<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1999 COMMISSION FILE NO. 0-23981
WASTE CONNECTIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
94-3283464
(I.R.S. Employer Identification No.)
620 COOLIDGE DRIVE, SUITE 350, FOLSOM, CA 95630 (Address
of principal executive offices, as of November 15, 1999)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (916) 608-8200
2260 DOUGLAS BOULEVARD, SUITE 280, ROSEVILLE, CA 95661
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (916) 772-2221
(Address and telephone of principal executive offices, through
November 15, 1999)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock:
As of November 11, 1999: 20,937,851 shares of Common Stock
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets - December 31, 1998 and
September 30, 1999
Condensed Consolidated Statements of Income for the three and nine
months ended September 30, 1998 and 1999
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1999
Notes to Condensed Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities
Item 6 - Exhibits and Reports on Form 8-K
Signatures
1
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(RESTATED)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 3,244 $ 8,775
Accounts receivable, less allowance for doubtful
accounts of $544 at December 31, 1998 and
$1,917 at September 30, 1999 14,858 25,580
Prepaid expenses and other current assets 2,355 3,197
--------- ---------
Total current assets 20,457 37,552
Property and equipment, net 50,297 253,050
Intangible assets 101,560 204,576
Other assets 2,709 6,694
--------- ---------
$ 175,023 $ 501,872
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ -- $ 940
Short-term borrowings 1,500 --
Accounts payable 8,731 18,378
Advances from related party 571 --
Deferred revenue 3,174 4,165
Accrued liabilities 5,767 14,051
Current portion of notes payable 11,939 7,470
Other current liabilities 2,758 353
--------- ---------
Total current liabilities 34,440 45,357
Long-term debt and notes payable, net 67,176 226,388
Other long-term liabilities 4,396 5,320
Deferred income taxes 2,339 13,985
--------- ---------
Total liabilities 108,351 291,050
========= =========
Commitments and contingencies
Stockholders' equity:
Preferred stock $.01 par value; 10,000,000 shares
authorized; none issued and outstanding -- --
Common stock: $.01 par value; 50,000,000 shares
authorized; 13,218,568 shares issued and
outstanding at December 31, 1998, 20,935,007
shares issued and outstanding at September 30, 1999 132 209
Additional paid-in capital 66,557 207,121
Deferred stock compensation (428) (218)
Retained earnings 411 3,710
--------- ---------
Total stockholders' equity 66,672 210,822
--------- ---------
$ 175,023 $ 501,872
========= =========
</TABLE>
See accompanying notes.
2
<PAGE> 4
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Revenues $ 28,245 $ 48,610 $ 68,092 $ 121,423
Operating Expenses:
Cost of operations 19,904 29,308 48,596 75,381
Selling, general and administrative 2,801 4,056 6,580 10,188
Depreciation and amortization 2,426 3,885 5,461 9,483
Stock compensation 120 70 561 210
Acquisition related expenses -- -- -- 8,805
------------ ------------ ------------ ------------
Income from operations 2,994 11,291 6,894 17,356
Interest expense (987) (3,178) (2,230) (6,366)
Other income (expense), net (100) (8) 79 (6)
------------ ------------ ------------ ------------
Income before income tax provision 1,907 8,105 4,743 10,984
Income tax provision (870) (3,186) (2,027) (7,227)
------------ ------------ ------------ ------------
Net income before extraordinary item 1,037 4,919 2,716 3,757
Extraordinary item - early extinguishment of
debt, net of tax benefits of $165 -- -- (815) --
------------ ------------ ------------ ------------
Net Income $ 1,037 $ 4,919 $ 1,901 $ 3,757
============ ============ ============ ============
Redeemable convertible preferred stock accretion -- -- (917) --
------------ ------------ ------------ ------------
Net income applicable to common
Stockholders $ 1,037 $ 4,919 $ 984 $ 3,757
============ ============ ============ ============
Basic earnings per common share:
Income before extraordinary item $ 0.08 $ 0.26 $ 0.20 $ 0.21
Extraordinary item -- -- (0.09) --
------------ ------------ ------------ ------------
Net income per common share $ 0.08 $ 0.26 $ 0.11 $ 0.21
============ ============ ============ ============
Diluted earnings per common share:
Income before extraordinary item $ 0.07 $ 0.24 $ 0.16 $ 0.20
Extraordinary item -- -- (0.07) --
------------ ------------ ------------ ------------
Net income per common share $ 0.07 $ 0.24 $ 0.09 $ 0.20
============ ============ ============ ============
Shares used in the per share calculations:
Basic 12,680,095 19,078,869 9,258,411 17,640,924
============ ============ ============ ============
Diluted 14,588,037 20,240,020 11,220,537 19,039,810
============ ============ ============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 5
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
1998 1999
--------- ---------
(RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,901 $ 3,757
