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Waste Services 10-K 2007 Documents found in this filing:
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Commission file number
000-25955
(Successor registrant of Capital
Environmental Resource Inc. now known as Waste Services (CA)
Inc.)
Registrant’s telephone number, including area code:
(905) 319-1237
Securities registered pursuant to Section 12(b) of the
Act:
Common Stock, par value $0.01 per share
Securities registered pursuant to Section 12(g) of the
Act:
None
Indicate by check mark whether the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes o No þ
Indicate by check mark whether the registrant is not required to
file reports pursuant to Section 13 or Section 15(d)
of the Act.
Yes o No þ
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 þ No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in a definitive proxy or
information statement incorporated by reference in Part III
of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer and large
accelerated filer” in
Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated
filer o Accelerated
filer þ Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The approximate aggregate market value of the voting stock held
by non-affiliates of the Registrant as of June 30, 2006 was
$209.1 million based upon the closing price of the
Registrant’s Common Shares as quoted on the Nasdaq National
Market as of that date.
The number of Common Shares of the Registrant outstanding as of
February 27, 2007 was 45,972,082 (assuming exchange of
6,307,862 exchangeable shares of Waste Services (CA) Inc. not
owned by Capital Environmental Holdings Company for 2,102,620 of
the registrant’s common stock.)
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PART I
This annual report on
Form 10-K
contains certain “forward-looking statements” within
the meaning of Section 21E of the Securities Exchange Act
of 1934. Some of these forward-looking statements include
forward-looking phrases such as “anticipates,”
“believes,” “could,” “estimates,”
“expects,” “foresees,” “intends,”
“may,” “should” or “will
continue,” or similar expressions or the negatives thereof
or other variations on these expressions, or similar
terminology, or discussions of strategy, plans or intentions.
Such statements reflect our current views regarding future
events and are subject to certain risks, uncertainties and
assumptions. Many factors could cause the actual results,
performance or achievements to be materially different from any
future results, performance or achievements that forward-looking
statements may express or imply, including, among others:
Some of these factors are discussed in more detail in this
annual report on
Form 10-K
under “Item 1A — Risk Factors”. If one
or more of these risks or uncertainties affects future events
and circumstances, or if underlying assumptions do not
materialize, actual results may vary materially from those
described in this annual report as anticipated, believed,
estimated or expected, and this could have a material adverse
effect on our business, financial condition and the results of
our operations. Further, any forward-looking statement speaks
only as of the date on which it is made, and except as required
by law, we undertake no obligation to update any forward-looking
statement to reflect events or circumstances after the date on
which it is made or to reflect the occurrence of anticipated or
unanticipated events or circumstances.
Waste Services, Inc. (“Waste Services”) and its wholly
owned subsidiaries (collectively, “we,” “us”
or “our”) is a multi-regional, integrated solid waste
management company. We provide collection, transfer, disposal
and recycling services for non-hazardous solid waste in the
United States and Canada. As of December 31, 2006, we
served an estimated 76,000 commercial and industrial customers
and served an estimated 7,700,000 residential
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addresses. We currently own or operate 9 landfills, 20
transfer stations, 13 recycling facilities, and 36 collection
operations.
We are organized geographically by region within the U.S. and
Canada. Our Canadian operations are organized in two regions:
Eastern Canada (Ontario) and Western Canada (Alberta,
Saskatchewan and British Columbia); the U.S. is organized
in three regions: Florida, Texas and Arizona. Accordingly, we
have five operating segments, three in the United States and two
in Canada. Due to a pending sale, our Arizona operations are
presented as discontinued operations. We do not have significant
(in volume or dollars) inter-segment operation-related
transactions. For more information regarding our segments refer
to Note 18 accompanying our Consolidated Financial
Statements.
Our predecessor company, Capital Environmental Resource Inc.
(“Capital Environmental”), was incorporated in
Ontario, Canada in May 1997. Initially, Capital Environmental
incorporated us as one of its subsidiaries in Delaware in 2003
under the name Omni Waste, Inc. In 2003, we changed our name to
Waste Services, Inc. Under a plan of arrangement designed to
domicile the corporate parent of our operations in the United
States, we became the successor to Capital Environmental. This
migration transaction was completed July 31, 2004 and was
accomplished primarily by the exchange of shares of Capital
Environmental into shares of Waste Services, Inc. As a result of
the migration transaction, Capital Environmental became our
subsidiary and we became the parent company. Capital
Environmental also changed its name to Waste Services (CA) Inc.
(“Waste Services (CA)”)
Our corporate offices are located at 1122 International Blvd.,
Suite 601, Burlington, Ontario, Canada L7L 6Z8. Our
telephone number is
(905) 319-1237.
We file annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and other filings with the Securities and Exchange Commission
(“SEC”). The public may read and copy any materials we
file with the SEC at the SEC’s Office of Public Reference
at 100 F Street, N.E., Room 1580, Washington, D.C.
20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC also maintains an internet site that contains reports,
proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The
internet address is
http://www.sec.gov.
We make available, at no charge through our website address at
http://www.wasteservicesinc.com, our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and amendments to these reports filed or furnished with the SEC
as soon as reasonably practicable after we electronically file
such material with, or furnish it to the SEC. Information on our
website does not form a part of this annual report.
Our goal is to be a highly profitable, multi-regional
non-hazardous solid waste services company in North America
with leading market positions in each of the markets we serve.
In order to achieve this goal, we intend to:
Maximize Density and Vertical Integration of
Operations. We believe that achieving a high
degree of density and vertical integration of operations leads
to higher profitability and returns on invested capital. In each
of our local markets, we seek to maximize the density of our
collection routes. This allows us to leverage our facilities and
vehicle fleet by increasing the number of customers served and
revenue generated by each route. In addition, we seek to
vertically integrate our operations where possible, using
transfer stations to link collection operations with our
landfills to increase internalization of waste volume. By
securing and controlling the waste stream from collection
through disposal, we are able to achieve cost savings for our
collection operations, while at the same time providing our
landfills with more stable and predictable waste volume and
enhancing margins through the internalization of collecting and
gathering efforts. In our efforts to maximize vertical
integration, we periodically evaluate markets where we are not
internalized for possible collection or transfer station
acquisitions or asset swap transactions to enhance density or
internalization in existing markets where we are vertically
integrated.
Provide Consistent, Superior Customer
Service. Our long-term growth and profitability
will be driven, in large part, by our ability to provide
consistent, superior service to our customers. We believe that
our local
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and regional operating focus allows us to respond effectively to
customer needs on a local basis, as well as maintain strong
relationships with our commercial, municipal and residential
accounts. In each of our markets, customer retention and new
account generation are key areas of focus for our local managers.
Maintain a Decentralized Operating Management Structure with
Centralized Controls and Information Systems. The
solid waste industry is a local and regional business by nature.
We believe that asset investment, customer relationships,
pricing and operational productivity are most effectively
managed on a local and regional basis. We have structured our
operating management team on a geographically decentralized
basis, because we believe that talented, experienced and focused
local management are in the best position to make effective,
profitable decisions regarding local operations, including
customer acquisition and retention, and to provide strong
customer service. Our senior management team provides
significant oversight and guidance for our local management,
developing operating goals and standards tailored to each
market. Our senior management does not impose corporate
directives regarding certain local operating decisions.
While our operating management structure is decentralized, all
of our operations adhere to uniform corporate policies and
financial controls and use integrated information systems. Our
information systems provide both corporate and local management
with comprehensive, consistent and timely operating and
financial data, enabling them to maintain detailed, ongoing
visibility of the performance and trends in each of our local
market operations.
Execute a Disciplined, Disposal-Based Growth
Strategy. Our growth strategy consists of both
making
“tuck-in”
acquisitions within an existing market, which typically consist
of collection operations or transfer stations, and making new
geographic market entries by acquiring disposal capacity. In any
acquisition, we focus on maximizing long-term cash flow and
return on invested capital.
For tuck-in
acquisitions, we only pursue opportunities that:
For new market entries, we will only pursue opportunities where
we can:
Operations
We provide our services on a geographic basis in three regions
in the United States: Florida, Arizona and Texas; and in two
regions in Canada: Eastern (Ontario) and Western (Alberta,
British Columbia and Saskatchewan). For a discussion on the
seasonality of our business, see Item 7 —
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations —
Seasonality.”
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A summary of the collection, recycling, transfer station,
landfill disposal and other services that we provide as of
December 31, 2006 is as follows:
We provide collection services to an estimated 76,000 commercial
and industrial customers and serve an estimated 7,700,000
residential addresses, as of December 31, 2006. We have a
front-line collection fleet size of approximately 1,100 vehicles
with an average fleet age of approximately 6 to 7 years.
