and worker
training and emergency response programs.
Flow Control/Interstate Waste Restrictions
Certain permits and approvals, as well as certain state and local
regulations, may limit a landfill or transfer station to accepting waste that
originates from specified geographic areas, restrict the importation of
out-of-state waste or wastes originating outside the local jurisdiction or
otherwise discriminate against non-local waste. These restrictions, generally
known as flow control restrictions, are controversial, and some courts have held
that some flow control schemes violate constitutional limits on state or local
regulation of interstate commerce. From time to time, federal legislation is
proposed that would allow some local flow control restrictions. Although no such
federal legislation has been enacted to date, if such federal legislation should
be enacted in the future, states in which we own or operate landfills could
limit or prohibit the importation of out-of-state waste or direct that wastes be
handled at specified facilities. Such state actions could adversely affect our
landfills. These restrictions could also result in higher disposal costs for our
collection operations. If we were unable to pass such higher costs through to
our customers, our business, financial condition and operating results could be
adversely affected.
Certain state and local jurisdictions may also seek to enforce flow control
restrictions through local legislation or contractually. In certain cases, we
may elect not to challenge such restrictions. These restrictions could reduce
the volume of waste going to landfills in certain areas, which may adversely
affect our ability to operate our landfills at their full capacity and/or reduce
the prices that we can charge for landfill disposal services. These restrictions
may also result in higher disposal costs for our collection operations. If we
were unable to pass such higher costs through to our customers, our business,
financial condition and operating results could be adversely affected.
State and Local Regulation
Each state in which we now operate or may operate in the future has laws
and regulations governing the generation, storage, treatment, handling,
transportation and disposal of solid waste, occupational safety and health,
water and air pollution and, in most cases, the siting, design, operation,
maintenance, closure and post-closure maintenance of landfills and transfer
stations. State and local permits and approval for these operations may be
required and may be subject to periodic renewal, modification or revocation by
the issuing agencies. In addition, many states have adopted statutes comparable
to, and in some cases more stringent than, CERCLA. These statutes impose
requirements for investigation and cleanup of contaminated sites and liability
for costs and damages associated with such sites, and some provide for the
imposition of liens on property owned by responsible parties. Furthermore, many
municipalities also have ordinances, local laws and regulations affecting our
operations. These include zoning and health measures that limit solid waste
management activities to specified sites or activities, flow control provisions
that direct or restrict the delivery of solid wastes to specific facilities,
laws that grant the right to establish franchises for collection services and
then put such franchises out for bid, and bans or other restrictions on the
movement of solid wastes into a municipality.
Permits or other land use approvals with respect to a landfill, as well as
state or local laws and regulations, may specify the quantity of waste that may
be accepted at the landfill during a given time period, and/or specify the types
of waste that may be accepted at the landfill. Once an operating permit for a
landfill is obtained, it must generally be renewed periodically.
There has been an increasing trend at the state and local level to mandate
and encourage waste reduction at the source and waste recycling, and to prohibit
or restrict the disposal of certain types of solid wastes, such as yard wastes,
leaves and tires, in landfills. The enactment of regulations reducing the volume
and types of wastes available for transport to and disposal in landfills could
prevent us from operating our facilities at their full capacity.
Some state and local authorities enforce certain federal laws in addition
to state and local laws and regulations. For example, in some states, RCRA, the
OSH Act, parts of the Clean Air Act and parts of the
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Clean Water Act are enforced by local or state authorities instead of by the
EPA, and in some states those laws are enforced jointly by state or local and
federal authorities.
Public Utility Regulation
In many states, public authorities regulate the rates that landfill
operators may charge. The adoption of rate regulation or the reduction of
current rates in states in which we own or operate landfills could adversely
affect our business, financial condition and operating results.
Solid waste collection services in all unincorporated areas of Washington
and in electing municipalities in Washington are provided under G certificates
awarded by the WUTC. The WUTC also sets rates for regulated solid waste
collection services in Washington.
Risk Management, Insurance and Performance Bonds
We maintain environmental and other risk management programs appropriate
for our business. Our environmental risk management program includes evaluating
existing facilities and potential acquisitions for environmental law compliance.
We do not presently expect environmental compliance costs to increase above
current levels, but we cannot predict whether future acquisitions will cause
such costs to increase. We also maintain a worker safety program that encourages
safe practices in the workplace. Operating practices at all Waste Connections
operations emphasize minimizing the possibility of environmental contamination
and litigation. Our facilities comply in all material respects with applicable
federal and state regulations.
We carry a broad range of insurance, which our management considers
adequate to protect our assets and operations. The coverage includes general
liability, comprehensive property damage, workers' compensation and other
coverage customary in the industry. These policies generally exclude coverage
for damages associated with environmental conditions. Because of the limited
availability and high cost of environmental impairment liability insurance, we
have not obtained such coverage. If we were to incur liability for environmental
cleanups, corrective action or damage, our financial condition could be
materially and adversely affected. We will continue to investigate the
possibility of obtaining environmental impairment liability insurance,
particularly if we acquire or operate additional landfills. We believe that most
other landfill operators do not carry such insurance.
Municipal solid waste collection contracts may require performance bonds or
other means of financial assurance to secure contractual performance. Certain
environmental regulations also require demonstrated financial assurance to meet
closure and post-closure requirements for landfills. We have not experienced
difficulty in obtaining performance bonds or letters of credit for our current
operations. At December 31, 2000, we had provided customers and various
regulatory authorities with surety bonds in the aggregate amount of
approximately $9.9 million to secure our obligations (exclusive of letters of
credit backing certain municipal bond obligations). If we are unable to obtain
surety bonds or letters of credit in sufficient amounts or at acceptable rates,
we could be precluded from entering into additional municipal solid waste
collection contracts or obtaining or retaining landfill operating permits.
