<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 JUNE 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.)
2260 DOUGLAS BOULEVARD, SUITE 280, ROSEVILLE, CALIFORNIA 95661
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (916) 772-2221
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 August 12, 1999: 18,228,417 Shares of Common Stock
<PAGE> 2
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets - December 31, 1998 and June 30, 1999
Condensed Consolidated Statements of Operations for the three and six months ended
June 30, 1998 and 1999
Condensed Consolidated Statements of Cash Flows for the six months ended
June 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
</TABLE>
1
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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 JUNE 30, 1999
----------------- -------------
<S> <C> <C>
(RESTATED)
ASSETS
Current assets:
Cash $ 3,244 $ 10,384
Accounts receivable, less allowance for doubtful
accounts of $544 at December 31, 1998 and
$909 at June 30, 1999 14,858 19,664
Prepaid expenses and other current assets 2,355 1,958
------------- -------------
Total current assets 20,457 32,006
Property and equipment, net 50,297 146,865
Intangible assets 101,560 140,519
Other assets 2,709 4,788
------------- -------------
$ 175,023 $ 324,178
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt $ -- $ 940
Short-term borrowings 1,500 --
Accounts payable 8,731 17,542
Advances from related party 571 --
Deferred revenue 3,174 3,554
Accrued liabilities 5,737 10,566
Current portion of notes payable 11,939 1,021
Other current liabilities 2,758 359
------------- -------------
Total current liabilities 34,410 33,982
Long-term debt and notes payable, net 67,176 145,646
Other long term liabilities 4,396 5,122
Deferred income taxes 2,339 2,336
Commitments and contingencies
Stockholders' equity:
Preferred stock $.01 par value; 7,500,000 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, 18,228,417
shares issued and outstanding at June 30, 1999 132 182
Additional paid-in capital 66,557 138,378
Deferred stock compensation (428) (288)
Retained earnings (accumulated deficit) 441 (1,180)
------------- -------------
Total stockholders' equity 66,702 137,092
------------- -------------
$ 175,023 $ 324,178
============= =============
</TABLE>
See accompanying notes.
2
<PAGE> 4
WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------- ---------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
(RESTATED) (RESTATED)
Revenues $ 21,973 $ 40,219 $ 39,847 $ 72,813
Operating Expenses:
Cost of operations 15,576 24,805 28,692 46,073
Selling, general and administrative 2,032 3,297 3,779 6,132
Depreciation and amortization 1,645 3,079 3,035 5,598
Stock compensation 121 70 441 140
Acquisition related expenses -- 1,005 -- 8,805
------------ ------------ ------------ ------------
Income (loss) from operations 2,599 7,963 3,900 6,065
Interest expense (696) (2,164) (1,243) (3,187)
Other income (expense), net 25 39 179 2
------------ ------------ ------------ ------------
Income (loss) before income tax provision 1,928 5,838 2,836 2,880
Income tax provision (765) (2,686) (1,157) (4,042)
------------ ------------ ------------ ------------
Net income (loss) before extraordinary item 1,163 3,152 1,679 (1,162)
Extraordinary item - early extinguishment of
Debt, net of tax benefits of $165 (815) -- (815) --
------------ ------------ ------------ ------------
Net Income (loss) $ 348 $ 3,152 $ 864 $ (1,162)
============ ============ ============ ============
Redeemable convertible preferred stock accretion (345) -- (917) --
------------ ------------ ------------ ------------
Net income (loss) applicable to common
stockholders $ 3 $ 3,152 $ (53) $ (1,162)
============ ============ ============ ============
Basic earnings per common share:
Income before extraordinary item $ 0.09 $ 0.18 $ 0.10 $ (0.07)
Extraordinary item (0.09) -- (0.11) --
------------ ------------ ------------ ------------
Net income (loss) per common share $ 0.00 $ 0.18 $ (0.01) $ (0.07)
============ ============ ============ ============
Diluted earnings per common share:
Income before extraordinary item $ 0.07 $ 0.16 $ 0.08 $ (0.07)
Extraordinary item (0.07) -- (0.09) --
------------ ------------ ------------ ------------
Net income (loss) per common share $ 0.00 $ 0.16 $ (0.01) $ (0.07)
============ ============ ============ ============
Shares used in the per share calculations:
Basic 8,900,277 17,997,934 7,497,362 16,911,490
Diluted 11,112,687 19,373,132 9,687,313 16,911,490
</TABLE>
3
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WASTE CONNECTIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
--------------------------------
1998 1999
------------ ------------
<S> <C> <C>
(RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 864 $ (1,162)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Gain on sale of assets (29) (15)
Depreciation 2,660 3,961
Amortization of intangibles 373 1,637
Amortization of debt issuance costs, debt guarantee fees and
accretion of discount on long term debt 134 50
Stock issued for compensation and services 441 784
Extraordinary item - early extinguishment of debt 981 --
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable, net (630) (1,929)
Prepaid expenses and other current assets (680) 571
Accounts payable 562 8,176
Deferred revenue 180 352