Commercial and Industrial Collection. We
perform commercial and industrial collection services
principally under one to five year service agreements, which
typically contain provisions for automatic renewal and which
prohibit the customer from terminating the agreement prior to
its expiration date without incurring a penalty. Roll-off
containers are also provided to our customers for temporary
services, such as for construction projects, under short-term
purchase orders. Stationary compactors are rented to customers,
allowing them to compact their waste at their premises prior to
its collection. Commercial and industrial collection vehicles
normally require one operator. We provide two to eight cubic
yard containers to commercial customers and ten to forty cubic
yard roll-off containers to industrial customers.
Charges for our commercial and industrial services are
determined by a variety of factors, including collection
frequency, level of service, route density, the type, volume and
weight of the waste collected, type of equipment and containers
furnished, the distance to the disposal or processing facility,
the cost of disposal or processing, and prices charged by
competitors for similar services. Our contracts with commercial
and industrial customers typically allow us to pass on increased
costs resulting from variable items such as disposal and fuel
costs and surcharges. Our ability to pass on price increases is,
however, sometimes limited by the terms of our contracts.
Residential Collection. Our residential waste
collection services are provided under a variety of contractual
arrangements, including contracts with municipalities, owners
and operators of large residential complexes and mobile home
parks, and homeowners associations. In certain markets, we also
provide residential subscription services to individual
homeowners.
Our contracts with municipalities are typically for a fixed term
of from three to ten years. Charges for residential services to
municipalities are determined based upon the number of homes
serviced as well as the frequency of service. These contracts
often contain a formula, generally based on a predetermined
published price index, for adjustments to charges to cover
increases in some, but not all, of our operating costs. Certain
of our contracts with municipalities also contain renewal
provisions or capital commitments.
Charges for residential non-hazardous solid waste collection
services provided on a subscription basis are based primarily on
route density, the frequency and level of service, the distance
to the disposal or transfer facility, the cost of disposal or
transfer and prices we charge in the market for similar services.
Our transfer stations allow us to internalize our collection
volume into the landfills we own. They also receive
non-hazardous solid waste from third parties. Waste received at
our transfer station is compacted and transferred, generally by
third-party subcontractors, for disposal to our own or
third-party landfills. We charge third-parties fees to dispose
of their waste at our transfer stations. Transfer station fees
are generally based on the cost of processing, transportation
and disposal. We also may enter into long-term put or pay
disposal arrangements whereby third-party
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customers can secure disposal capacity with us at pre-arranged
fixed rates or pay a penalty equal to the number of tons below
the required tonnage multiplied by that disposal rate.
We believe that the benefits of using our transfer stations
include improved utilization of our collection infrastructure
and better relationships with municipalities and private
operators that deliver waste to our transfer stations, which can
lead to additional growth opportunities. We believe that
transfer stations will become increasingly important to our
operations as new landfills are opening further away from
metropolitan areas and waste needs to travel further for
disposal in large metropolitan markets.
We offer collection and processing services to our municipal,
commercial and industrial customers for a variety of recyclable
materials, including cardboard, office paper, plastic
containers, glass bottles, fiberboard, and ferrous and aluminum
metals. In some markets, we operate material recovery facilities
that are used to sort, bale and ship recyclable materials to
market. We also deliver recyclable materials that we collect to
third parties for processing and resale. In an effort to reduce
our exposure to commodity price fluctuations on recycled
materials, where competitive pressures permit, we charge
collection or processing fees for recycling volume collected
from our commercial customers. We may also manage our exposure
to commodity price fluctuations through the use of commodity
brokers, which arrange for the sale of recyclable material
collected in our operations to third party purchasers. We
believe that recycling will continue to be an important
component of municipal non-hazardous solid waste management
plans due to the public’s environmental awareness and
regulations that mandate or encourage recycling.
We charge our landfill customers a tipping fee on a per ton or
per cubic yard basis for disposing of their non-hazardous solid
waste at our landfills. We generally base our landfill tipping
fees on market factors and the type and weight or volume of the
waste deposited. We may enter into long-term put or pay disposal
arrangements whereby third-party customers can secure disposal
capacity at our landfills at pre-arranged fixed rates or pay a
penalty equal to the number of tons below the required tonnage
multiplied by that disposal rate.
We dispose of the non-hazardous solid waste we collect in one of
four ways: (i) at our own landfills; (ii) through our
own transfer stations; (iii) at municipally-owned
landfills; or (iv) at third-party landfills or transfer
stations. In markets where we do not have our own landfills, we
seek to secure favorable long-term disposal arrangements with
municipalities or private owners of landfills or transfer
stations. In some markets, we may enter into put or pay disposal
arrangements with third party operators of disposal facilities.
These types of arrangements allow us to fix our disposal costs,
but also expose us to the risk that if our tonnage declines and
we are unable to deliver the minimum tonnage, we will be
required to pay the penalty.
We offer other specialized services consisting primarily of
sales and leasing of compactor equipment and portable toilet
services for special events or construction sites.
We manage our business on a local/regional basis. Each of our
operating regions also has a number of operating districts where
the business is managed on a local basis.
From a management perspective, each region has a regional vice
president or manager who reports to our President and Chief
Operating Officer. Reporting to the regional vice presidents or
managers are district managers who are responsible for the
day-to-day
operations of their districts, including supervising their sales
force, maintaining service quality, implementing our health and
safety and environmental programs and overseeing contract
administration. District managers work closely with the regional
vice presidents or managers to execute business plans and
identify business development opportunities. This structure is
designed to provide decision-making authority to our district
managers who are closest to the needs of the customers they
serve in the community.
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This localized approach allows us to quickly identify and
address customer needs, manage local operating dynamics and take
advantage of market opportunities.
We market our services on a decentralized basis principally
through our district managers and direct sales representatives.
Our sales representatives visit customers on a regular basis and
call upon potential new customers within a specified territory
or service area. These sales representatives receive a portion
of their compensation based on meeting certain incentive targets.
We have a diverse customer base, with no single contract or
customer representing more than 2.5% of consolidated revenue for
the year ended December 31, 2006.
The non-hazardous solid waste services industry is highly
competitive and fragmented. We compete with large, national
non-hazardous solid waste services companies, as well as smaller
regional non-hazardous solid waste services companies of varying
sizes and resources. Some of our competitors are better
capitalized, have greater name recognition and greater
financial, operational and marketing resources than we have. We
also compete with operators of alternative disposal facilities,
and with municipalities that maintain their own waste collection
and disposal operations. Public sector operators may have
financial advantages over us because of their access to user
fees or tax revenue, as well as their ability to regulate flow
of waste streams.
The U.S. non-hazardous solid waste industry currently
includes three large national waste companies: Waste Management,
Inc., Allied Waste Industries, Inc. and Republic Services, Inc.
Waste Management of Canada Corporation, and BFI Canada, Inc. are
our significant competitors in Canada.
We compete for collection, transfer and disposal volume based
primarily on the price and quality of service. From time to
time, competitors may reduce the prices of their services in an
effort to expand their market share or service areas or to win
competitively bid municipal contracts. These practices may cause
us to reduce the prices of our services or, if we elect not to
do so, to lose business. Occasionally, we have elected not to
renew or rebid for certain contracts due to the relatively low
operating margins associated with them.
Competition exists not only for collection, transfer and
disposal volume, but also for acquisition candidates. We
generally compete for acquisition candidates with publicly owned
regional and large national non-hazardous solid waste services
companies.
Our facilities and operations in the United States and Canada
are subject to significant and evolving federal, state,
provincial and local environmental, health and safety and land
use laws and regulations that impose significant compliance
burdens and risks upon us and require us to obtain permits or
approvals from various government agencies. We incur recurring,
annual operating and capital costs in complying with this
regulatory regime. Most permits or approvals must be
periodically renewed. Renewals of our landfill permits may
result in the imposition of additional conditions that could
increase cell development and operating costs above currently
anticipated levels, or may limit the type, quantity or quality
of waste that may be accepted at the site, thereby reducing
operating revenue. Approvals and permits may also be modified or
revoked by the issuing agency, impacting operating revenue, and
civil or criminal fines and penalties may be imposed for our
failure to comply with the terms of our permits and approvals
and applicable regulations. In addition, in connection with
landfill expansions or increases in transfer station capacities,
we will incur significant capital costs in order to meet
applicable environmental standards that are a condition to the
approval of such expansions or increases.
The principal statutes and regulations that affect our
operations are summarized below:
The Resource Conservation and Recovery Act of 1976, as amended,
or RCRA, regulates the generation, treatment, storage, handling,
transportation and disposal of solid waste and requires states
to develop programs to ensure the safe disposal of solid waste.