Employees
At December 31, 2001, we employed approximately 2,010 full-time employees,
including approximately 211 persons classified as professionals or managers,
approximately 1,526 employees involved in collection, transfer, disposal and
recycling operations, and approximately 273 sales, clerical, data processing or
other administrative employees.
The Teamsters Union represents approximately 113 drivers and mechanics at
our Vancouver, Washington operation. The labor agreement between the Union and
Waste Connections was renewed in January 2000 for a period of three years.
The Teamsters Union represents approximately 26 drivers and mechanics at
Arrow Sanitary Services, Inc. ("Arrow"), one of our wholly owned subsidiaries.
The current labor agreement expired on March 1, 2001
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and the we are negotiating a new contract. We expect these negotiations to be
resolved without any material adverse effects on Waste Connections.
The Teamsters Union represents approximately 59 of the drivers for the
Murrey Companies, which are wholly owned subsidiaries of Waste Connections. A
new collective bargaining agreement, with a term of three and a half years, was
negotiated during the fourth quarter of 1999.
The Teamsters Union represents approximately seven drivers and mechanics at
our Miles City, Montana operation. The current labor agreement expires in
October 2001.
There have been organizing efforts at two of our other operations covering
a total of 52 non-management employees. We do not anticipate that these efforts
will lead to organization of these operations.
We are not aware of any other organizational efforts among our employees
and believe that our relations with our employees are good.
ITEM 2. PROPERTIES
As of December 31, 2001, we owned and operated 64 collection operations, 21
transfer stations, 14 Subtitle D landfills and 16 recycling facilities and
operated an additional nine transfer stations and six Subtitle D landfills. We
lease various offices and facilities, including our corporate offices in Folsom,
California. The real estate that we own is not subject to material encumbrances.
We own various equipment, including waste collection and transportation
vehicles, related support vehicles, carts, containers, and heavy equipment used
in landfill operations. We believe that our existing facilities and equipment
are generally adequate for our current operations. However, we expect to make
additional investments in property and equipment for expansion and replacement
of assets and in connection with future acquisitions.
Our corporate headquarters are located in Folsom, California, where we
lease approximately 14,800 square feet of space.
ITEM 3. LEGAL PROCEEDINGS
We are a party to various legal proceedings in the ordinary course of
business and as a result of the extensive governmental regulation of the solid
waste industry. Our management does not believe that these proceedings, either
individually or in the aggregate, are likely to have a material adverse effect
on our business, financial condition, operating results or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 2000.
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MANAGEMENT
EXECUTIVE OFFICERS
The following table sets forth certain information concerning our executive
officers as of March 31, 2001:
NAME AGE POSITIONS
---- --- ---------
Ronald J. Mittelstaedt(1)(2)........... 37 President, Chief Executive Officer and Chairman
Steven F. Bouck........................ 44 Executive Vice President and Chief Financial Officer
Darrell W. Chambliss................... 36 Executive Vice President -- Operations, Secretary
David M. Hall.......................... 43 Vice President -- Business Development
Michael R. Foos........................ 35 Vice President -- Finance and Chief Accounting
Officer
Eric J. Moser.......................... 34 Vice President -- Corporate Controller, Treasurer
Jerri L. Hunt.......................... 49 Vice President -- Human Resources and Risk Management
James M. Little........................ 39 Vice President -- Engineering
Eric Hansen............................ 36 Vice President -- Information Technology
- ---------------
(1) Member of the Executive Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
Ronald J. Mittelstaedt has been President, Chief Executive Officer and a
director since Waste Connections was formed, and was elected Chairman in January
1998. He also served as a consultant to Waste Connections in August and
September 1997. Mr. Mittelstaedt has more than ten years of experience in the
solid waste industry. He served as a consultant to United Waste Systems, Inc.,
with the title of Executive Vice President, from January 1997 to August 1997,
where he was responsible for corporate development for all states west of
Colorado. As Regional Vice President of USA Waste Services, Inc. (including
Sanifill, Inc., which was acquired by USA Waste Services, Inc.) from November
1993 to January 1997, he was responsible for all operations in 16 states and
Canada. Mr. Mittelstaedt held various positions at Browning-Ferris Industries,
Inc. from August 1987 to November 1993, most recently as Division Vice President
in northern California, overseeing the San Jose market. Previously he was the
District Manager responsible for BFI's operations in Sacramento and the
surrounding areas. He holds a B.S. in Finance from the University of California
at Santa Barbara.
Steven F. Bouck has been Executive Vice President and Chief Financial
Officer since February 1998. Mr. Bouck held various positions with First
Analysis Corporation from 1986 to 1998, including most recently as Managing
Director coordinating corporate finance. In that capacity, he provided merger
and acquisition advisory services to companies in the environmental industry.
Mr. Bouck was also responsible for assisting in investing venture capital funds
focused on the environmental industry that were managed by First Analysis. In
connection with those investments, he served on the boards of directors of
several companies. While at First Analysis, Mr. Bouck also provided analytical
research coverage of a number of publicly traded environmental services
companies. Mr. Bouck holds B.S. and M.S. degrees in mechanical engineering from
Rensselaer Polytechnic Institute and an M.B.A. in Finance from the Wharton
School. He has been a Chartered Financial Analyst since 1990.