Accrued liabilities 148 (233)
Other liabilities 247 (2,713)
------- --------
Net cash provided by operating activities 5,251 9,479
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 675 235
Payments for acquisitions, net of cash acquired (30,281) (103,051)
Capital expenditures for property and equipment (3,353) (6,001)
(Increase) decrease in other assets (62) (56)
------- --------
Net cash used in investing activities (33,021) (108,873)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 41,610 130,634
Principal payments on long-term debt and notes payable (33,631) (89,552)
Proceeds from sale of common stock 24,126 65,041
Net change in short term borrowings (873) --
Net change in advances from related party (66) --
Payment of dividends (531) (458)
Proceeds from options and warrants -- 1,558
Debt issuance costs (584) (689)
------------ ------------
Net cash provided by financing activities 30,051 106,534
------------ ------------
Net increase in cash 2,281 7,140
Cash at beginning of period 1,197 3,244
------------ ------------
Cash at end of period $ 3,478 $ 10,384
============ ============
</TABLE>
See accompanying notes.
4
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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 operations and cash flows relate to Waste
Connections, Inc. and its subsidiaries (the "Company") for the three and six
month periods ended June 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 six month periods
ended June 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 June 30, 1999, the consolidated
statements of operations for the three and six months ended June 30, 1999 and
1998, and the consolidated statements of cash flows for the six months ended
June 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 August 5, 1999.
The Company has also restated its previously issued financial statements as of
and for the three and six months ended June 30, 1998 to reflect the acquisitions
consummated during the six months ended June 30, 1999, accounted for using the
pooling-of -interests method of accounting (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"). The maximum amount available under the Credit Facility is $225,000
(including stand-by letters of credit) and the borrowings bear interest at
various fixed and/or variable rates at the Company's option (approximately 7.0%
as of June 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 0.375% 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
For the six months ended June 30, 1999, the Company acquired 13 solid waste
collection businesses that were accounted for using the purchase method of
accounting. The aggregate consideration for these acquisitions was approximately
$107,604 consisting of $103,051 in cash, $93 in seller notes, and $4,460 in
stock.
5
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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 six months ended June 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 3,443,128 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 six 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 six
months ended June 30, 1999, had occurred as of January 1, 1998:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Revenue $ 50,732 $ 75,583
Net loss $ (65) $ (1,836)
Pro forma basic and diluted net loss per share $ (0.01) $ (0.11)
Shares used in the pro forma per share calculations 7,947,362 17,127,469
</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 $65,300 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 SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------------------- -------------------------------
1998 1999 1998 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) before extraordinary item $ 1,163 $ 3,152 $ 1,679 $ (1,162)
Redeemable convertible preferred stock accretion (345) -- (917) --
------------ ------------ ------------ ------------
Income (loss) applicable to common stockholders
Before extraordinary item 818 3,152 762 (1,162)
Extraordinary item (815) -- (815) --
------------ ------------ ------------ ------------
Net income (loss) applicable to common
stockholders $ 3 $ 3,152 $ (53) $ (1,162)
============ ============ ============ ============
Denominator:
Basic shares outstanding 8,900,277 1,375,198 7,497,362 16,911,490
Dilutive effect of options and warrants 1,679,077 -- 1,423,284 --
Madera Redeemable Common Stock 533,333 17,997,934 766,667 --
------------ ------------ ------------ ------------
Diluted Shares Outstanding 11,112,687 19,373,132 9,687,313 16,911,490
============ ============ ============ ============
</TABLE>
For the six months ended June 30, 1999, outstanding options to purchase
1,279,779 shares of common stock (with exercise prices ranging from $2.80 to
$23.88) and outstanding warrants to purchase 680,752 shares of common stock
(with exercise prices ranging from $2.80 to $22.13) could potentially dilute
basic earnings per share in the future and have not been included in the
computation of diluted net loss 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 June 30, 1999, we serve more than
390,000 commercial, industrial and residential customers in California, Idaho,
Kansas, Minnesota, Nebraska, Oklahoma, Oregon, South Dakota, Utah, Washington,
and Wyoming. As of that date, we owned 42 collection operations and operated or
owned 20 transfer stations, eight Subtitle D landfills and 13 recycling
facilities.