The Subtitle D Regulations, which govern solid waste landfills,
include
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location restrictions, facility design standards, operating
criteria, closure and post-closure requirements, financial
assurance requirements, groundwater monitoring requirements,
methane gas emission control requirements, groundwater
remediation standards and corrective action requirements. The
Subtitle D Regulations also require certain landfill sites to
meet stringent liner design criteria to keep leachate out of
groundwater. All of the states in which we currently operate
have adopted regulations or programs as stringent as, or more
stringent than, the Subtitle D Regulations.
The Federal Water Pollution Control Act of 1972, as amended, or
Clean Water Act, regulates the discharge of pollutants from
landfill and other sites into waters of the United States. If
run-off from our transfer stations or of collected leachate from
our landfills is discharged into surface waters, the Clean Water
Act requires us to obtain a discharge permit, conduct sampling
and monitoring and, under certain circumstances, reduce the
quantity of pollutants in the discharge. Our landfills are also
required to comply with the EPA’s storm water regulations
issued in November 1990, which are designed to prevent
contaminated landfill storm water run-off from flowing into
surface waters.
The Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, or CERCLA, establishes a
program for the investigation and cleanup of facilities from
which a release of any hazardous substance into the environment
has occurred or is threatened. CERCLA imposes strict joint and
several liability for the cleanup of facilities on current
owners and operators of the site, owners and operators of the
site at the time of the disposal of the hazardous substances,
any person who arranges for the transportation, disposal or
treatment of the hazardous substances, and transporters of waste
containing hazardous substances, who select the disposal and
treatment facilities. CERCLA also imposes liability for the cost
of evaluation and remediation of any damage to natural
resources. The costs of a CERCLA investigation and cleanup can
be very substantial and liability is not dependent upon a
deliberate discharge of a hazardous substance. If we were found
to be a responsible party for a CERCLA cleanup, the enforcing
agency could hold us, or any other generator, transporter or the
owner or operator of the contaminated facility, responsible for
all investigative and remedial costs, even if others were also
liable. While CERCLA gives a responsible party the right to
bring a contribution action against other responsible parties,
the ability to obtain reimbursement from others could be limited
by the ability to find other responsible parties, prove the
extent of their responsibility and by the financial resources of
these other parties.
The Clean Air Act of 1970, as amended or Clean Air Act,
regulates emissions of air pollutants. The EPA has developed
standards that may apply to our landfills depending on the date
of construction, location, the materials disposed of at the
landfill and the volume of the landfill emissions. The EPA has
also issued standards regulating the disposal of asbestos
containing materials under the Clean Air Act. Our disposal and
collection operations are required to meet certain permitting
requirements under the Clean Air Act. We may be required to
install methane gas recovery systems at our landfills to meet
emission standards under the Clean Air Act.
All of the federal statutes described above contain provisions
authorizing, under certain circumstances, the institution of
lawsuits by private citizens to enforce the provisions of the
statutes. In addition to a penalty award to the
U.S. government, some of these statutes authorize an award
of attorneys’ fees to parties successfully advancing such
an action.
The Occupational Safety and Health Act of 1970, as amended,
(“OSHA”) and provincial occupation health and safety
laws in Canada establish employer responsibilities for worker
health and safety, including the obligation to maintain a
workplace free of recognized injury causing hazards and to
implement certain health and safety training programs. Various
OSHA standards apply to our operations, including standards
concerning notices of hazards, the handling of asbestos and
asbestos-containing materials and worker training and emergency
response programs.
In addition to these federal regulations which are a applicable
to our U.S. operations, each state or province in which we
operate has laws and regulations governing the generation,
storage, treatment, handling, transportation and disposal of
solid waste, occupational health and safety, water and air
pollution and, in most cases, the siting, design, operation,
maintenance, closure and post-closure care of landfills and
transfer stations. Many municipalities also have ordinances,
local laws and regulations that affect our operations. These
include zoning and health measures which may limit solid waste
management activities to specified sites or activities, impose
flow control restrictions that direct the delivery of solid
wastes to specific facilities or regulate discharges into
municipal sewers
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from our solid waste facilities, laws that grant the right to
establish franchises for collection services and then put these
franchises out for bid, and bans or other restrictions on the
movement of solid wastes into a municipality.
Permits or other land use approvals for our landfills, as well
as state, provincial or local laws and regulations, may specify
the quantity of waste that may be accepted at the landfill
during a given time period, specify the types of waste that may
be accepted at the landfill or the areas from which waste may be
accepted at a landfill. Changes in landfill design standards for
landfills may require us to construct or operate future landfill
cells and infrastructure to a higher and potentially more costly
standard than currently anticipated.
There has been an increasing trend to mandate and encourage
waste reduction at the source and waste recycling, and to
prohibit or restrict the disposal of certain types of solid
wastes, such as yard wastes, leaves and tires, in landfills. The
enactment of regulations reducing the volume and types of wastes
available for transport to and disposal in landfills could
affect the ability of our transfer stations and landfills to
operate at full capacity.
As of December 31, 2006, we employed approximately
2,160 full-time employees, including approximately 100
persons categorized as professionals or managers, approximately
1,800 employees involved in collection, transfer, disposal and
recycling operations, and approximately 260 sales, clerical,
data processing or other administrative employees. In Canada,
non-salaried employees in 13 of our 23 collection operations are
governed by collective agreements, three of which are to be
renewed in 2007. We are not aware of any current organizing
efforts among our non-unionized employees and believe that
relations with our employees are good.
Executive
Officers
The following table sets forth information regarding our
executive officers as of February 27, 2007:
Certain biographical information regarding each of our executive
officers is set forth below:
David Sutherland-Yoest has been our Chairman and Chief
Executive Officer and a director since September 6, 2001.
Mr. Sutherland-Yoest also held the position of Chairman and
Chief Executive Officer of
H2O
Technologies Ltd., a water purification company, from March 2000
to October 2003 and served as a director of
H2O
Technologies Ltd. from March 2000 to January 2004.
Mr. Sutherland-Yoest served as the Senior Vice
President — Atlantic Area of Waste Management, Inc.
from July 1998 to November 1999. From August 1996 to July 1998,
he was the Vice Chairman and Vice President — Atlantic
Region of USA Waste Services, Inc., or USA Waste and the
President of Canadian Waste Services, Inc., which, during such
time, was a subsidiary of USA Waste. Prior to joining
USA Waste, Mr. Sutherland-Yoest was President, Chief
Executive Officer and a director of Envirofil, Inc. Between 1981
and 1992, he served in various capacities at Laidlaw Waste
Systems, Inc. and Browning-Ferris Industries, Ltd.
Charles A. Wilcox was appointed our President and Chief
Operating Officer effective July 14, 2004. Prior to joining
us, Mr. Wilcox worked for Waste Management, Inc. from
December 1994 where he held the positions of Senior Vice
President, Market Planning and Development and prior to that
Senior Vice President, Eastern Group.
Ivan R. Cairns was appointed our Executive Vice
President, General Counsel and Corporate Secretary effective
January 5, 2004. Prior to joining us, Mr. Cairns
served as Senior Vice President and General Counsel at Laidlaw
International Inc. and was Senior Vice President and General
Counsel at its predecessor, Laidlaw
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Inc., for over 20 years. In June 2001, Laidlaw Inc., and
four of its direct and indirect subsidiaries, filed voluntary
petitions for bankruptcy under the U.S. Bankruptcy Code and
also commenced Canadian insolvency proceedings. In June 2003,
these companies emerged from bankruptcy and the Canadian
insolvency proceedings.
Brian A. Goebel was appointed our Vice President, Chief
Accounting Officer and Corporate Controller effective
October 1, 2003 and named Acting Chief Financial Officer
effective September 2006. From December 1999 until joining
us, Mr. Goebel, a Certified Public Accountant, held the
position of Assistant Controller, ANC Rental Corporation, which
owned Alamo and National Car Rental. From January 1997 to
December 1999, Mr. Goebel was a Director of Corporate
Accounting for AutoNation, Inc. Prior to joining AutoNation,
Inc., Mr. Goebel spent eight years in the Business
Assurance practice of Coopers & Lybrand, LLP.
Bradford J. Helgeson was appointed our Vice President,
Finance effective June 1, 2004, and was appointed Treasurer
effective December 1, 2005. Prior to joining us,
Mr. Helgeson was an Associate in Investment Banking at
Lehman Brothers, where he focused on working with clients in the
industrial sector, including the solid waste industry. Before
joining Lehman Brothers in 2000, Mr. Helgeson had three
years of investment banking experience at Donaldson,
Lufkin & Jenrette.