Darrell W. Chambliss has been Executive Vice President -- Operations and
Secretary since October 1, 1997. Mr. Chambliss held various management positions
at USA Waste Services, Inc. (including Sanifill, Inc. and United Waste, Inc.,
both of which were acquired by USA Waste Services, Inc.) from April 1995 to
September 1997, including most recently Division Manager in Corning, California,
where he was responsible for the operations of 19 operating companies as well as
supervising and integrating acquisitions. From July 1989 to April 1995, he held
various management positions with Browning-Ferris Industries, Inc., including
serving as Assistant District Manager in San Jose, California, where he was
responsible for a significant hauling operation, and serving as District Manager
in Tucson, Arizona for more than three years. Mr. Chambliss holds a B.S. in
Business Administration from the University of Arkansas.
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David M. Hall has been Vice President -- Business Development since August
1, 1998. Mr. Hall has over fifteen years of experience in the solid waste
industry with extensive operating and marketing experience in the Western U.S.
From October, 1995 to July 1998, Mr. Hall was the Divisional Vice President of
USA Waste Services, Inc., Rocky Mountain Division (including for Sanifill, Inc.
which was acquired by USA Waste Services, Inc.). In that position, he oversaw
all operations and business development in six Rocky Mountain states. Prior to
his employment with Sanifill, Mr. Hall held various management positions with
BFI from October 1986 to October 1995, including Vice President of Sales for the
Western United States. Mr. Hall was employed from 1979 to 1986 in a variety of
sales and marketing management positions in the high technology sector. Mr. Hall
received a BS degree in Management and Marketing in 1979 from Southwest Missouri
State University.
Michael R. Foos has been Vice President -- Finance and Chief Accounting
Officer since October 1999. From October 1997 to September 1999, Mr. Foos served
as Vice President and Corporate Controller of Waste Connections. Mr. Foos served
as Division Controller of USA Waste Services, Inc. (including Sanifill, Inc.,
which was acquired by USA Waste Services, Inc.) from October 1996 to September
1997, where he was responsible for financial compilation and reporting and
acquisition due diligence for a seven-state region. Mr. Foos served as Assistant
Regional Controller at USA Waste Services, Inc. from August 1995 to September
1996, where he was responsible for internal financial reporting for operations
in six states and Canada. Mr. Foos also served as District Controller for Waste
Management, Inc. from February 1990 to July 1995, and was a member of the audit
staff of Deloitte & Touche from 1987 to 1990. Mr. Foos holds a B.S. in
Accounting from Ferris State University.
Eric J. Moser has been Waste Connections' Vice President -- Corporate
Controller, Treasurer since October 1999. From October 1997 to September 1999,
Mr. Moser served as Waste Connections' Treasurer and Assistant Corporate
Controller. From August 1995 to September 1997, Mr. Moser held various finance
positions at USA Waste Services, Inc. (including Sanifill, Inc., which was
acquired by USA Waste Services, Inc.), most recently as Controller of the Ohio
Division, where he was responsible for internal financial compilation and
reporting and acquisition due diligence. Previously Mr. Moser was Controller of
the Michigan Division of USA Waste Services, Inc., where he was responsible for
internal financial reporting. Mr. Moser served as Controller for Waste
Management, Inc. from June 1993 to August 1995, where he was responsible for
internal financial reporting for a hauling company, landfill and transfer
station. Mr. Moser holds a B.S. in Accounting from Illinois State University.
Jerri L. Hunt has been Vice President -- Human Resources and Risk
Management since December 1999. From 1994 to 1999, Ms. Hunt held various
positions with First Union National Bank (including the Money Store, which was
acquired by First Union National Bank), most recently Vice President of Human
Resources in which she managed all aspects of human resources for over 5,000
employees located throughout the United States. From 1989 to 1994, Ms. Hunt
served as Manager of Human Resources and Risk Management for BFI, where she was
responsible for all aspects of human resources and safety and environmental
compliance matters. Ms. Hunt also served as a Human Resources Supervisor for
United Parcel Service from 1976 to 1989. She holds a B.A. in Human Resources
from California State University, Sacramento and a M.S. in Human Resources from
Golden Gate University.
Jim M. Little has been Vice President -- Engineering since September 1999.
Mr. Little held various management positions with Waste Management, Inc.
(including USA Waste Services, Inc., which was acquired by Waste Management,
Inc. and Chambers Development Co. Inc., which was acquired by USA Waste
Services, Inc.) from January 1990 to September 1999, including most recently
Division Manager in Ohio, where he was responsible for the operations of ten
operating companies in the Northern Ohio area. Mr. Little holds both a B.S. and
M.S. in Geology from Slippery Rock University of Pennsylvania.
Eric Hansen, has been Vice President -- Information Technology since
January 2001. From April 1998 to December 2000, Mr. Hansen served as Waste
Connections' Director of Management Information Systems. Mr. Hansen served as
Information Systems Manager with Fibres International from October 1997 to April
1998. Mr. Hansen held various positions including NT Administrator for the
Multnomah Athletic Club in Portland, Oregon from August 1989 to October 1997.
Mr. Hansen earned a Bachelor of Science degree from Portland State University in
1989.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock trades on The Nasdaq Stock Market(R) -- National Market
under the symbol "WCNX". The following table shows the high and low sale prices
for the common stock as reported by the Nasdaq National Market for the periods
indicated.
HIGH LOW
------ ------
1999
First Quarter............................................ $24.00 $16.50
Second Quarter........................................... 32.13 22.00
Third Quarter............................................ 31.00 19.13
Fourth Quarter........................................... 20.94 10.88
2000
First Quarter............................................ $14.94 $ 9.25
Second Quarter........................................... 19.75 9.75
Third Quarter............................................ 25.94 17.13
Fourth Quarter........................................... 35.25 21.69
On February 28, 2001, there were 92 record holders of Waste Connections
common stock.