We intend to pursue an acquisition-based growth strategy and as of June 30,
1999, we have acquired 80 businesses since inception in September 1997. The
results of operations of these acquired businesses have been included in our
financial statements only from the respective dates of acquisition, except
eleven 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 70% of our revenues
for the three months ended June 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. Waste Connections owns and/or operates 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 June 30, 1999, Waste Connections had no
capitalized expenditures relating to landfill development projects and
approximately $41,000 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 Madera
had any financial obligation for closure and post-closure costs for the Fairmead
Landfill as of June 30, 1999. We will have additional material financial
obligations relating to closure and post-closure costs of any disposal
facilities we may own or operate in the future. In such case, Waste Connections
will accrue for those obligations, based on engineering estimates of consumption
of permitted landfill airspace over the useful life of any such landfill.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 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
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<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------
1998 1999
-------- --------
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of operations 70.9 61.7
Selling, general and
administrative expenses 9.2 8.2
Depreciation and
amortization expense
7.5 7.7
Stock compensation 0.5 0.2
Acquisition related expenses -- 2.5
-------- --------
Operating income (loss) 11.8 19.8
Interest expense, net (3.2) (5.4)
Other income (expense), net 0.1 0.1
Income tax benefit (expense) (3.5) (6.7)
-------- --------
Net income (loss) 5.3% 7.8%
======== ========
EBITDA margin(1) 19.9% 30.1%
</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 $18.2 million, or 83.0%, to $40.2 million for
the three months ended June 30, 1999 from $22.0 million for the three months
ended June 30, 1998. Revenues for the six months ended June 30, 1999 increased
$33.0 million, or 82.7%, to $72.8 million from $39.8 million for the six months
ended June 30, 1998. The increase was primarily attributable to the inclusion of
the acquisitions closed in the last year with a nominal contribution from growth
in the existing businesses.
Cost of Operations. Total cost of operations increased $9.2 million, or 59.3%,
to $24.8 million for the three months ended June 30, 1999 from $15.6 million for
the three months ended June 30, 1998. Cost of operations for the six months
ended June 30, 1999 increased $17.4 million, or 60.6%, to $46.1 million from
$28.7 million for the six months ended June 30, 1998. The increase was primarily
attributable to cost of operations of the acquisitions closed in the last year,
offset by economies of scale from the greater revenue base, greater integration
of collection volumes into landfills we own or operate, elimination of private
company expenses and selective price increases. Cost of operations as a
percentage of revenues decreased 9.2%, to 61.7% for the three months ended June
30, 1999 from 70.9% for the three months ended June 30, 1998. Cost of operations
as a percentage of revenues for the six months ended June 30, 1999 decreased
8.7% to 63.3% from 72.0% for the six months ended June 30, 1998. The decrease as
a percentage of revenues was primarily attributable to elimination of private
company expenses, the effect of tuck-in acquisitions closed since the beginning
of 1998, 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 61.9%, to $3.3 million for the
three months ended June 30, 1999 from $2.0 million for the three months ended
June 30, 1998. SG&A for the six months ended June 30, 1999 increased $2.4
million, or 62.3%, to $6.1 million from $3.8 million for the six months ended
June 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 1.0% to 8.2% for the three
months ended June 30, 1999 from 9.2% for the three months ended June 30, 1998.
SG&A as a percentage of revenues for the six months ended June 30, 1999
decreased 1.1% to 8.4% from 9.5% for the six months ended June 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 1998, offset by increases in corporate overhead and the costs associated with
being a public company.
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<PAGE> 12
Depreciation and Amortization. Depreciation and amortization expense increased
$1.4 million, or 87.2%, to $3.1 million for the three months ended June 30, 1999
from $1.6 million for the three months ended June 30, 1998. Depreciation and
amortization for the six months ended June 30, 1999 increased $2.6 million, or
85.9%, to $5.6 million from $3.0 million for the six months ended June 30, 1998.