Our
indebtedness may make us more vulnerable to unfavorable economic
conditions and competitive pressures, limit our ability to
borrow additional funds, require us to dedicate or reserve a
large portion of cash flow from operations to service debt, and
limit our ability to take actions that would increase our
revenue and execute our growth strategy
As of December 31, 2006, we had total outstanding debt and
capital lease obligations of $410.4 million. Our debt is
primarily comprised of a $60.0 million revolving credit
facility due in April 2009 (which is part of our senior secured
credit facilities), against which there were no amounts
outstanding at December 31, 2006, and $22.1 million of
which was used to support outstanding letters of credit; a
$245.3 million term loan maturing in March 2011 and
$160.0 million
91/2% senior
subordinated notes due 2014. Our senior secured credit
facilities are secured by substantially all of the assets of our
U.S. restricted subsidiaries, as well as by a pledge of 65%
of the common shares of our first tier foreign subsidiaries,
including Waste Services (CA). Our Canadian operations guarantee
and pledge all of their assets only in support of the
$15.0 million portion of the revolving credit facility
available to them.
The amount of our indebtedness owed under the senior secured
credit facilities and senior subordinated notes may have adverse
consequences for us, including making us more vulnerable to
unfavorable economic conditions and competitive pressures,
limiting our ability to borrow additional funds, requiring us to
dedicate or reserve a large portion of cash flow from operations
to service debt, limiting our ability to plan for or react to
changes in our business and industry and placing us at a
disadvantage compared to competitors with less debt in relation
to cash flow.
The credit facilities contain covenants and restrictions that
could limit the manner in which we conduct our operations and
could adversely affect our ability to raise additional capital.
Any failure by us to comply with these covenants and
restrictions will, unless waived by the lenders, result in an
immediate obligation to repay indebtedness. If such events
occurred, we would be required to refinance or obtain capital
from other sources, including sales of additional debt or equity
or the sale of assets, in order to meet our repayment
obligations. We may not be successful in obtaining alternative
sources of funding to repay these obligations should events of
default occur.
Our ability to remain competitive, sustain our growth and
maintain our operations largely depends on our cash flow from
operations and our access to capital. We intend to fund our cash
needs through our operating cash flow and borrowings under our
senior credit facilities. We may require additional equity or
debt financing to fund our growth and debt repayment obligations.
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Additionally, we have provided for our liabilities related to
our closure and post-closure obligations. As we undertake
acquisitions, expand our operations, and deplete our landfills,
our cash expenditures will increase. As a result, working
capital levels may decrease and require financing. If we must
close a landfill sooner than we currently anticipate, or if we
reduce our estimate of a landfill’s remaining available air
space, we may be required to incur such cash expenditures
earlier than originally anticipated. Expenditures for closure
and post-closure obligations may increase as a result of any
federal, state or local government regulatory action taken to
accelerate such expenditures. These factors could substantially
increase our cash expenditures and therefore impair our ability
to invest in our existing or new facilities.
We may need to refinance our existing debt obligations to pay
the principal amounts due at maturity. In addition, we may need
additional capital to fund future acquisitions and the
integration of the businesses that we acquire. Our business may
not generate sufficient cash flow, we may not be able to obtain
sufficient funds to enable us to pay our debt obligations and
capital expenditures or we may not be able to refinance on
commercially reasonable terms, if at all.
We are subject to significant environmental and land use laws
and regulations. To own and operate solid waste facilities,
including landfills and transfer stations, we must obtain and
maintain licenses or permits, as well as zoning, environmental
and other land use approvals. It has become increasingly
difficult, costly and time-consuming to obtain required permits
and approvals to build, operate and expand solid waste
management facilities. The process often takes several years,
requires numerous hearings and compliance with zoning,
environmental and other requirements and is resisted by citizen,
public interest and other groups. The cost of obtaining permits
could be prohibitive. We may not be able to obtain and maintain
the permits and approvals needed to own, operate or expand our
solid waste facilities. Moreover, the enactment of additional
laws and regulations or the more stringent enforcement of
existing laws and regulations could increase the costs
associated with our operations. Any of these occurrences could
reduce our expected earnings and cash flow.
In some markets in which we operate, permitting requirements may
be prohibitive and may differ between those required of us and
those required of our competitors. Our inability to obtain and
maintain permits for solid waste facilities may adversely affect
our ability to service our customers and compete in these
markets, thereby resulting in reduced operating revenue.
In addition, stringent controls on the design, operation,
closure and post-closure care of solid waste facilities could
require us to undertake investigative or remedial activities,
curtail operations, close a facility temporarily or permanently,
or modify, supplement or replace equipment or facilities at
substantial costs resulting in reduced profitability and cash
flow.
Any failure to maintain the required financial assurance or
insurance to support existing or future service contracts may
prevent us from meeting our contractual obligations, and we may
be unable to bid on new contracts or retain existing contracts
resulting in reduced operating revenue and earnings.
Municipal solid waste services contracts and permits to operate
transfer stations, landfills and recycling facilities typically
require us to obtain performance bonds, letters of credit or
other means of financial assurance to secure our contractual
performance. Such contracts and permits also typically require
us to maintain adequate insurance coverage. We carry a broad
range of insurance coverage and retain certain insurance
exposure that we believe is customary for a company of our size.
If our obligations were to exceed our estimates, there could be
a material adverse effect on our results of operations. We
satisfy these financial assurance requirements by providing
performance bonds or letters of credit. Our ability to obtain
performance bonds or letters of credit is generally dependent on
our creditworthiness. Also, the issuance of letters of credit
reduces the availability of our revolving credit facilities for
other purposes. Our bonding arrangements are generally renewed
annually. If we are unable to renew our bonding arrangements on
favorable terms or at all or enter into arrangements with new
surety providers, we would be unable to meet our existing
contractual obligations that require the posting of performance
bonds, and we would be unable to bid on new contracts. This
would reduce our operating revenue and our earnings.
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Part of our strategy to expand our business and increase our
revenue and profitability is to pursue the acquisition of
disposal-based and collection assets and businesses. We have
identified a number of acquisition candidates, both in the
United States and Canada. However, we may not be able to acquire
these candidates at prices or on terms and conditions that are
favorable to us. Furthermore, we expect to finance future
acquisitions through a combination of seller financing, cash
from operations, borrowings under our financing facilities or
issuing additional equity or debt securities. Our ability to
execute our acquisition strategy also depends upon other
factors, including our ability to obtain financing on favorable
terms, the successful integration of acquired businesses and our
ability to effectively compete in the new markets we enter.
If we are unable to identify suitable acquisition candidates or
successfully complete and integrate acquisitions, we may not
realize the expected benefits from our acquisition growth
strategy, including any expected benefits from the proposed
vertical integration of acquired operations and our existing
disposal facilities.
Our
business strategy depends in part upon vertically integrating
our operations. If we are unable to permit, expand or renew
permits for our existing landfill sites or enter into agreements
that provide us with access to landfill sites and acquire, lease
or otherwise secure access to transfer stations, this may reduce
our profitability and cash flow
Our ability to execute our business strategy depends in part on
our ability to permit, expand or renew permits for our existing
landfills, develop new landfill sites in proximity to our
operations, enter into agreements that will give us long-term
access to landfill sites in our markets and to acquire, lease or
otherwise secure access to transfer stations that permit us to
internalize our collection volume to our own landfill sites.
Permits to expand landfills are often not approved until the
remaining permitted disposal capacity of a landfill is very low.
We may not be able to purchase additional landfill sites, renew
the permits for or expand existing landfill sites, negotiate or
renegotiate agreements to obtain a long-term advantage for
landfill costs or permit or renew permits for transfer stations
that allow us to internalize the waste we collect. If we were to
exhaust our permitted capacity at our landfills, our ability to
expand internally could be limited, and we could be required to
cap and close our landfills and dispose of collected waste at
more distant landfills or at landfills operated by our
competitors or other third parties. In Alberta, Canada,
regulations require landfills to be re-approved every
10 years, thereby providing the regulator an opportunity to
add potentially more stringent or costly design or operating
conditions to the permit or prevent the renewal of the permit.
Our landfill located in Alberta, Canada was re-approved on
January 31, 2007. Our inability to secure favorable
arrangements (through ownership of landfills or otherwise) for
the disposal of collected waste would increase our disposal
costs and could result in the loss of business to competitors
with more favorable disposal options thereby reducing our
profitability and cash flow.