We have never paid cash dividends on our common stock. We do not currently
anticipate paying any cash dividends on our common stock. We intend to retain
all earnings to fund the operation and expansion of our business. In addition,
our existing credit facility restricts the payment of cash dividends.
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ITEM 6. SELECTED FINANCIAL DATA
This table sets forth selected financial data of Waste Connections and our
predecessors for the periods indicated. This data should be read in conjunction
with and is qualified by reference to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included in Item 7 in this Annual
Report on Form 10-K and our audited consolidated financial statements, including
the notes thereto and the independent auditors' report thereon and the other
financial information included in Item 8 in this Form 10-K. The selected data in
this section are not intended to replace the consolidated financial statements
included in this Report.
The entities Waste Connections acquired in September 1997 from
Browning-Ferris Industries, Inc. ("BFI") are collectively referred to as Waste
Connections' predecessors. BFI acquired the predecessors at various times during
1995 and 1996, and prior to being acquired by BFI, the predecessors operated as
separate stand-alone businesses. The predecessors' results of operations are
prepared on a combined basis during those periods in which they were under
common ownership and control. For periods prior to WCI's incorporation on
September 7, 1997, the accompanying Statement of Operations and Balance Sheet
Data for Waste Connections consists of entities acquired by Waste Connections in
the poolings-of-interest transactions described below.
The selected financial information has been restated to reflect the
business combinations of Waste Connections with Murrey's Disposal Company, Inc.,
American Disposal Company, Inc., D.M. Disposal Co., Inc., and Tacoma Recycling
Company, Inc., Roche & Sons, Inc., Ritters Sanitary Service, Inc., Central Waste
Disposal, Inc., Cen San, Inc., Omega Systems, Inc., The Garbage Company,
Nebraska Ecology Systems and G&P Development, Inc., Cook's Wastepaper and
Recycling, Inc. and Waste Wranglers, Inc. (each accounted for as a
pooling-of-interests).
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WASTE CONNECTIONS, INC. AND PREDECESSORS
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
THE
DISPOSAL
GROUP
COMBINED
FROM PREDECESSORS
JANUARY 1, PREDECESSORS WASTE COMBINED
1996 COMBINED CONNECTIONS NINE MONTHS WASTE CONNECTIONS, INC.
THROUGH PERIOD ENDED YEAR ENDED ENDED YEARS ENDED DECEMBER 31,
JULY 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, ------------------------
1996 1996 1996 1997 1997 1998
---------- ------------ ------------ ------------- ---------- -----------
STATEMENT OF OPERATIONS DATA(1):
Revenues............................ $8,738 $13,422 $ 35,744 $18,114 $ 47,510 $ 99,624
Operating expenses:
Cost of operations................ 6,174 11,420 27,426 14,753 36,213 71,635
Selling, general and
administrative.................. 2,126 1,649 3,731 3,009 5,088 9,967
Depreciation and amortization..... 324 962 2,580 1,083 3,180 8,008
Start-up and integration.......... -- -- -- -- 493 --
Stock compensation................ -- -- -- -- 4,395 632
Acquisition related expenses...... -- -- -- -- -- --
------ ------- ---------- ------- ---------- -----------
Income (loss) from operations....... 114 (609) 2,007 (731) (1,859) 9,382
Interest expense.................... (12) (225) (834) (456) (1,957) (3,458)
Other income (expense), net......... 2,661 (147) 420 14 449 410
------ ------- ---------- ------- ---------- -----------
Income (loss) before income tax
provision......................... 2,763 (981) 1,593 (1,173) (3,367) 6,334
Income tax provision................ (505) -- (580) -- (332) (3,040)
------ ------- ---------- ------- ---------- -----------
Income (loss) before extraordinary
item.............................. 2,258 (981) 1,013 (1,173) (3,699) 3,294
Extraordinary item -- early
extinguishment of debt, net of tax
benefit of $264................... -- -- -- -- -- (1,027)
------ ------- ---------- ------- ---------- -----------
Net income (loss)................... $2,258 $ (981) $ 1,013 $(1,173) $ (3,699) $ 2,267
====== ======= ========== ======= ========== ===========
Redeemable convertible preferred
stock accretion................... -- -- -- -- (531) (917)
------ ------- ---------- ------- ---------- -----------
Net income (loss) applicable to
common stockholders............... $2,258 $ (981) $ 1,013 $(1,173) $ (4,230) $ 1,350
====== ======= ========== ======= ========== ===========
Basic income (loss) per common
share:
Income (loss) before extraordinary
item............................ $ 0.26 $ (0.73) $ 0.23
Extraordinary item................ -- -- (0.10)
---------- ---------- -----------
Net income (loss) per common
share............................. $ 0.26 $ (0.73) $ 0.13
========== ========== ===========
Diluted income (loss) per common
share:
Income (loss) before extraordinary
item............................ $ 0.26 $ (0.73) $ 0.19
Extraordinary item................ -- -- (0.08)
---------- ---------- -----------
Net income (loss) per common
share............................. $ 0.26 $ (0.73) $ 0.11
========== ========== ===========
Shares used in calculating basic
income (loss) per share........... 3,849,260 5,825,142 10,412,868
========== ========== ===========
Share used in calculating diluted
income (loss) per share........... 3,849,260 5,825,142 12,323,990
========== ========== ===========
WASTE CONNECTIONS, INC.