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on sale of assets (8) (15)
Depreciation 4,405 6,719
Amortization of intangibles 1,055 2,764
Amortization of debt issuance costs, debt guarantee fees and
accretion of discount on long-term debt 176 120
Stock issued for compensation and services 561 854
Extraordinary item - early extinguishment of debt 981 --
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable, net (1,532) (3,102)
Prepaid expenses and other current assets (137) 218
Accounts payable 905 5,895
Deferred revenue 634 878
Accrued liabilities (55) 1,150
Other liabilities 158 (2,738)
--------- ---------
Net cash provided by operating activities 9,044 16,500
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 683 235
Payments for acquisitions, net of cash acquired (44,302) (142,363)
Capital expenditures for property and equipment (5,388) (10,125)
Net change in other assets 38 35
--------- ---------
Net cash used in investing activities (48,969) (152,218)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 59,683 212,153
Principal payments on long-term debt and notes payable (41,063) (135,245)
Proceeds from sale of common stock 24,126 65,041
Net change in short-term borrowings (1,008) --
Net change in advances from related party (66) --
Payment of dividends (536) (458)
Proceeds from options and warrants -- 1,597
Debt issuance costs (600) (1,839)
--------- ---------
Net cash provided by financing activities 40,536 141,249
--------- ---------
Net increase in cash and equivalents 611 5,531
Cash and equivalents at beginning of period 1,197 3,244
--------- ---------
Cash and equivalents at end of period $ 1,808 $ 8,775
========= =========
</TABLE>
See accompanying notes.
4
<PAGE> 6
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
1. BASIS OF PRESENTATION AND SUMMARY
The accompanying statements of income and cash flows relate to Waste
Connections, Inc. and its subsidiaries (the "Company") for the three and nine
month periods ended September 30, 1998 and 1999. The consolidated financial
statements of the Company include the accounts of Waste Connections, Inc. and
its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. Operating results for the three and nine month periods
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the year ending December 31, 1999.
The Company's consolidated balance sheet as of September 30, 1999, the
consolidated statements of income for the three and nine months ended September
30, 1999 and 1998, and the consolidated statements of cash flows for the nine
months ended September 30, 1999 and 1998 are unaudited. In the opinion of
management, such financial statements include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the Company's
financial position, results of operations, and cash flows for the periods
presented. The consolidated financial statements presented herein should be read
in conjunction with the Company's annual report on Form 10-K and the Company's
current report on Form 8-K dated September 15, 1999, which contains re-stated
historical financial statements to reflect acquisitions consummated through
September 30, 1999, accounted for as poolings-of-interests (Note 3).
2. LONG-TERM DEBT
On March 30, 1999, the Company entered into a new revolving credit facility with
a syndicate of banks for which BankBoston N.A. acts as agent (the "Credit
Facility"). As of September 30, 1999, the maximum amount available under the
Credit Facility is $315,000 (including stand-by letters of credit) and the
borrowings bear interest at various fixed and/or variable rates at the Company's
option (approximately 7.5% as of September 30, 1999). The Credit Facility
replaced an existing revolving credit facility. The Credit Facility allows for
the Company to issue up to $20,000 in stand-by letters of credit. The Credit
Facility requires quarterly payments of interest and it matures in March 2004.
Borrowings under the Credit Facility are secured by virtually all of the
Company's assets. The Credit Facility requires the Company to pay an annual
commitment fee equal to 0.5% of the unused portion of the Credit Facility. The
Credit Facility places certain business, financial and operating restrictions on
the Company relating to, among other things, the incurrance of additional
indebtedness, investments, acquisitions, asset sales, mergers, dividends,
distributions and repurchases and redemption of capital stock. The Credit
Facility also requires that specified financial ratios and balances be
maintained.
3. ACQUISITIONS
During the nine months ended September 30, 1999, the Company acquired 34 solid
waste services businesses that were accounted for using the purchase method of
accounting. The aggregate consideration for these acquisitions was approximately
$272,640 consisting of $142,363 in cash, $6,232 in assumed liabilities, $51,077
in seller notes, and $72,968 in stock.
5
<PAGE> 7
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
The purchase prices have been allocated to the identified intangible assets and
tangible assets acquired based on fair values at the dates of acquisition, with
any residual amounts allocated to goodwill.