Changes in legislative or regulatory requirements may cause
changes in the landfill site permitting process. These changes
could make it more difficult or costly for us to obtain or renew
landfill permits. Technical design requirements, as approved,
may need modification at some future point in time, which could
result in higher development and construction costs than
projected. Our current estimates of future disposal capacity may
change as a result of changes in design requirements prescribed
by legislation, construction requirements and changes in the
expected waste density over the life of a landfill site. The
density of waste used to convert the available airspace at a
landfill into tons may be different than estimated because of
variations in operating conditions, including waste compaction
practices, site design, climate and the nature of the waste.
We could be held liable for environmental damage at solid waste
facilities that we own or operate, including damage to
neighboring landowners and residents for contamination of the
air, soil, groundwater, surface water and drinking water. Our
liability could extend to damage resulting from pre-existing
conditions and off-site
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contamination caused by pollutants or hazardous substances that
we or our predecessors arranged to transport, treat or dispose
of at other locations. We are also exposed to liability risks
from businesses that we acquire because these businesses may
have liabilities that we fail or are unable to discover,
including noncompliance with environmental laws. Our insurance
program may not cover all liabilities associated with
environmental cleanup or remediation or compensatory damages,
punitive damages, fines, or penalties imposed on us as a result
of environmental damage caused by our operations or those of any
predecessor. The incurring of liabilities for environmental
damages that are not fully covered by insurance could adversely
affect our liquidity and could result in significant expenses,
which would reduce the funds we have available for other
purposes, including debt service and reduction and acquisitions.
Although we operate landfills for non-hazardous commercial,
industrial and municipal solid waste, it is possible that third
parties may dispose of hazardous waste at our landfills or that
we may unknowingly dispose of hazardous waste at our landfills.
If this were to happen, we could become liable for remediation
costs under applicable regulations and, although we would have a
cause of action against any third party responsible for
disposing of the hazardous waste, we may be unable to identify
or recover against that person. The presence of hazardous waste
at our landfills could also negatively affect future permitting
processes with governmental authorities. If we become
responsible for remediation costs for hazardous waste or if
governmental authorities deny or restrict the scope of our
future permits, our profitability and operations may be
adversely impacted.
The markets in which we operate are highly competitive and
require substantial labor and capital resources. We compete with
large, national solid waste services companies as well as
smaller regional solid waste services companies. Some of our
competitors are better capitalized, have greater name
recognition and greater financial, operational and marketing
resources than us, or may otherwise be able to provide services
at a lower price.
We also compete with operators of alternative disposal
facilities and municipalities that maintain their own waste
collection and disposal operations. Public sector operators may
have financial advantages over us because of their access to
user fees and similar charges as well as to tax revenue.
Responding to this competition may result in reduced operating
margins. Further, competitive pressures may make our internal
growth strategy of improving service and increasing sales
penetration difficult or impossible to execute.
We derive a portion of our revenue from municipal contracts that
require competitive bidding by potential service providers.
Although we intend to continue to bid on municipal contracts and
to re-bid some of our existing municipal contracts, such
contracts may not be maintained or won in the future. We may be
unable to meet bonding requirements for municipal contracts at a
reasonable cost to us or at all. These requirements may limit
our ability to bid for some municipal contracts and may favor
some of our competitors. If we are unable to compete
successfully for municipal contracts because of bonding or other
requirements, we may lose important sources of revenue.
We also derive a portion of our revenue from non-municipal
contracts, which generally have a term of one to five years.
Some of these contracts permit our customers to terminate them
before the end of the contractual term. Any failure by us to
replace revenue from contracts lost through competitive bidding,
termination or non-renewal within a reasonable time period could
result in a decrease in our operating revenue and our earnings.
We depend on third parties for disposal of solid waste and if we
cannot maintain disposal arrangements with them we could incur
significant costs that would result in reduced operating margins
and revenue.
We currently deliver a portion of the solid waste we collect to
municipally owned disposal facilities and to privately owned or
operated disposal facilities. If municipalities increase their
disposal rates or if we cannot obtain and maintain disposal
arrangements with private owners or operators, we could incur
significant additional costs and, if we are not able to pass
these cost increases on to our customers because of competitive
pressures, this could result in reduced operating margins and
revenue.
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Some of our employees in Canada have chosen to be represented by
unions, and we have negotiated collective bargaining agreements
with them. Labor unions may make attempts to organize our
non-unionized employees. The negotiation of any collective
bargaining agreement could divert management’s attention
away from other business matters. If we are unable to negotiate
acceptable collective bargaining agreements, we may have to wait
through “cooling-off” periods, which are often
followed by union-initiated work stoppages, including strikes.
Unfavorable collective bargaining agreements, work stoppages or
other labor disputes may result in increased operating expenses
and reduced operating revenue.
Although fuel and energy costs account for a relatively small
portion of our total operating costs, sustained increases in
such costs, which we are unable to pass on to our customers
because of competitive pressures or contractual limitations,
could lower our operating margins and negatively impact our
profitability.
Our operating revenue tends to be somewhat lower in the fall and
winter months for our Canadian operations, reflecting the lower
volume of solid waste generated during those periods. Our first
and fourth quarter results typically reflect this seasonality.
In addition, particularly harsh weather conditions may result in
temporary slowdowns or suspension of certain of our operations
or higher labor and operational costs, any of which could have a
material adverse effect on our results of operations.
A portion of our operations are domiciled in Canada; as such, we
translate the results of our operations and financial condition
of our Canadian operations into U.S. dollars. Therefore,
our reported results of operations and financial condition are
subject to changes in the exchange relationship between the two
currencies. For example, as the relationship of the Canadian
dollar strengthens against the U.S. dollar our revenue is
favorably affected and conversely our expenses are unfavorably
affected. Assets and liabilities of Canadian operations have
been translated from Canadian dollars into U.S. dollars at
the exchange rates in effect at the relevant balance sheet date,
and revenue and expenses of Canadian operations have been
translated from Canadian dollars into U.S. dollars at the
average exchange rates prevailing during the period. Unrealized
gains and losses on translation of the Canadian operations into
U.S. dollars are reported as a separate component of
shareholders’ equity and are included in comprehensive
income (loss). Separately, monetary assets and liabilities
denominated in U.S. dollars held by our Canadian operation
are re-measured from U.S. dollars into Canadian dollars and
then translated into U.S. dollars. The effects of
re-measurement are reported currently as a component of net
income (loss). Currently, we do not hedge our exposure to
changes in foreign exchange rates.
Waste reduction programs may reduce the volume of waste
available for collection and disposal in some areas where we
operate. Some areas in which we operate offer alternatives to
landfill disposal, such as recycling and composting. In
addition, state, local, and provincial authorities increasingly
mandate recycling and waste reduction at the source and prohibit
the disposal of certain types of waste, such as yard waste, at
landfills. Any significant adverse change in regulation or
patterns regarding disposal of waste could have a material
adverse effect on our earnings by reducing the level of demand
for our services, resulting in decreased revenue and the
earnings we are able to generate.
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There is limited disposal capacity available in Ontario, Canada,
a market in which we have significant operations. As a result, a
significant portion of the solid waste collected in Ontario is
transported to sites in the United States for disposal.
Disruptions in the cross-border flow of waste, or periodic
closures of the border to solid waste would cause us to incur
more costs due to the increased time our trucks may be required
to spend at border check-points or increased processing or
sorting requirements. Additionally, our trucks might be required
to travel further to dispose of their waste in other areas of
Ontario. Disruptions in the cross-border flow of waste could
also result in a lack of disposal capacity available to our
Ontario market at a reasonable price or at all. These
disruptions could have a material adverse effect on our
operating results by increasing our costs of disposal in the
Ontario market and thereby decreasing our operating margins and
could result in the loss of business to competitors with more
favorable disposal options.
None
Our principal executive offices are in leased premises in
Burlington, Ontario and in Boca Raton, Florida. We also have
leased administrative offices in Florida, Arizona, Alberta and
Ontario. Our principal property and equipment consist of land,
buildings, vehicles and equipment, substantially all of which
are encumbered by liens in favor of our lenders under our
revolving and term loan credit facilities.
The following table summarizes the real properties used in our
operations as of December 31, 2006:
We use approximately 1,100 front-line waste collection vehicles
in our operations. We believe that our vehicles, equipment and
operating properties are adequate for our current operations.
However, we expect to continue to make investments in additional
equipment and property for expansion, replacement of assets and
in connection with future acquisitions.
In the normal course of our business and as a result of the
extensive governmental regulation of the solid waste industry,
we may periodically become subject to various judicial and
administrative proceedings involving federal, state, provincial
or local agencies. In these proceedings, an agency may seek to
impose fines on us or revoke or deny renewal of an operating
permit or license that is required for our operations. From time
to time, we may also be subject to actions brought by
citizens’ groups or adjacent landowners or residents in
connection with the permitting and licensing of transfer
stations and landfills or alleging environmental damage or
violations of the permits and licenses pursuant to which we
operate. We may become party to various lawsuits pending for
alleged damages to persons and property, alleged violations of
certain laws and alleged liabilities arising out of matters
occurring during the normal operation of a solid waste
management business.