The increase resulted primarily from the acquisitions and the inclusion of their
depreciation and amortization as well as the amortization of goodwill associated
with such acquisitions. Depreciation and amortization as a percentage of
revenues increased 0.2% to 7.7% for the three months ended June 30, 1999 from
7.5% for the three months ended June 30, 1998. Depreciation and amortization as
a percentage of revenues for the six months ended June 30, 1999 increased 0.1%
to 7.7% from 7.6% for the six months ended June 30, 1998. The increase in
depreciation and amortization as a percentage of revenues was primarily a result
of amortization of goodwill associated with acquisitions and a higher proportion
of landfill revenues, which have associated higher depreciation and amortization
costs.
Stock Compensation Expense. Stock compensation expense decreased $51,000, or
41.9%, to $70,000 for the three months ended June 30, 1999 from $121,000 for the
three months ended June 30, 1998. Stock compensation expense for the six months
ended June 30, 1999 decreased $301,000 or 68.2%, to $140,000 from $441,000 for
the six months ended June 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. 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.
Acquisition Related Expenses. Acquisition related expenses increased $1.0
million for the three months ended June 30, 1999 to $1.0 million from zero for
the three months ended June 30, 1998. Acquisition related expenses for the six
months ended June 30, 1999 increased $8.8 million, to $8.8 million from zero for
the six months ended June 30, 1998. The largest part of the acquisition related
expenses for the three months ended June 30, 1999 were commissions, professional
fees, and other direct costs resulting from the four mergers that were accounted
for using poolings-of-interests method.
Operating Income. Operating income increased $5.4 million to $8.0 million for
the three months ended June 30, 1999 from $2.6 million for the three months
ended June 30, 1998. The increase was primarily attributable to the inclusion of
acquisitions closed in the last year, economies of scale from the greater
revenue base, greater integration of collection volumes into landfills we own or
operate, elimination of private company expenses and selective price increases.
This was offset by higher depreciation expenses and the acquisition related
expenses. Without the acquisition related expenses, operating income would have
increased to $9.0 million, an increase of 245.1%. Operating income for the six
months ended June 30, 1999 increased $2.2 million, to $6.1 million from $3.9
million for the six months ended June 30, 1998. The increase for the six months
was attributable to the same factors as the increase for the three months,
offset by higher acquisition related expenses, without which operating income
would have increased to $14.9 million, an increase of 279.9%. Operating income
as a percentage of revenues increased 8.0% to 19.8% for the three months ended
June 30, 1999 from 11.8% for the three months ended June 30, 1998. The increase
is attributable to the improvement in gross margins coupled with declines in
SG&A expenses as a percentage of revenue, offset by increases in depreciation
and amortization as a percentage of revenue. Operating income as a percentage of
revenues for the six months ended June 30, 1999 decreased 1.5% to 8.3% from 9.8%
for the six months ended June 30, 1998. The decrease is attributable to the
acquisition related expenses and increases in depreciation and amortization as a
percentage of revenue offset by the improvement in gross margins coupled with
declines in SG&A expenses as a percentage of revenue.
Interest Expense. Interest expense increased $1.5 million, or 211.0%, to $2.2
million for the three months ended June 30, 1999 from $696,000 for the three
months ended June 30, 1998. Interest expense for the six months ended June 30,
1999 increased $1.9 million, to $3.2 million from $1.2 million for the six
months ended June 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 $1.9 million, or 251.0%, to
$2.7 million for the three months ended June 30, 1999 from $765,000 for the
three months ended June 30, 1998. The effective income tax rate for the three
months ended June 30, 1999, before acquisition related and stock compensation
expenses was 38.8%, which is above the federal statutory of 34.0% rate as the
result of state and local taxes and non-deductible goodwill associated with
certain acquisitions. Provision for income taxes for the six months ended June
30, 1999 increased $2.9 million, to $4.0 million from $1.2 million for the six
months ended June 30, 1998.
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<PAGE> 13
Net Income before Extraordinary Item. Net income before extraordinary item
increased by $2.0 million, or 171.1%, to $3.2 million for the three months ended
June 30, 1999, from net income of $1.2 million for the three months ended June
30, 1998. The increase was primarily attributable to the inclusion of
acquisitions closed in the last year, economies of scale from the greater
revenue base, greater integration of collection volumes into landfills we own or
operate, elimination of private company expenses and selective price increases.