During the nine months ended September 30, 1999, the Company merged with Roche
and Sons Inc. ("Roche"), Murrey's Disposal Company, Inc., D.M. Disposal Co.,
Inc., American Disposal Company, Inc., and Tacoma Recycling, Inc. (collectively,
the "Murrey Companies"), Ritter's Sanitary Service, Inc. ("Ritter"), Central
Waste Disposal Inc. ("Central"), Omega Systems, Inc. ("Omega"), and The Garbage
Company, Nebraska Ecology Systems and G&P Development, Inc (collectively,
"G&P"). These transactions were accounted for as poolings-of-interests, whereby
the Company issued an aggregate of 3,781,879 shares of its common stock for all
of the outstanding shares of Roche, the Murrey Companies, Ritter, Central,
Omega, and G&P. In connection with the mergers, the Company incurred
transaction-related costs of approximately $8,805, which were charged to
operations in the first nine months of 1999.
The following pro forma information shows the results of the Company's
operations as though the significant purchases that occurred during the nine
months ended September 30, 1999, had occurred as of January 1, 1998:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1998 1999
----------- -----------
<S> <C> <C>
Pro forma revenue $ 112,918 $ 148,224
Pro forma net income applicable to common stockholders $ 9,395 $ 3,504
Pro forma net income per share:
Basic $ 0.80 $ 0.18
Diluted $ 0.68 $ 0.16
Shares used in the pro forma per share calculations:
Basic 11,799,791 19,921,650
Diluted 13,761,917 21,320,536
</TABLE>
The pro forma results have been prepared for comparative purposes only and are
not necessarily indicative of the actual results of operations had the
acquisitions taken place as of January 1, 1998, or the results of future
operations of the Company. Furthermore, the pro forma results do not give effect
to all cost savings or incremental costs that may occur as a result of the
integration and consolidation of the acquisitions.
4. STOCKHOLDERS' EQUITY
Effective February 9, 1999, the Company sold approximately 4,000,000 shares of
its common stock at $17.50 per share. As a result of that offering, the Company
received approximately $65,041 in net proceeds and used the proceeds to pay down
approximately $50,200 of its outstanding debt.
5. EARNINGS PER SHARE CALCULATION
The following table sets forth the numerator and denominator used in the
computation of earnings per share:
6
<PAGE> 8
WASTE CONNECTIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ -------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Income before extraordinary item $ 1,037 $ 4,919 $ 2,716 $ 3,757
Redeemable convertible preferred stock accretion -- -- (917) --
------------ ------------ ------------ ------------
Income applicable to common stockholders
Before extraordinary item 1,037 4,919 1,799 3,757
Extraordinary item -- -- (815) --
------------ ------------ ------------ ------------
Net income applicable to common
Stockholders $ 1,037 $ 4,919 $ 984 $ 3,757
============ ============ ============ ============
Denominator:
Basic shares outstanding 12,680,095 19,078,869 9,258,411 17,640,924
Dilutive effect of options and warrants 1,907,942 1,161,151 1,584,836 1,398,886
Redeemable Common Stock -- -- 377,290 --
------------ ------------ ------------ ------------
Diluted shares outstanding 14,588,037 20,240,020 11,220,537 19,039,810
============ ============ ============ ============
</TABLE>
For the nine months ended September 30, 1999, 63,193 shares of common stock held
in escrow, outstanding options to purchase 62,000 shares of common stock (with
exercise prices ranging from $23.88 to $26.50) and outstanding warrants to
purchase 47,000 shares of common stock (with exercise prices ranging from $23.88
to $30.50) could potentially further dilute earnings per share in the future and
have not been included in the computation of diluted net income per share
because to do so would have been anitdilutive.
7
<PAGE> 9
WASTE CONNECTIONS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
financial statements and notes thereto included elsewhere herein.
FORWARD LOOKING STATEMENTS
Certain statements included in this Quarterly Report on Form 10-Q, including,
without limitation, information appearing under Part I, Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," are
forward-looking statements (within the meaning of Section 27A of the Securities
Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange
Act of 1934) that involve risks and uncertainties. Factors set forth herein and
from time to time in our other filings with the Securities and Exchange
Commission could affect our actual results and could cause our actual results to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, Waste Connections in this Quarterly Report on Form 10-Q.
OVERVIEW
Waste Connections, Inc. is a regional, integrated solid waste services company
that provides solid waste collection, transfer, disposal and recycling services
in secondary markets of the Western U.S. As of September 30, 1999, we served
more than 475,000 commercial, industrial and residential customers in
California, Idaho, Iowa, Kansas, New Mexico, Minnesota, Nebraska, Oklahoma,
Oregon, South Dakota, Texas, Utah, Washington, and Wyoming. As of that date, we
owned 51 collection operations and operated or owned 20 transfer stations, 12
Subtitle D landfills and 13 recycling facilities.