In December 2002, Waste Management of Canada Corporation
(formerly Canadian Waste Services Inc.), or Canadian Waste, one
of our competitors, commenced an action in the Court of
Queen’s Bench of Alberta against us and one of our former
employees in Western Canada who had previously been employed by
Canadian Waste. The action alleges breach of the employment
contract between the former employee and Canadian Waste, and
breach of fiduciary duties. The action also alleges that we
participated in those alleged breaches. The action seeks damages
in the amount of approximately C$14.5 million, and an
injunction enjoining the employee from acting contrary to his
alleged employment contract and fiduciary duties.
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We intend to vigorously defend this action both with respect to
liability and damages, and no provisions have been made in these
financial statements for the above matter.
As of the date of this report, we do not believe that the
reasonably possible losses in respect of all or any of these
matters would have a material adverse impact on our business,
financial condition, results of operations or cash flows.
In March 2005, we filed a Complaint against Waste Management,
Inc. in the United States District Court in the Middle District
of Florida (Orlando). The Complaint alleges that Waste
Management sought to prevent us from establishing ourselves as
an effective competitor to Waste Management in the State of
Florida, by tortiously interfering with our business
relationships and committing antitrust violations under both
federal and Florida law. We are seeking in excess of
$25.0 million in damages against Waste Management. If we
are successful in our suit under antitrust laws, Waste
Management would be liable for treble damages or in excess of
$75.0 million. On February 9, 2007, the Court granted
summary judgment dismissing all of our claims. We intend to
appeal this judgment.
On December 12, 2006, we held a special meeting of our
shareholders to consider and approve the issuance of
9,894,738 shares of our common stock in a private placement
to accredited investors and to affiliates of Kelso and Company,
L.P. at a price of $9.50 per share in exchange for expected
proceeds payable to the Company of up to $66.5 million and
up to $27.5 million aggregate amount of our Series A
Preferred Stock. The number of votes cast for, against or
withheld including the number of abstentions and broker
non-votes for the resolution to approve the issuance of common
shares described above were as follows:
On June 30, 2006, we effected a reverse one for three split
of our common stock. As a result of the reverse split, each
holder of three outstanding shares of common stock received one
share of common stock. No fractional shares of common stock were
issuable in connection with the reverse stock split. In lieu of
such fractional shares, stockholders received a cash payment
equal to the product obtained by multiplying the fraction of
common stock by $9.15. Corresponding amendments have been made
to the exchangeable shares of Waste Services (CA) Inc., so that
each one exchangeable share will entitle the holder to one-third
of one share of our common stock, without regard to any
fractional shares. The reverse split has been retroactively
applied to all applicable information to the earliest period
presented, unless otherwise noted as being “pre-reverse
split”.
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Our common shares are traded on the Nasdaq National Market. The
following table provides high and low common share price
information for each quarter within our last two fiscal years:
As of February 23, 2007, there were 101 holders of record
of our common shares (including holders of record of
exchangeable shares of Waste Services (CA)).
We have not paid cash dividends on our common shares to date.
The terms of our Senior Secured Credit Facilities and Senior
Subordinated Notes prohibit us from paying cash dividends
without the consent of our lenders. See Item 7 —
“Management Discussion and Analysis of Financial Condition
and Results of Operations — Liquidity and Capital
Resources — Senior Secured Credit Facilities and
Senior Subordinated Notes”.
We currently intend to retain our future earnings, if any, to
finance the growth, development and expansion of our business
and repayment of indebtedness. Accordingly, we do not intend to
declare or pay any cash dividends on our common shares in the
immediate future. The declaration, payment and amount of future
cash dividends, if any, will be at the discretion of our board
of directors after taking into account various factors. These
factors include our financial condition, results of operations,
cash flows from operations, current and anticipated capital
requirements and expansion plans, the income tax laws then in
effect and the requirements of applicable laws.
Repurchases
of Securities
None.
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The following tables set forth our selected consolidated
financial data for the periods indicated and are qualified by
reference to, and should be read in conjunction with our
Consolidated Financial Statements and the Notes thereto, which
are included elsewhere in this annual report, especially
Note 4 as it relates to our business combinations,
significant asset acquisitions and dispositions, and
Item 7 — “Management’s Discussion and
Analysis of Financial Condition and Results of Operation.”
The financial data as of December 31, 2006, 2005, 2004,
2003 and 2002 and for each of the years then ended have been
derived from our audited Consolidated Financial Statements. The
selected consolidated financial data as of December 31,
2006, 2005, 2004, 2003 and 2002 and for each of the years then
ended have been prepared in accordance with accounting
principles generally accepted in the United States.
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The following discussion is based on, and should be read in
conjunction with Item 6. “Selected Financial
Data” and our Consolidated Financial Statements and Notes
thereto contained elsewhere in this annual report.
We are a multi-regional, integrated solid waste services
company, providing collection, transfer, landfill disposal and
recycling services for commercial, industrial and residential
customers. Our operations are located in the United States and
Canada. Our U.S. operations are located in Florida, Texas
and Arizona and our Canadian operations are located in Eastern
Canada (Ontario) and Western Canada (Alberta, Saskatchewan and
British Columbia). Due to a pending sale, we have presented
our Arizona operations as discontinued.
Our revenue consists primarily of fees charged to customers for
solid waste collection, landfill disposal, transfer and
recycling services.
We derive our collection revenue from services provided to
commercial, industrial and residential customers. Collection
services are generally performed under service agreements or
pursuant to contracts with municipalities. We recognize revenue
when services are rendered. Amounts billed to customers prior to
providing the related services are reflected as deferred revenue
and reported as revenue in the periods in which the services are
rendered.
We provide collection services for commercial and industrial
customers generally under one to five year service agreements.
We determine the fees we charge our customers based on a variety
of factors, including collection frequency, level of service,
route density, the type, volume and weight of the waste
collected, type of equipment and containers furnished, the
distance to the disposal or processing facility, the cost of
disposal or processing and prices charged by competitors for
similar services. Our contracts with commercial and industrial
customers typically allow us to pass on increased costs
resulting from variable items such as disposal and fuel costs
and surcharges. Our ability to pass on cost increases is
however, sometimes limited by the terms of our contracts.
We provide residential waste collection services through a
variety of contractual arrangements, including contracts with
municipalities, owners and operators of large residential
complexes, mobile home parks and homeowners associations or
through subscription arrangements with individual homeowners.
Our contracts with municipalities are typically for a term of
three to ten years and contain a formula, generally based on a
predetermined published price index, for adjustments to fees to
cover increases in some, but not all, of our operating costs.
Certain of our contracts with municipalities contain renewal
provisions. The fees we charge for residential solid waste
collection services provided on a subscription basis are based
primarily on route density, the frequency and level of service,
the distance to the disposal or processing facility, the cost of
disposal or processing and prices we charge in the market for
similar services.
We charge our landfill and transfer station customers a tipping
fee on a per ton or per cubic yard basis for disposing of their
solid waste at our transfer stations and landfills. We generally
base our landfill tipping fees on market factors and the type
and weight of, or volume of the waste deposited. We generally
base our transfer station tipping fees on market factors and the
cost of processing the waste deposited at the transfer station,
the cost of transporting the waste to a disposal facility and
the cost of disposal.
Material recovery facilities generate revenue from the sale of
recyclable commodities. In an effort to reduce our exposure to
commodity price fluctuations on recycled materials, where
competitive pressures permit, we charge collection or processing
fees for recycling volume collected from our customers. We may
also manage our exposure to commodity price fluctuations through
the use of commodity brokers who will arrange for the sale of
recyclable materials from our collection operations to third
party purchasers.
Our cost of operations primarily includes tipping fees and
related disposal costs, labor and related benefit costs,
equipment maintenance, fuel, vehicle, liability and
workers’ compensation insurance and landfill capping,
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closure and post-closure costs. Our strategy is to create
vertically integrated operations where possible, using transfer
stations to link collection operations with our landfills to
increase internalization of our waste volume. Internalization
lowers our disposal costs by allowing us to eliminate tipping
fees otherwise paid to third party landfill or transfer station
operator. We believe that internalization provides us with a
competitive advantage by allowing us to be a low cost provider
in our markets. We expect that our internalization will
gradually increase over time as we develop our network of
transfer stations and maximize delivery of collection volumes to
our landfill sites.