YEARS ENDED DECEMBER 31,
-------------------------
1999 2000
----------- -----------
STATEMENT OF OPERATIONS DATA(1):
Revenues............................ $ 184,225 $ 304,355
Operating expenses:
Cost of operations................ 112,686 174,510
Selling, general and
administrative.................. 15,754 25,416
Depreciation and amortization..... 14,769 27,195
Start-up and integration.......... -- --
Stock compensation................ 265 163
Acquisition related expenses...... 9,003 150
----------- -----------
Income (loss) from operations....... 31,748 76,921
Interest expense.................... (11,531) (28,705)
Other income (expense), net......... (66) (717)
----------- -----------
Income (loss) before income tax
provision......................... 20,151 47,499
Income tax provision................ (10,924) (19,310)
----------- -----------
Income (loss) before extraordinary
item.............................. 9,227 28,189
Extraordinary item -- early
extinguishment of debt, net of tax
benefit of $264................... -- --
----------- -----------
Net income (loss)................... $ 9,227 $ 28,189
=========== ===========
Redeemable convertible preferred
stock accretion................... -- --
----------- -----------
Net income (loss) applicable to
common stockholders............... $ 9,227 $ 28,189
=========== ===========
Basic income (loss) per common
share:
Income (loss) before extraordinary
item............................ $ 0.49 $ 1.21
Extraordinary item................ -- --
----------- -----------
Net income (loss) per common
share............................. $ 0.49 $ 1.21
=========== ===========
Diluted income (loss) per common
share:
Income (loss) before extraordinary
item............................ $ 0.46 $ 1.17
Extraordinary item................ -- --
----------- -----------
Net income (loss) per common
share............................. $ 0.46 $ 1.17
=========== ===========
Shares used in calculating basic
income (loss) per share........... 18,655,801 23,301,358
=========== ===========
Share used in calculating diluted
income (loss) per share........... 19,929,539 23,994,994
=========== ===========
See footnotes on page 19.
18
21
WASTE CONNECTIONS, INC.
PREDECESSORS ----------------------------------------------------------
COMBINED DECEMBER 31,
DECEMBER 31, ----------------------------------------------------------
1996 1996 1997 1998 1999 2000
------------- ------- ------- ------------ -------- --------
BALANCE SHEET DATA:
Cash and equivalents........................ $ 102 $ 483 $ 1,327 $ 3,351 $ 2,393 $ 2,461
Working capital (deficit)................... 695 (4,447) (5,380) (14,167) (10,149) (10,398)
Property and equipment, net................. 5,069 15,553 23,275 51,422 335,260 384,237
Total assets................................ 15,291 21,302 45,905 176,659 617,958 810,104
Long-term debt (2).......................... 89 5,928 14,500 68,274 275,145 334,194
Redeemable convertible preferred stock...... -- -- 7,523 -- -- --
Total stockholders' equity.................. -- 4,858 5,374 66,837 218,521 334,208
- ---------------
(1) The entities Waste Connections acquired in September 1997 from BFI are
collectively referred to as Waste Connections' predecessors. BFI acquired
the predecessors at various times during 1995 and 1996, and prior to being
acquired by BFI, the predecessors operated as separate stand-alone
businesses. Various factors affect the year-to-year comparability of the
amounts presented. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations" for additional
information concerning Waste Connections and our predecessors.
(2) Excludes redeemable convertible preferred stock, which converted into common
stock upon our May 1998 initial public offering.
19
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data," our Consolidated Financial Statements and the notes thereto
included elsewhere herein.
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 December 31, 2000, we
served more than 700,000 commercial, industrial and residential customers in
California, Colorado, Iowa, Kansas, New Mexico, Minnesota, Montana, Nebraska,
Oklahoma, Oregon, South Dakota, Texas, Utah, Washington, and Wyoming. As of that
date, we owned 64 collection operations and operated or owned 30 transfer
stations, 20 Subtitle D landfills and 16 recycling facilities.
We have acquired 116 businesses from our inception in September 1997
through December 31, 2000, with 26 of these acquisitions occurring in 2000. The
aggregate consideration for acquisitions occurring in 2000, using the purchase
method of accounting, was approximately $172 million. From inception through
December 31, 2000, the results of operations of these acquired businesses have
been included in our financial statements only from the respective dates of
acquisition, except for 14 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 our operating results.
In 2000, we acquired one business in a combination accounted for as a
pooling-of-interests. The aggregate consideration paid consisted of 103,315
shares of our common stock. In connection with this merger, we incurred
transaction-related costs of $150,000, which were charged to operations.
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 many of our existing municipal contracts give
us 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. Over 50% of our revenues for the
year ended December 31, 2000 were derived from services provided in exclusive
markets. Governmental certificates grant us 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. Our
collection business also generates revenues from the sale of recyclable
commodities. The table below shows for the periods indicated the percentage of
our total reported revenues attributable to services provided, prior to
intercompany
20
23
eliminations. The data below have been restated to give effect to acquisitions
that were accounted for using the pooling-of-interests method for business
combinations.
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999 2000
----- ----- -----
Collection.................................................. 85.6% 71.1% 70.8%
Transfer and processing..................................... 7.4 14.8 9.3
Landfill.................................................... 4.9 10.1 13.4
Recycling................................................... 1.8 3.0 6.0
Other....................................................... 0.3 1.0 0.5
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
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 indexed price 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.
We derive a substantial portion of our revenues from services provided
under exclusive municipal contracts and franchise agreements. No single contract
or customer accounted for more than 5% of our revenues for the years ended
December 31, 1998, 1999 or 2000.