We intend to pursue an acquisition-based growth strategy, and we acquired 89
businesses from our inception in September 1997 through September 30, 1999. The
results of operations of these acquired businesses have been included in our
financial statements only from the respective dates of acquisition, except for
11 acquisitions accounted for under the poolings-of-interests method of
accounting, which are included for all periods presented. We anticipate that a
substantial part of our future growth will come from acquiring additional solid
waste collection, transfer and disposal businesses and, as a consequence,
additional acquisitions could continue to affect period-to-period comparisons of
the our operating results.
GENERAL
Our revenues consist mainly of fees we charge customers for solid waste
collection, transfer, disposal and recycling services. A large part of our
collection revenues come from providing commercial, industrial and residential
services. We frequently perform these services under service agreements or
franchise agreements with counties or municipal contracts. County franchise
agreements and municipal contracts generally last from one to ten years. Our
existing franchise agreements and all of our existing municipal contracts give
Waste Connections the exclusive right to provide specified waste services in the
specified territory during the contract term. These exclusive arrangements are
awarded, at least initially, on a competitive bid basis and subsequently on a
bid or negotiated basis. We also provide residential collection services on a
subscription basis with individual households. Approximately 65% of our revenues
for the three months ended September 30, 1999 were derived from services
provided under exclusive franchise agreements, long term municipal contracts and
governmental certificates. Governmental certificates grant Waste Connections
perpetual and exclusive collection rights in the covered areas. Contracts with
counties and municipalities and governmental certificates provide relatively
consistent cash flow during the terms of the contracts. Because we bill most
residential customers on a periodic basis, subscription agreements provide a
stable source of revenues for Waste Connections. Our collection business also
generates revenues from the sale of recyclable commodities.
8
<PAGE> 10
We charge transfer station and landfill customers a tipping fee on a per ton
basis for disposing of their solid waste at the transfer stations and the
landfill facilities we own and operate. Most of our transfer and landfill
customers have entered into one to ten year disposal contracts with us, most of
which provide for annual cost of living increases.
We typically determine the prices for our solid waste services by the collection
frequency and level of service, route density, volume, weight and type of waste
collected, type of equipment and containers furnished, the distance to the
disposal or processing facility, the cost of disposal or processing, and prices
charged by competitors for similar services. The terms of our contracts
sometimes limit our ability to pass on price increases. Long-term solid waste
collection contracts typically contain a formula, generally based on a published
price index that automatically adjusts fees to cover increases in some, but not
all, operating costs.
Costs of operations include labor, fuel, equipment maintenance and tipping fees
paid to third party disposal facilities, worker's compensation and vehicle
insurance, the cost of materials we purchase for recycling, third party
transportation expense, district and state taxes and host community fees and
royalties. As of September 30, 1999, Waste Connections owned and/or operated 20
transfer stations, which reduce our costs by allowing us to use collection
personnel and equipment more efficiently and by consolidating waste to gain more
favorable disposal rates that may be available for larger quantities of waste.
Selling, general and administrative ("SG&A") expenses include management,
clerical and administrative compensation overhead costs associated with our
marketing and sales force, professional services and community relations
expense.
Depreciation and amortization expense includes depreciation of fixed assets over
their estimated useful lives using the straight-line method and amortization of
goodwill and other intangible assets using the straight-line method.
Waste Connections capitalizes some third-party expenditures related to pending
acquisitions or development projects, such as legal and engineering expenses. We
expense indirect acquisition costs, such as executive and corporate overhead,
public relations and other corporate services, as we incur them. We charge
against net income any unamortized capitalized expenditures and advances (net of
any portion that we believe we may recover, through sale or otherwise) that
relate to any operation that is permanently shut down and any pending
acquisition or landfill development project that is not completed. We routinely
evaluate all capitalized costs, and expense those related to projects that we
believe are not likely to succeed. As of September 30, 1999, Waste Connections
had no capitalized expenditures relating to landfill development projects and
approximately $273,000 in capitalized expenditures relating to pending
acquisitions.
We accrue for estimated landfill closure and post-closure maintenance costs at
the landfills we own. Under applicable regulations, Waste Connections and Madera
County, as operator and owner, respectively, are jointly liable for closure and
post-closure liabilities with respect to the Fairmead Landfill. We have not
accrued for such liabilities because Madera County, as required by state law,
has established a special fund into which it deposits a portion of tipping fee
surcharges to pay such liabilities. Consequently, we do not believe that the
Company had any financial obligation for closure and post-closure costs for the
Fairmead Landfill as of September 30, 1999. We will have additional material
financial obligations relating to closure and post-closure costs of the other
disposal facilities that we currently own or operate and that we may own or
operate in the future. Waste Connections accrues and will accrue for those
obligations, based on engineering estimates of consumption of permitted landfill
airspace over the useful life of such landfills.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND
1999
The following table sets forth items in Waste Connections' consolidated
statement of operations as a percentage of revenues for the periods indicated.