In markets where we do not have our own landfills, we seek to
secure disposal arrangements with municipalities or private
owners of landfills or transfer stations. In these markets, our
ability to maintain competitive prices for our collection
services is generally dependent upon our ability to secure
competitive disposal pricing. If owners of third party disposal
sites discontinue our arrangements, we would have to seek
alternative disposal sites which could impact our profitability
and cash flow. In addition, if third party disposal sites
increase their tipping fees and we are unable to pass these
increases on to our collection customers, our profitability and
cash flow would be negatively impacted.
We believe that the age and condition of our vehicle fleet has a
significant impact on operating costs, including, but not
limited to, repairs and maintenance, insurance and driver
training and retention costs. Through capital investment, we
seek to maintain an average fleet age of approximately six
years. We believe that this enables us to best control our
repair and maintenance costs, safety and insurance costs and
employee turnover related costs.
Selling, general and administrative expenses include managerial
costs, information systems, sales force, administrative expenses
and professional fees.
Depreciation, depletion and amortization includes depreciation
of fixed assets over their estimated useful lives using the
straight-line method, depletion of landfill costs, including
capping, closure and post-closure obligations using the
units-of-consumption
method, and amortization of intangible assets including customer
relationships and contracts and covenants
not-to-compete,
which are amortized over the expected life of the benefit to be
received from such intangibles.
We capitalize certain third party costs related to pending
acquisitions or development projects. These costs remain
deferred until we cease to be engaged on a regular and ongoing
basis with completion of the proposed acquisition, at which
point they are charged to current earnings. In the event that
the target is acquired, these costs are incorporated in the cost
of the acquired business. We expense indirect and internal costs
including executive salaries, overhead and travel costs related
to acquisitions as they are incurred.
We have executed definitive agreements with Allied Waste
Industries, Inc. (“Allied Waste”) whereby we will
(i) purchase Allied Waste’s hauling, transfer station
and recycling operations in Miami, Florida for
$63.0 million in cash, and (ii) sell our Arizona
hauling, transfer station and landfill operations to Allied
Waste for $53.0 million in cash. We anticipate closing on
this transaction during the first quarter of 2007. Accordingly,
we have presented the net assets and operations of our Arizona
operations as discontinued operations for all periods presented.
Revenue from discontinued operations was $28.0 million,
$26.4 million and $23.7 million and for the years
ended December 31, 2006, 2005 and 2004, respectively.
Pre-tax net income (loss) from discontinued operations was
$(1.5) million, $0.1 million and $(0.6) million
for the years ended December 31, 2006, 2005 and 2004,
respectively. The decrease in pre-tax net income (loss) from
discontinued operations for 2006 compared to 2005 is in part
attributable to retention bonuses granted to employees at our
Arizona operations during 2006. Previously, our Arizona
operations were reported as part of our “Other
Operations” segment.
In January 2007, we entered into definitive agreements to
indirectly acquire a roll-off collection and transfer operation,
a transfer station development project and a landfill
development project, all in south-west Florida, for an aggregate
purchase price of $51.2 million in cash. Of the total
$51.2 million purchase price, $10.0 million is
contingent upon the receipt of certain operating permits and
$19.5 million is due and payable at the earlier of the
receipt of all operating permits for the landfill site or
July 29, 2008. The existing transfer station is permitted
to
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accept construction and demolition waste volume. We expect to
complete these acquisitions in the second quarter of 2007.
In December 2006, we acquired (i) a construction and
demolition waste landfill in Charlotte County, Florida (the
“SLD Landfill”), and (ii) Pro Disposal, Inc.
(“Pro Disposal”), which operates a roll-off collection
and transfer business. The aggregate purchase price for the SLD
Landfill and Pro Disposal was $75.0 million in cash. The
SLD Landfill, which has a permitted capacity of
15.8 million cubic yards, commenced operations in
December 2006. Pro Disposal has collection operations in
Lee County, Florida and Collier County, Florida with two
transfer stations, one located in Fort Myers and the other
in Naples. The transfer stations are both permitted to accept
construction and demolition waste volumes. We expect to
internalize our Pro Disposal waste volumes into the SLD Landfill.
In December 2006, we issued 7,000,001 shares of our common
stock to Westbury (Bermuda) Limited (“Westbury”) and
Prides Capital, LLC (“Prides”) for a purchase price of
$66.5 million. We also issued 2,894,737 shares of our
common stock to Kelso Investment Associates VI, L.P. and KEP VI,
LLC (collectively “Kelso”) in exchange for shares of
our previously outstanding redeemable Preferred Stock
(“Preferred Stock”) in an amount equal to
$27.5 million, all of which were owned by Kelso. On
December 15, 2006, we used all of the net proceeds received
in the private placement from Westbury and Prides, as well as
debt and our available cash, to redeem the remaining outstanding
shares of our Series A Preferred Stock from Kelso.
In June 2006, we acquired Sun Country Materials, LLC (“Sun
Country Materials”) in Hillsborough County, Florida. The
purchase price for Sun Country Materials consisted of
$5.0 million in cash and the issuance of 4,013,378
(pre-reverse split) shares of our common stock valued at
approximately $12.4 million. Sun Country Materials owns a
construction and demolition landfill located in Hillsborough
County, Florida, which has recently been issued an expansion
permit.
In May 2006, we acquired Liberty Waste, LLC (“Liberty
Waste”) in Tampa, Florida. The purchase price for Liberty
Waste consisted of $8.0 million in cash and the issuance of
1,155,116 (pre-reverse split) shares of our common stock valued
at approximately $3.6 million. We had previously paid a
deposit of $6.0 million in cash and issued 946,372
(pre-reverse split) shares of our common stock valued at
approximately $2.9 million. Liberty Waste is a collection
operation based in Tampa with two transfer stations, one located
in Tampa and the other in Clearwater. The transfer stations are
both permitted to accept construction and demolition and
Class III waste volumes.
The Liberty Waste and Sun Country Materials acquisitions will
compliment our existing operations in the Tampa market. In
addition with the acquisition of Sun County, we will be able to
internalize our existing construction and demolition waste
volumes and those of Liberty Waste into the acquired landfill.
In April 2006, we acquired a materials recovery facility and
solid waste transfer station in Taft, Florida
(“Taft Recycling”). The purchase price for the
facility consisted of $11.3 million in cash and the
issuance of 1,269,841 (pre-reverse split) shares of our common
stock valued at approximately $3.9 million. In addition,
upon the issuance of the final operating permit on June 15,
2006, we paid $1.5 million in cash and delivered an
additional 1,269,842 (pre-reverse split) shares of our common
stock valued at approximately $3.7 million, of which
769,842 (pre-reverse split) shares were newly issued and 500,000
(pre-reverse split) shares were transferred from treasury. The
acquisition of Taft Recycling will allow us greater access to
third party waste volumes that can be disposed of at our JED
Landfill in Osceola County, Florida.
Critical
Accounting Estimates
General
Our discussion and analysis of our financial condition and
results of operations are based upon our Consolidated Financial
Statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of the financial statements requires us to make
estimates and judgments that affect the reported amounts of
assets, liabilities, revenue, expenses and related disclosure of
contingent assets and liabilities. On an ongoing basis we
evaluate our estimates, including those related to areas that
require a significant level of judgment or are otherwise subject
to an inherent degree of uncertainty. These areas include
allowances for doubtful accounts, landfill airspace, intangible
and long-lived assets, closure and post-
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closure liabilities, revenue recognition, income taxes and
commitments and contingencies. We base our estimates on
historical experience, our observance of trends in particular
areas, information or valuations and various other assumptions
that we believe to be reasonable under the circumstances and
which form the basis for making judgments about the carrying
value of assets and liabilities that may not be readily apparent
from other sources. Actual amounts could differ significantly
from amounts previously estimated.
We believe that of our significant accounting policies (refer to
the Notes to Consolidated Financial Statements contained
elsewhere in this annual report), the following may involve a
higher degree of judgment and complexity:
We recognize revenue when services, such as providing collection
services or accepting waste at our disposal facilities, are
rendered. Amounts billed to customers prior to providing the
related services are reflected as deferred revenue and reported
as revenue in the period in which the services are rendered.
We maintain an allowance for doubtful accounts based on their
expected collectibility. We perform credit evaluations of our
significant customers and establish an allowance for doubtful
accounts based on the aging of our receivables, payment
performance factors, historical trends, and other information.
In general, we reserve a portion of those receivables
outstanding more than 90 days and 100% of those outstanding
over 120 days. We evaluate and revise our reserve on a
monthly basis based upon a review of specific accounts
outstanding and our history of uncollectible accounts.