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 December 31, 2000, we owned and/or operated 30 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 and depletion
of property and equipment over their estimated useful lives and amortization of
goodwill and other intangible assets using the straight-line method.
We capitalize 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 December 31, 2000, we had $69,000 in capitalized expenditures
relating to pending acquisitions and $8,000 in capitalized interest related to
construction in process.
Goodwill represents the excess of the purchase price over the fair value of
the net assets of the acquired entities, and is amortized on a straight-line
basis over the period of expected benefit of 40 years. Accumulated amortization
of goodwill amounted to $5.4 million and $13.1 million as of December 31, 1999
and 2000,
21
24
respectively. In allocating the purchase price of an acquired company among its
assets, we first assign value to the tangible assets, followed by intangible
assets, including covenants not to compete and certain contracts and customer
lists that are determinable both in terms of size and life. We determine the
value of the other intangible assets by considering, among other things, the
present value of the cash flows associated with those assets.
We continually evaluate the value and future benefits of our intangible
assets, including goodwill. We assess the recoverability from future operations
using cash flows and income from operations of the related acquired businesses
as measures. Under this approach, the carrying value is reduced if it becomes
probable that our best estimate for expected future cash flows of the related
business would be less than the carrying amount of the intangible assets. As of
December 31, 2000, there have been no adjustments to the carrying amounts of
intangibles resulting from these evaluations. As of December 31, 2000, goodwill
and other intangible assets represented approximately 44.9% of total assets and
108.8% of stockholders' equity.
We reserve for estimated landfill closure and post-closure maintenance
costs at the landfills we own. 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. The net present value of the closure and post closure commitment is
calculated assuming an inflation rate of 3% and a discount rate of 7.5%.
Discounted amounts previously recorded are accreted to reflect the effect of the
passage of time.
RESULTS OF OPERATIONS
The following table sets forth items in our consolidated statement of
operations in thousands and as a percentage of revenues for the periods
indicated:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1998 AS A 1999 AS A 2000 AS A
% OF % OF % OF
1998 REVENUE 1999 REVENUE 2000 REVENUE
------- --------- -------- --------- -------- ---------
Revenues.......................... $99,624 100.0% $184,225 100.0% $304,355 100.0%
Cost of operations................ 71,635 71.9 112,686 61.2 174,510 57.3
Selling, general and
administrative.................. 9,967 10.0 15,754 8.6 25,416 8.4
Depreciation and amortization..... 8,008 8.0 14,769 8.0 27,195 8.9
Stock compensation................ 632 0.6 265 0.1 163 0.1
Acquisition related expenses...... -- -- 9,003 4.9 150 0.0
------- ----- -------- ----- -------- -----
Operating income.................. 9,382 9.4 31,748 17.2 76,921 25.3
Interest expense, net............. (3,458) (3.5) (11,531) (6.3) (28,705) (9.4)
Other income (expense), net....... 410 0.4 (66) 0.0 (717) (0.2)
Income tax provision.............. (3,040) (3.1) (10,924) (5.9) (19,310) (6.3)
Extraordinary charges............. (1,027) (1.0) -- -- -- --
------- ----- -------- ----- -------- -----
Net income........................ $ 2,267 2.3% $ 9,227 5.0% $ 28,189 9.3%
======= ===== ======== ===== ======== =====
EBITDA(1)......................... 18.1% 30.3% 34.3%
======= ======== ========
- ---------------
(1) EBITDA represents earnings presented above before extraordinary loss,
interest, (other) expense, income taxes, depreciation and amortization
expense and stock compensation expense. EBITDA is not a measure of cash
flow, operating results or liquidity, as determined in accordance with
accounting principles generally accepted in the United States.
22
25
Years Ended December 31, 2000 and 1999
Revenues. Revenues for 2000 increased $120.2 million, or 65.2%, to $304.4
million from $184.2 million for 1999. Approximately $37 million of the increase
resulted from acquisitions accounted for using the purchase method of accounting
that closed since the beginning of 2000. The remaining increase was primarily
attributable to the inclusion in 2000 of 12 months of revenues from businesses
acquired in 1999 and selective price increases and growth in the base business.
Cost of Operations. Cost of operations for 2000 increased $61.8 million, or
54.9%, to $174.5 million from $112.7 million for 1999. The increase was
primarily attributable to the inclusion of the cost of operations of
acquisitions closed since the beginning of the year and the inclusion in 2000 of
12 months of operating costs from businesses acquired in 1999. Cost of
operations as a percentage of revenues declined by 3.9 percentage points to
57.3% in 2000 from 61.2% in 1999. The decline in cost of operations as a percent
of revenues was primarily attributable to the effect of tuck-in acquisitions
closed since the beginning of 2000, economies of scale from the greater revenue
base, elimination of overhead in privately held companies acquired in
acquisitions accounted for as poolings-of-interests, greater integration of
collection volumes into landfills we own or operate and selective price
increases.
SG&A. SG&A expenses increased $9.6 million, or 61.3%, to $25.4 million for
2000 from $15.8 million for 1999. The increase resulted primarily from
additional personnel from companies acquired in 2000, the inclusion in 2000 of
12 months of SG&A costs from businesses acquired in 1999 and additional
corporate overhead to accommodate our growth. SG&A as a percentage of revenues
declined by 0.2 percentage points to 8.4% for 2000 from 8.6% for 1999. 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 2000, offset by increases in corporate overhead.