9
<PAGE> 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
1998 1999
----- -----
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of operations 70.5 60.3
Selling, general and
administrative expenses 9.9 8.3
Depreciation and
amortization expense 8.6 8.0
Stock compensation 0.4 0.2
----- -----
Operating income 10.6 23.2
Interest expense, net (3.5) (6.5)
Other income (expense), net (0.3) --
Income tax expense (3.1) (6.6)
----- -----
Net income 3.7% 10.1%
===== =====
EBITDA margin(1) 19.6% 31.4%
===== =====
</TABLE>
(1) EBITDA margin represents EBITDA expressed as a percentage of revenues.
EBITDA represents earnings presented above before interest, income taxes,
depreciation and amortization expense, acquisition related expenses, and stock
compensation expense. EBITDA is not a measure of cash flow, operating results or
liquidity, as determined in accordance with generally accepted accounting
principles.
Revenues. Total revenues increased $20.4 million, or 72.1%, to $48.6 million for
the three months ended September 30, 1999, from $28.2 million for the three
months ended September 30, 1998. Revenues for the nine months ended September
30, 1999 increased $53.3 million, or 78.3%, to $121.4 million from $68.1 million
for the nine months ended September 30, 1998. The increase was primarily
attributable to the inclusion of the acquisitions closed during the last year
and selective price increases, with a nominal contribution from growth in the
existing businesses.
Cost of Operations. Total cost of operations increased $9.4 million, or 47.2%,
to $29.3 million for the three months ended September 30, 1999, from $19.9
million for the three months ended September 30, 1998. Cost of operations for
the nine months ended September 30, 1999, increased $26.8 million, or 55.1%, to
$75.4 million from $48.6 million for the nine months ended September 30, 1998.
The increase was primarily attributable to cost of the acquisitions closed
during the year, offset by greater integration of collection volumes into
landfills we own or operate. Cost of operations as a percentage of revenues
decreased 10.2%, to 60.3% for the three months ended September 30, 1999, from
70.5% for the three months ended September 30, 1998. Cost of operations as a
percentage of revenues for the nine months ended September 30, 1999 decreased
9.3% to 62.1% from 71.4% for the nine months ended September 30, 1998. The
decrease as a percentage of revenues was primarily attributable to the effect of
tuck-in acquisitions closed since the beginning of 1999, economies of scale from
the greater revenue base, greater integration of collection volumes into
landfills we own or operate and selective price increases.
SG&A. SG&A expenses increased $1.3 million, or 44.8%, to $4.1 million for the
three months ended September 30, 1999, from $2.8 million for the three months
ended September 30, 1998. SG&A for the nine months ended September 30, 1999
increased $3.6 million, or 54.8%, to $10.2 million from $6.6 million for the
nine months ended September 30, 1998. Our SG&A increased as a result of
additional personnel from companies acquired and some additional corporate
overhead to accommodate our growth. SG&A as a percentage of revenues declined
1.6% to 8.3% for the three months ended September 30, 1999, from 9.9% for the
three months ended September 30, 1998. SG&A as a percentage of revenues for the
nine months ended September 30, 1999 decreased 1.3% to 8.4% from 9.7% for the
nine months ended September 30, 1998. The decline in SG&A as a percentage of
revenues was a result of spreading of overhead expenses over a larger base of
revenue from the acquisitions completed in 1999, offset by increases in
corporate overhead and the costs associated with becoming a public company in
May 1998.
Depreciation and Amortization. Depreciation and amortization expense increased
$1.5 million, or 60.1%, to $3.9 million for the three months ended September 30,
1999 from $2.4 million for the three months ended September 30, 1998.
Depreciation and amortization for the nine months ended September 30, 1999
10
<PAGE> 12
increased $4.0 million, or 73.6%, to $9.5 million from $5.5 million for the nine
months ended September 30, 1998. The increase resulted primarily from the
acquisitions completed during the year and the inclusion of the depreciation and
amortization of the businesses acquired as well as the amortization of goodwill
associated with such acquisitions. Depreciation and amortization as a percentage
of revenues decreased 0.6% to 8.0% for the three months ended September 30,
1999, from 8.6% for the three months ended September 30, 1998. Depreciation and
amortization as a percentage of revenues for the nine months ended September 30,
1999 decreased 0.2% to 7.8% from 8.0% for the nine months ended September 30,
1998. The decrease in depreciation and amortization as a percentage of revenues
was primarily a result of accounting for eleven acquisitions in 1999 using the
pooling-of-interests method, for which no goodwill and related amortization is
recognized, offset by a higher proportion of landfill revenues, which have
associated higher depreciation and amortization costs.