This was offset by higher depreciation and interest expenses and acquisition
related expenses. Excluding the acquisition related expenses, net income before
extraordinary item would have increased to $4.2 million, an increase of 357.6%.
Net income before extraordinary item for the six months ended June 30, 1999
decreased $2.9 million, to a loss of $1.2 million from income of $1.7 million
for the six months ended June 30, 1998. The decrease was attributable to the
acquisition related expenses in the first quarter, a significant portion of
which were not tax deductible. Excluding the acquisition related expenses on a
tax adjusted basis, net income would have increased to $7.1 million, an increase
of 317.4%. Net income before extraordinary item as a percentage of revenue
increased 2.5% to 7.8% for the three months ended June 30, 1999 from 5.3% for
the three months ended June 30, 1998. The increase is attributable to
improvement in gross margins and declines in SG&A expenses as a percentage of
revenue, offset by increases in depreciation and amortization as a percentage of
revenue and higher interest expenses. Net income before extraordinary item as a
percentage of revenue for the six months ended June 30, 1999 decreased 5.8% to
(1.6%) from 4.2% for the six months ended June 30, 1998. The decline was
attributable to acquisition related expenses in the first quarter, increases in
depreciation and amortization as a percentage of revenue and higher interest
expenses, offset by improvement in gross margins and declines in SG&A expenses
as a percentage of revenue. In the quarter ending June 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 June 30, 1999, we had a working capital deficit of $2.0 million, including
cash and cash equivalents of $10.4 million. Subsequent to the close of the
quarter, we paid down our line of credit by $3.0 million and paid $4.3 million
to close various acquisitions. This also had the effect of reducing accounts
payable by $4.3 million. 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 $225 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 the 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 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 June 30, 1999, an aggregate of approximately $132.2 million
was outstanding under our credit facility, and the interest rate on outstanding
borrowings under the credit facility was approximately 7.0%. We are currently
exploring an increase in our credit facility
For the six months ended June 30, 1999, net cash provided by operations was
approximately $9.5 million, of which $13.5 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. $5.0 million of net cash provided by operations was provided by a
decrease in working capital (net of acquisitions) for the period.
For the six months ended June 30, 1999, net cash used by investing activities
was $108.9 million. Of this, $103.1 million was used to fund the cash portion of
acquisitions. Cash used for capital expenditures was $6.0 million, which was
primarily for investments in fixed assets, consisting primarily of trucks,
containers and other equipment.
For the six months ended June 30, 1999, net cash provided by financing
activities was $106.5 million, which was provided by net borrowings under our
various debt arrangements and $65 million in proceeds from the sale of
3,9999,307 shares of common stock in a secondary public offering.
Capital expenditures relating to existing businesses for 1999 are currently
expected to be approximately $9.0 million. We intend to fund our remaining
planned 1999 capital expenditures principally through internally generated
12
<PAGE> 14
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 common stock. We have
entered in discussions with a financial institution to increase our existing
credit facility. 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, if we are
unable to expand our credit facility, we may be unable to fund future
acquisitions.
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 expect to complete those modifications and upgrades
during 1999 at a total cost of approximately $100,000. Additional acquisitions,
depending on the size of the operation, could increase the budget required for
Year 2000 modifications. We spent part of our Year 2000 budget on replacing our
billing systems in Vancouver, Washington, Idaho Falls and Mountain Home, Idaho,
Orem and Layton, Utah, and Madera and Amador, California. 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 challenges
lie in the following areas: 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 and 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 June 30, 1999, we issued 93,766 shares of our common stock to the
shareholders of G&P Development, Inc. at a price of $29.23 per share in
connection with the merger of a wholly owned subsidiary of Waste Connections
into G&P Development, Inc. The transaction was accounted for under the
pooling-of-interests method. Such shares were issued pursuant to Regulation D
under the Securities Act.
On June 30, 1999, we issued 7,993 shares of our common stock to a shareholder of
Western Johns, at a price of $30.50 per share, in connection with our
acquisition of the assets of Western Johns. Such shares were issued pursuant to
Regulation D under the Securities Act.