Depreciation and Amortization. Depreciation and amortization expense
increased $12.4 million, or 84.1%, to $27.2 million for 2000 from $14.8 million
for 1999. The increase resulted primarily from the inclusion of depreciation and
amortization of businesses acquired in 2000, the inclusion in 2000 of 12 months
of depreciation and amortization from businesses acquired in 1999, the
amortization of goodwill and other intangible assets associated with
acquisitions accounted for using the purchase method of accounting and a greater
percentage of revenues derived from landfill activity. Depreciation and
amortization as a percentage of revenues increased 0.9 percentage points to 8.9%
for 2000 from 8.0% for 1999. The increase in depreciation and amortization as a
percentage of revenues in 2000 was due to the increased amortization of landfill
airspace associated with landfill purchased in 2000 and the roll over effect of
landfills acquired in 1999. The landfill amortization rates as a percentage of
revenues are generally higher than the historical depreciation and amortization
rates of our collection companies.
Stock Compensation Expense. Stock compensation expense decreased $102,000,
or 38.5%, to $163,000 for 2000 from $265,000 for 1999. Our stock compensation
expense is attributable to the valuation of common stock options and warrants
with exercise prices less than the estimated fair value or our common stock on
the date of grant and relates solely to stock options and warrants granted prior
to the initial public offering in May 1998. The expense attributable to these
options and warrants was fully amortized between 1998 and 2000. Stock
compensation as a percentage of revenues was 0.1% for 2000 and 1999.
Acquisition-Related Expenses. Acquisition-related expenses decreased $8.85
million to $150,000 for 2000 from $9.0 million for 1999. The decrease is related
primarily to the decline in the number and size of acquisitions accounted for
using the pooling-of-interests method of accounting in 2000 relative to 1999.
These expenses arise from commissions, professional fees, and other direct costs
resulting from the one acquisition in 2000 and the 13 acquisitions in 1999 that
were accounted for using the pooling-of-interests method.
Operating Income. Operating income increased $45.2 million, or 142.3%, to
$76.9 million in 2000 from $31.7 million in 1999. The increase was attributable
to operating income recognized from acquisitions closed in 2000, the inclusion
in 2000 of 12 months of operating income from acquisitions closed in 1999, the
reduction of acquisition-related expenses associated with 13 acquisitions that
were accounted for using the pooling-of-interest method in 1999, economies of
scale from a greater revenue base and greater integration of
23
26
collection volumes into transfer stations and landfills we own or operate.
Operating income as a percentage of revenues increased by 8.1 percentage points
to 25.3% for 2000 from 17.2% for 1999. The increase was attributable to
improvements in gross margins coupled with declines in SG&A, acquisition related
expenses and stock compensation expenses as a percentage of revenue.
Interest Expense. Interest expense increased $17.2 million, or 148.9%, to
$28.7 million for 2000 from $11.5 million for 1999. The increase was primarily
attributable to higher debt levels incurred to fund certain of our acquisitions.
Other Expense. Other expense increased $651,000, or 986.4%, to $717,000 in
2000 from $66,000 in 1999. The increase was primarily attributable to a loss on
sale of assets in 2000.
Provision for Income Taxes. Income taxes increased $8.4 million, or 76.8%,
to $19.3 million for 2000 from $10.9 million for 1999. The effective income tax
rate in 2000 was 40.6%, which is above the federal statutory rate of 35.0% as
the result of the non-deductibility of certain expenses associated with
acquisitions accounted for as poolings-of-interests, state and local taxes,
non-deductible goodwill associated with certain acquisitions and the
non-deductibility of the stock compensation expense.
Net Income. Net income increased by $19.0 million, or 205.5%, to $28.2
million in 2000 from $9.2 million in 1999. The increase was attributable to the
increase in operating income, offset by the increases in interest expense,
income tax expense and other expense. Net income as a percentage of revenues
increased by 4.3 percentage points to 9.3% for 2000 from 5.0% for 1999. The
increase was attributable to improvements in gross margins coupled with declines
in SG&A, acquisition related expenses and stock compensation expenses as a
percentage of revenue offset by increases in interest expense and income taxes.
Years Ended December 31, 1999 and 1998
Revenues. Revenues for 1999 increased $84.6 million, or 84.9%, to $184.2
million from $99.6 million for 1998. Approximately $50 million of the increase
resulted from acquisitions accounted for using the purchase method of accounting
that closed since the beginning of 1999. The remaining increase was primarily
attributable to the inclusion in 1999 of 12 months of revenues from businesses
acquired in 1998, selective price increases and a nominal contribution from
growth in the businesses acquired prior to 1999.
Cost of Operations. Cost of operations for 1999 increased $41.1 million, or
57.3%, to $112.7 million from $71.6 million for 1998. The increase was primarily
attributable to the inclusion of the cost of operations of acquisitions closed
since the beginning of the year and the inclusion in 1999 of 12 months of
operating costs from businesses acquired in 1998. Cost of operations as a
percentage of revenues declined by 10.7 percentage points to 61.2% in 1999 from
71.9% in 1998. The decline in cost of operations as a percent 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, elimination
of overhead in privately held companies acquired in acquisitions accounted for
as poolings-of-interests, greater integration of collection volumes into
landfills we own or operate and selective price increases.
SG&A. SG&A expenses increased $5.8 million, or 58.1%, to $15.8 million for
1999 from $10.0 million for 1998. The increase resulted primarily from
additional personnel from companies acquired in 1999, the inclusion in 1999 of
12 months of SG&A costs from businesses acquired in 1998 and additional
corporate overhead to accommodate our growth. SG&A as a percentage of revenues
declined by 1.4 percentage points to 8.6% for 1999 from 10.0% for 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
being a public company for the full year.