Stock Compensation Expense. Stock compensation expense decreased $50,000, or
41.7%, to $70,000 for the three months ended September 30, 1999, from $120,000
for the three months ended September 30, 1998. Stock compensation expense for
the nine months ended September 30, 1999 decreased $351,000 or 62.6%, to
$210,000 from $561,000 for the nine months ended September 30, 1998. Our stock
compensation expense is attributable to the valuation of common stock options
and warrants with exercise prices less than the estimated fair value of our
common stock on the date of the grant and relates solely to stock options
granted prior to the initial public offering in May 1998. Our stock compensation
expense in 1999 consists of continued amortization of deferred stock
compensation recorded in 1998 at the time of the initial public offering. The
decrease in the amortization of deferred stock compensation for the three and
nine months ended September 30, 1999, compared to the three and nine months
ended September 30, 1998, was due to the amortization of the deferred stock
compensation over the vesting periods of the related options using the multiple
option approach prescribed by SFAS No. 123.
Acquisition Related Expenses. Acquisition related expenses for the nine months
ended September 30, 1999 were $8.8 million, and related primarily to
commissions, professional fees, and other direct costs resulting from the eleven
acquisitions that were accounted for using the pooling-of-interests method.
Operating Income. Operating income increased $8.3 million, or 277.1%, to $11.3
million for the three months ended September 30, 1999, from $3.0 million for the
three months ended September 30, 1998. The increase was primarily attributable
to the inclusion of acquisitions closed in the last year, economies of scale
from a greater revenue base, greater integration of collection volumes into
landfills we own or operate and selective price increases. This was offset by
higher depreciation and amortization and SG&A expenses. Operating income for the
nine months ended September 30, 1999 increased $10.5 million, or 151.8%, to
$17.4 million from $6.9 million for the nine months ended September 30, 1998.
That increase was attributable to the same factors as the increase for the three
months ended September 30, 1999, offset by higher acquisition related expenses,
without which operating income would have increased to $26.2 million, an
increase of 279.5%. Operating income as a percentage of revenues increased 12.6%
to 23.2% for the three months ended September 30, 1999 from 10.6% for the three
months ended September 30, 1998. The increase was attributable to the
improvement in gross margins coupled with declines in SG&A expenses and
depreciation and amortization as percentages of revenue. Operating income as a
percentage of revenues for the nine months ended September 30, 1999 increased
4.2% to 14.3% from 10.1% for the nine months ended September 30, 1998. The
increase was attributable to the same factors as the increase for the three
months ended September 30, 1999, offset by acquisition related expenses.
Interest Expense. Interest expense increased $2.2 million, or 222.0%, to $3.2
million for the three months ended September 30, 1999, from $987,000 for the
three months ended September 30, 1998. Interest expense for the nine months
ended September 30, 1999 increased $4.2 million, to $6.4 million from $2.2
million for the nine months ended September 30, 1998. The increases were
primarily attributable to higher debt levels incurred to fund certain of our
acquisitions.
Provision for Income Taxes. Income taxes increased $2.3 million, or 266.2%, to
$3.2 million for the three months ended September 30, 1999, from $870,000 for
the three months ended September 30, 1998. Income taxes increased $5.2 million,
or 256.5%, to $7.2 million for the nine months ended September 30, 1999, from
$2.0 million for the nine month periods ended September 30, 1998. The effective
income tax rate for both the three and nine months ended September 30, 1999,
before acquisition related and stock compensation expenses, was 39.0%, which is
above the federal statutory rate of 35.0% as the result of state and local taxes
and non-deductible goodwill associated with certain acquisitions.