On June 25, 1999, we issued 156,160 shares of our common stock to the
shareholders of Central Waste Disposal, Inc. and Cen San, Inc. at a price of
$26.79 per share in connection with the mergers of two wholly owned subsidiaries
of Waste Connections into Central Waste Disposal, Inc. and Cen San, Inc. The
transaction was accounted for under the pooling-of-interests method. Such shares
were issued pursuant to Regulation D under the Securities Act.
On June 30, 1999, we issued 59,150 shares of our common stock to the
shareholders of Omega Systems, Inc. at a price of $29.47 per share in connection
with the merger of a wholly owned subsidiary of Waste Connections into Omega
Systems, Inc. The transaction was accounted for under the pooling-of-interests
method. Such shares were issued pursuant to Regulation D under the Securities
Act.
On June 30, 1999, we issued 31,131 shares of our common stock to the
shareholders of Nebraska Ecology Systems, Inc. and The Garbage Company at a
price of $29.23 per share in connection with the mergers of two wholly owned
subsidiaries of Waste Connections into Nebraska Ecology Systems, Inc. and The
Garbage Company. The transaction was accounted for under the
pooling-of-interests method. Such shares were issued pursuant to Regulation D
under the Security Act.
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 August 5, 1999, we filed a Form 8K 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 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 May 7, 1999, we filed a Form 8K presenting the consolidated summary income
statement data of Waste Connections for the one-month period and the four-month
period ended April 30, 1999. We voluntarily reported certain financial results
covering at least 30 days of post-acquisition combined operations because of
rules pertaining to pooling-of-interests accounting under Securities and
Exchange Commission Accounting Series Release 135. This filing pertained to the
March 30, 1999, merger between Waste Connections and Ritter's Sanitary Service,
Inc.
On April 29, 1999, we filed a Form 8K/A amending the Form 8-K filed on April 12,
1999, to include the financial statements and pro forma financial information
relating to our acquisition on March 31, 1999, of MENI and RHFC which were not
available at that time.
On April 14, 1999, we filed a Form 8K describing our acquisition on March 31,
1999, of the outstanding capital stock of each of Management Environmental
National, Inc. ("MENI") and RH Financial Corporation ("RHFC"). MENI and RHFC are
the sole partners of two limited partnerships, one of which provides solid waste
handling and transportation services in the City of Vancouver and in Clark
County, Washington, and the other of which owns and operates the Finley-Buttes
Regional Landfill in Morrow County, Oregon.
On April 5, 1999, we filed a Form 8K/A amending the Form 8K filed on February 1,
1999, to include the financial statements and pro forma financial information
relating to the merger on January 19, 1999, of WCI Acquisition Corporation I,
WCI Acquisition Corporation II, WCI Acquisition Corporation III, and WCI
Acquisition Corporation IV, four Delaware corporations wholly owned by Waste
Connections into Murrey's Disposal Company, Inc., American Disposal Company,
Inc., D.M. Disposal Co., Inc. and Tacoma Recycling Company, Inc., respectively.
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: August 14, 1999
-------------------------------------------------------------
Ron J. Mittelstaedt, President and Chief Executive Officer
BY: /s/ Steven F. Bouck Date: August 14, 1999
-------------------------------------------------------------
Steven F. Bouck, Vice President and Chief Financial Officer
16
<PAGE> 18
WASTE CONNECTIONS, INC.
FORM 10-Q
INDEX TO EXHIBITS
27 Financial Data Schedule
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS EXHIBIT CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE 30,
1999, CONDENSED CONSOLIDATED BALANCE SHEET AND CONDENSED CONSOLIDATED STATEMENT
OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED JUNE 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> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 10,384
<SECURITIES> 0
<RECEIVABLES> 19,664
<ALLOWANCES> 909
<INVENTORY> 0
<CURRENT-ASSETS> 32,006
<PP&E> 146,865
<DEPRECIATION> 5,647
<TOTAL-ASSETS> 324,178
<CURRENT-LIABILITIES> 33,975
<BONDS> 145,647
0
0
<COMMON> 182
<OTHER-SE> 136,915
<TOTAL-LIABILITY-AND-EQUITY> 324,178
<SALES> 0
<TOTAL-REVENUES> 40,219
<CGS> 0
<TOTAL-COSTS> 32,254
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,164
<INCOME-PRETAX> 3,154
<INCOME-TAX> 2,685
<INCOME-CONTINUING> 3,154
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,154
<EPS-BASIC> .18
<EPS-DILUTED> .16
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