Depreciation and Amortization. Depreciation and amortization expense
increased $6.8 million, or 84.4%, to $14.8 million for 1999 from $8.0 million
for 1998. The increase resulted primarily from the inclusion of depreciation and
amortization of businesses acquired in 1999, the inclusion in 1999 of 12 months
of depreciation and amortization from businesses acquired in 1998, the
amortization of goodwill and other intangible assets associated with
acquisitions accounted for using the purchase method of accounting and a
24
27
greater percentage of revenues derived from landfill activity. Depreciation and
amortization as a percentage of revenues was 8.0% in both 1999 and 1998.
Stock Compensation Expense. Stock compensation expense decreased $367,000,
or 58.1%, to $265,000 for 1999 from $632,000 for 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 or our common stock on
the date of grant and relates solely to stock options and warrants granted prior
to the initial public offering in May 1998. Stock compensation as a percentage
of revenues decreased by 0.5 percentage points to 0.1% for 1999 from 0.6% for
1998. The decrease in the amortization of deferred stock compensation for 1999
was due to the amortization of the deferred stock compensation over the vesting
periods of the related options.
Acquisition-Related Expenses. Acquisition-related expenses in 1999 were
$9.0 million, and related primarily to commissions, professional fees, and other
direct costs resulting from the 13 acquisitions that were accounted for using
the pooling-of-interests method.
Operating Income. Operating income increased $22.3 million, or 238.4%, to
$31.7 million in 1999 from $9.4 million in 1998. The increase was attributable
to operating income recognized from acquisitions closed in 1999, the inclusion
in 1999 of 12 months of operating income from acquisitions closed in 1998,
economies of scale from a greater revenue base and greater integration of
collection volumes into transfer stations and landfills we own or operate.
Operating income as a percentage of revenues increased by 7.8 percentage points
to 17.2% for 1999 from 9.4% for 1998. The increase was attributable to
improvements in gross margins coupled with declines in SG&A and stock
compensation expenses as a percentage of revenue, offset by acquisition related
expenses.
Interest Expense. Interest expense increased $8.0 million, or 233.5%, to
$11.5 million for 1999 from $3.5 million for 1998. The increase was primarily
attributable to higher debt levels incurred to fund certain of our acquisitions.
Other Income (Expense). Other income (expense) decreased $476,000, or
116.1%, to ($66,000) in 1999 from $410,000 in 1998. The decrease was primarily
attributable to our recognizing less gain on sales of equipment in 1999,
compared to 1998, and the write-off of the unamortized balance of leasehold
improvements on our former corporate offices.
Provision for Income Taxes. Income taxes increased $7.9 million, or 259.3%,
to $10.9 million for 1999 from $3.0 million for 1998. The effective income tax
rate in 1999 was 54.2%, which is above the federal statutory rate of 35.0% as
the result of the non-deductibility of certain expenses associated with
acquisitions accounted for as poolings-of-interests, state and local taxes,
non-deductible goodwill associated with certain acquisitions and the
non-deductibility of the stock compensation expense.
Extraordinary Charges. Extraordinary charges in 1998 relate to the early
termination of our bank credit facility when it was replaced by a new and larger
facility. We entered into two new credit facilities during 1998.
Net Income. Net income increased by $6.9 million, or 307.0%, to $9.2
million in 1999 from $2.3 million in 1998. The increase was attributable to the
increase in operating income, offset by the increases in interest expense and
income tax expense and the decrease in other income. Net income as a percentage
of revenues increased by 2.7 percentage points to 5.0% for 1999 from 2.3% for
1998. The increase was attributable to improvements in gross margins coupled
with declines in SG&A and stock compensation expenses as a percentage of
revenue, offset by acquisition related expenses and increases in interest
expense and income taxes.
25
28
LIQUIDITY AND CAPITAL RESOURCES
Our business is capital intensive. Our capital requirements include
acquisitions and fixed asset purchases. We expect that we will also make capital
expenditures for landfill cell construction, landfill development and landfill
closure activities in the future. We plan to meet our capital needs through
various financing sources, including internally generated funds, debt and equity
financings.
As of December 31, 2000, we had a working capital deficit of $10.4 million,
including cash and cash equivalents of $2.5 million. Our strategy in managing
our working capital is generally to apply the cash generated from our operations
that remains 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.
At inception, we sold 2,300,000 shares of common stock at $0.01 per share
to our founders and 2,499,998 shares of Series A Preferred Stock at $2.80 per
share. In May and June 1998, we received approximately $24.0 million in net
proceeds from the sale of 2,300,000 shares in our initial public offering
(including exercise by the underwriters of their over-allotment option). In
February 1999, we received approximately $65.1 million in net proceeds from the
sale of 3,999,307 shares in a secondary public offering (including exercise by
the underwriters of their over-allotment option) and used the proceeds to pay
down approximately $50.2 million of our outstanding debt. In August 2000, we
received approximately $82.1 million in net proceeds from the sale of 4,427,500
shares in a secondary public offering (including exercise by the underwriters of
their over-allotment option) and used the proceeds to pay down approximately
$69.7 million of our outstanding debt. As of December 31, 2000, we had options
and warrants outstanding to purchase 1,646,876 shares of common stock at a
weighted average exercise price of $13.40 per share.
We have a $435 million revolving credit facility with a syndicate of banks
for which Fleet Boston Financial Corp. acts as agent. As of December 31, 2000,
we had an aggregate of $308.0 million outstanding under our credit facility, and
the interest rate on outstanding borrowings under the credit facility was at 2%
over LIBOR. The credit facility allows us to issue up to $40 million in stand-by
letters of credit. Outstanding letters of credit reduce the amount of t