11
<PAGE> 13
Net Income before Extraordinary Item. Net income before extraordinary item
increased by $3.9 million, or 374.3%, to $4.9 million for the three months ended
September 30, 1999, from net income of $1.0 million for the three months ended
September 30, 1998. The increase was primarily attributable to the inclusion of
acquisitions closed during the year, economies of scale from the greater revenue
base, greater integration of collection volumes into landfills we own or
operate, the effect of tuck-in acquisitions closed since the beginning of 1999
and selective price increases. This was offset by higher depreciation and
amortization and interest expenses. Net income before extraordinary item for the
nine months ended September 30, 1999 increased $1.1 million, or 38.3%, to $3.8
million from $2.7 million for the nine months ended September 30, 1998. The
increase was attributable to the same factors as the increase for the three
months ended September 30, 1999, offset by acquisition related expenses in the
first and second quarters of 1999, a significant portion of which were not tax
deductible. Excluding the acquisition related expenses on a tax adjusted basis,
net income before extraordinary item would have increased to $12.0 million, an
increase of 341.2%. Net income before extraordinary item as a percentage of
revenue increased 6.4% to 10.1% for the three months ended September 30, 1999,
from 3.7% for the three months ended September 30, 1998. The increase was
attributable to improvement in gross margins and declines in SG&A expenses and
depreciation and amortization as percentages of revenue, offset by higher
interest expenses. Net income before extraordinary item as a percentage of
revenue for the nine months ended September 30, 1999 decreased 0.9% to 3.1% from
4.0% for the nine months ended September 30, 1998. The decline was attributable
to acquisition related expenses in the first and second quarters of 1999 and
higher interest expenses, offset by improvement in gross margins and declines in
SG&A expense and depreciation and amortization as percentages of revenue. In the
quarter ended September 30, 1998, we recognized an extraordinary charge related
to the early extinguishment of debt when we refinanced our credit facility.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, we had a working capital deficit of $7.8 million,
including cash and cash equivalents of $8.8 million. Subsequent to September 30,
1999, cash and debt were reduced by $6.2 million, through the closing of various
acquisitions. Our strategy in managing our working capital is generally to apply
the cash generated from our operations that remains available after satisfying
our working capital and capital expenditure requirements to reduce our
indebtedness under our bank revolving credit facility and to minimize our cash
balances.
We have a $315 million revolving credit facility with a syndicate of banks for
which BankBoston, N.A. acts as agent, which is secured by virtually all assets
of Waste Connections, including our interest in the equity securities of our
subsidiaries. The credit facility matures in 2004 and bears interest at a rate
per annum equal to, at our discretion, either: (i) the BankBoston Base Rate; or
(ii) the Eurodollar Rate plus, in each case, applicable margin. The credit
facility requires us to maintain certain financial ratios and satisfy other
predetermined requirements, such as minimum net worth, net income and limits on
capital expenditures. It also requires the lenders' approval of acquisitions in
certain circumstances. As of September 30, 1999, an aggregate of approximately
$210.7 million was outstanding under our credit facility, and the interest rate
on outstanding borrowings under the credit facility was approximately 7.5%. We
expect to incur additional borrowings to fund acquisitions during the fourth
quarter of 1999.
For the nine months ended September 30, 1999, net cash provided by operations
was approximately $16.5 million, of which $23.2 million was provided by
operating results for the period exclusive of acquisition related and non-cash
stock compensation expenses. Acquisition related expenses were $8.2 million, net
of income taxes. $2.3 million of net cash provided by operations was provided by
a decrease in working capital (net of acquisitions) for the period.
For the nine months ended September 30, 1999, net cash used by investing
activities was $151.2 million. Of this, $142.4 million was used to fund the cash
portion of acquisitions. Cash used for capital expenditures was $10.1 million,
which was primarily for investments in fixed assets, consisting primarily of
trucks, containers and other equipment.
For the nine months ended September 30, 1999, net cash provided by financing
activities was $141.3 million, which was provided by net borrowings under our
various debt arrangements and approximately $65 million in proceeds from the
sale of 3,999,307 shares of common stock in a secondary public offering.
12
<PAGE> 14
Capital expenditures relating to existing businesses for the remainder of 1999
are currently expected to be approximately $5.7 million. We intend to fund our
remaining planned 1999 capital expenditures principally through internally
generated funds, and borrowings under our existing credit facility. We intend to
fund our future acquisitions and capital requirements through additional
borrowings under our credit facility and funds raised from sale of our equity
securities under appropriate market conditions. We believe that the credit
facility, and the funds expected to be generated from operations, will provide
adequate cash to fund our working capital and other cash needs for the
foreseeable future. However, increased use of debt to fund our capital
requirements will increase our interest expense. It may also raise our
debt-to-equity ratio, which could hinder our ability to obtain additional
credit. If we are unable to obtain additional debt financing or to sell
additional equity securities in the future, we may be unable to fund future
acquisitions, which could cause a decline in the growth rate of our revenues.
YEAR 2000
We will need to modify or replace portions of our software so that our computer
systems will function properly with respect to dates in the year 2000 ("Year
2000") and afterwards. We have completed Year 2000 conversions at substantially
all of our locations at a total cost of approximately $125,0000, and expect to
have completed Year 2000 conversions at the remaining locations before December
31, 1999. Additional acquisitions in the future may require additional Year 2000
conversions, at additional cost. Because our operations rely primarily on
mechanical systems such as trucks to collect solid waste, we do not expect our
operations to be significantly affected by Year 2000 issues. Our customers may
need to make Year 2000 modifications to software and hardware that they use to
generate records, bills and payments relating to Waste Connections. We do not
rely on vendors on a routine basis except for providers of disposal services. We
take waste to a site and are normally billed based on tonnage disposed. We
believe that if our disposal vendors encounter Year 2000 problems, they will
convert to manual billing based on scale recordings until they resolve those
issues.
In assessing our exposure to Year 2000 issues, we believe our biggest areas of
exposure are as follows: Year 2000 issues at our banks, large (typically
municipal) customers and acquired businesses between the time we acquire them
and the time we implement our own systems. We are obtaining Year 2000 compliance
certifications from our vendors, banks and customers. If Waste Connections and
our vendors, banks and customers do not complete required Year 2000
modifications on time, the Year 2000 issue could materially affect our
operations. We believe, however, that in the most reasonably likely worst case,
the effects of Year 2000 issues on our operations would be brief and small
relative to our overall operations. We have not made a contingency plan to
minimize operational problems if Waste Connections or our vendors, banks and
customers do not timely complete all required Year 2000 modifications.
13
<PAGE> 15
WASTE CONNECTIONS, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is no current proceeding or litigation involving Waste Connections that we
believe will have a material adverse impact on our business, financial
condition, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES
Sales of Unregistered Securities
On July 12, 1999, we issued 2,000 shares of Common Stock to the shareholders of
L&L Sanitation, Inc. at a price of $22.85 per share in connection with our
acquisition of the stock of that company. Such shares were issued pursuant to
Regulation D under the Securities Act of 1933.
14
<PAGE> 16
WASTE CONNECTIONS, INC.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27. Financial Data Schedule
(b) Reports on Form 8-K:
On July 15, 1999, we filed a Form 8-K/A further amending our Form 8-K filed on
April 12, 1999, to include certain additional pro forma financial data of Waste
Connections, Inc.
On August 5, 1999, we filed a Form 8-K amending our historical audited financial
statements for each of the three years in the period ended December 31, 1998, to
include financial information of certain companies acquired during the first
quarter of 1999 in transactions that were accounted for as
poolings-of-interests.
On August 25, 1999, we filed a Form 8-K reporting the execution on August 11,
1999 of an agreement pursuant to which International Environmental Industries,
Inc., a Nevada corporation ("IEII"), would merge with and into WCI Acquisition
Corporation I, a wholly owned subsidiary of Waste Connections.
On August 31, 1999, we filed a Form 8-K reporting certain financial results
covering 30 days of combined operations of Waste Connections and six companies
acquired in June 1999. This information was reported because of rules pertaining
to pooling-of-interests accounting under Securities and Exchange Commission
Accounting Series Release 135.
On September 2, 1999, we filed a Form 8-K/A amending the Form 8-K filed on
August 25, 1999, to include the financial statements and pro forma financial
information relating to our acquisition of IEII.
On September 15, 1999, we filed a Form 8-K amending our historical audited
financial statements for each of the three years in the period ended December
31, 1998, to include financial information of certain companies acquired during
the six months ended June 30, 1999 in transactions that were accounted for as
poolings-of-interests.
15
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
WASTE CONNECTIONS, INC.
BY: /s/ Ronald J. Mittelstaedt Date: November 12, 1999
--------------------------------------
Ron J. Mittelstaedt,
President and Chief Executive Officer
BY: /s/ Steven F. Bouck Date: November 12, 1999
--------------------------------------
Steven F. Bouck,
Vice President and Chief Financial Officer
16
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits Description
- -------- -----------
<S> <C>
27. Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS EXHIBIT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SEPTEMBER
30, 1999, CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1999, AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE
FOOTNOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,775
<SECURITIES> 0
<RECEIVABLES> 25,580
<ALLOWANCES> 1,917
<INVENTORY> 0
<CURRENT-ASSETS> 37,552
<PP&E> 253,020
<DEPRECIATION> 9,678
<TOTAL-ASSETS> 501,872
<CURRENT-LIABILITIES> 45,357
<BONDS> 226,388
0
0
<COMMON> 209
<OTHER-SE> 210,613
<TOTAL-LIABILITY-AND-EQUITY> 510,872
<SALES> 0
<TOTAL-REVENUES> 48,610
<CGS> 0
<TOTAL-COSTS> 37,319
<OTHER-EXPENSES> 8
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,178
<INCOME-PRETAX> 8,105
<INCOME-TAX> 3,186
<INCOME-CONTINUING> 4,919
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,919
<EPS-BASIC> .26
<EPS-DILUTED> .24
</TABLE>