We account for business acquisitions using the purchase method
of accounting. The total cost of an acquisition is allocated to
the underlying net assets based on their respective estimated
fair values. As part of this allocation process, management must
identify and attribute values and estimated lives to the
intangible assets acquired. Such determinations involve
considerable judgment, and often involve the use of significant
estimates and assumptions, including those with respect to
future cash inflows and outflows, discount rates and asset
lives. These determinations will affect the amount of
amortization expense recognized in future periods. Assets
acquired in a business combination that will be re-sold are
valued at fair value less cost to sell. Results of operating
these assets are recognized currently in the period in which
those operations occur.
We account for goodwill in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets” and test
goodwill for impairment using the two-step process. The first
step is a screen for potential impairment, while the second step
measures the amount of the impairment, if any. The first step of
the goodwill impairment test compares the fair value of a
reporting unit with its carrying amount, including goodwill. We
have defined our reporting units to be consistent with our
operating segments: Eastern Canada, Western Canada, Florida,
Texas and Arizona. In determining the fair value, we may
utilize: (i) discounted future cash flows;
(ii) operating results based upon a comparative multiple of
earnings or revenues; (iii) offers from interested
investors, if any; or (iv) appraisals. Significant
estimates used in the fair value calculation utilizing
discounted future cash flows include, but are not limited to:
(i) estimates of future revenue and expense growth by
reporting unit; (ii) future estimated effective tax rates,
which we estimate to range between 37% and 40%;
(iii) future estimated rate of capital expenditures as well
as future required investments in working capital;
(iv) estimated average cost of capital, which we estimate
to range between 9.0% and 10.0%; and (v) the future
terminal value of our reporting unit, which is based upon its
ability to exist into perpetuity. Significant estimates used in
the fair value calculation utilizing market value multiples
include but are not limited to: (i) estimated future growth
potential of the reporting unit; (ii) estimated multiples
of revenue or earnings a willing buyer is likely to pay; and
(iii) estimated control premium a willing buyer is likely
to pay.
Judgments regarding the existence of impairment indicators are
based on legal factors, market conditions and operational
performance of the acquired businesses. Future events could
cause us to conclude that impairment indicators exist and that
goodwill associated with the acquired businesses is impaired.
Additionally, as the valuation of identifiable goodwill requires
significant estimates and judgment about future performance,
cash flows and fair
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value, our future results could be affected if these current
estimates of future performance and fair value change. Any
resulting impairment loss could have a material adverse impact
on our financial condition and results of operations.
Acquisition deposits and deferred acquisition costs include
capitalized incremental direct costs associated with proposed
business combinations that are currently being negotiated. These
costs remain deferred until we cease to be engaged on a regular
and ongoing basis with completion of the proposed acquisition,
at which point they are charged to earnings. In the event that
the target is acquired, these costs are incorporated in the cost
of the acquired business. Indirect and internal costs, including
executive salaries, overhead and travel costs related to
acquisitions, are expensed as incurred.
We periodically evaluate whether events and circumstances have
occurred that may warrant revision of the estimated useful life
of property and equipment or whether the remaining balance of
property and equipment, or other long-lived assets including
amortizing intangible assets, should be evaluated for possible
impairment. Instances that may lead to an impairment include:
(i) a significant decrease in the market price of a
long-lived asset group; (ii) a significant adverse change
in the extent or manner in which a long-lived asset or asset
group is being used or in its physical condition; (iii) a
significant adverse change in legal factors or in the business
climate that could affect the value of a long-lived asset or
asset group, including an adverse action or assessment by a
regulator; (iv) an accumulation of costs significantly in
excess of the amount originally expected for the acquisition or
construction of a long-lived asset or asset group; (v) a
current-period operating or cash flow loss combined with a
history of operating or cash flow losses or a projection or
forecast that demonstrates continuing losses associated with the
use of a long-lived asset or asset group; or (vi) a current
expectation that, more likely than not, a long-lived asset or
asset group will be sold or otherwise disposed of significantly
before the end of its previously estimated useful life.
Upon recognition of an event, as previously described, we use an
estimate of the related undiscounted cash flows, excluding
interest, over the remaining life of the property and equipment
and long-lived assets in assessing their recoverability. We
measure impairment loss as the amount by which the carrying
amount of the asset(s) exceeds the fair value of the asset(s).
We primarily employ two methodologies for determining the fair
value of a long-lived asset: (i) the amount at which the
asset could be bought or sold in a current transaction between
willing parties; or (ii) the present value of estimated
expected future cash flows grouped at the lowest level for which
there are identifiable independent cash flows.
Costs associated with arranging financing are deferred and
expensed over the related financing arrangement using the
effective interest method. Should we repay an obligation earlier
than its contractual maturity, any remaining deferred financing
costs are charged to earnings. Fees paid to lenders for
amendments are deferred and expensed over the remaining life of
the facility; ancillary professional fees relating to an
amendment are expensed as incurred.
Landfill sites are recorded at cost. Capitalized landfill costs
include expenditures for land, permitting costs, cell
construction costs and environmental structures. Capitalized
permitting and cell construction costs are limited to direct
costs relating to these activities, including legal, engineering
and construction costs associated with excavation, liners and
site berms, leachate management facilities and other costs
associated with environmental management equipment and
structures.
Costs related to acquiring land, excluding the estimated
residual value of un-permitted, non-buffer land, and costs
related to permitting and cell construction are depleted as
airspace is consumed using the
units-of-consumption
method. Environmental structures, which include leachate
collection systems, methane collection systems and groundwater
monitoring wells, are charged to expense over the shorter of
their useful life or the life of the landfill.
Capitalized landfill costs may also include an allocation of the
purchase price paid for the landfills. For landfills purchased
as part of a group of several assets, the purchase price
assigned to the landfill is determined
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based upon the discounted expected future cash flows of the
landfill relative to the other assets within the acquired group.
If the landfill meets our expansion criteria, the purchase price
is further allocated between permitted airspace and expansion
airspace based upon the ratio of permitted versus probable
expansion airspace to total available airspace. Landfill sites
are amortized using the
units-of-consumption
method over the total available airspace including probable
expansion airspace where appropriate.
We assess the carrying value of our landfill sites in accordance
with the provisions of SFAS No. 144. These provisions,
as well as possible instances that may lead to impairment, are
addressed in “Long-Lived Assets”. There are certain
indicators previously discussed that require significant
judgment and understanding of the waste industry when applied to
landfill development or expansion.
We identified three sequential steps that landfills generally
follow to obtain expansion permits. These steps are as follows:
(i) obtaining approval from local authorities;
(ii) submitting a permit application to state or provincial
authorities; and (iii) obtaining permit approval from state
or provincial authorities.
Before expansion airspace is included in our calculation of
total available disposal capacity, the following criteria must
be met: (i) the land associated with the expansion airspace
is either owned by us or is controlled by us pursuant to an
option agreement; (ii) we are committed to supporting the
expansion project financially and with appropriate resources;
(iii) there are no identified fatal flaws or impediments
associated with the project, including political impediments;
(iv) progress is being made on the project; (v) the
expansion is attainable within a reasonable time frame; and
(vi) based upon senior management’s review of the
status of the permit process to date we believe it is more
likely than not the expansion permit will be received within the
next five years. Upon meeting our expansion criteria, the rates
used at each applicable landfill to expense costs to acquire,
construct, close and maintain a site during the post-closure
period are adjusted to include probable expansion airspace and
all additional costs to be capitalized or accrued associated
with the expansion airspace.
Once expansion airspace meets the criteria for inclusion in our
calculation of total available disposal capacity, management
continuously monitors each site’s progress in obtaining the
expansion permit. If at any point it is determined that an
expansion area no longer meets the required criteria, the
probable expansion airspace is removed from the landfill’s
total available capacity and the rates used at the landfill to
expense costs to acquire, construct, close and maintain a site
during the post-closure period are adjusted accordingly. Changes
in engineering estimates are primarily driven by landfill
design, compaction and density. These changes primarily affect
our depletion rates per ton or tonne, as applicable.
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The following table reflects landfill capacity activity for
permitted landfills owned by us for each of the three years
ended December 31, 2006, 2005 and 2004 (in thousands of
cubic yards):
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We recognize as an asset, an amount equal to the fair value of
the liability for an asset retirement obligation. The asset is
then depleted consistent with other capitalized landfill costs,
over the remaining useful life of the site based upon units of
consumption as airspace in the landfill is consumed.
Additionally, we recognize a liability for the present value of
the estimated future asset retirement obligation. The liability
will be adjusted for: (i) additional liabilities incurred
or settled; (ii) accretion of the liability to its future
value; and (iii) revisions in the estimated cash flows
relative to closure and post-closure costs.
Accrued closure and post-closure obligations represent an
estimate of the future obligation associated with closure and
post-closure monitoring of the solid waste landfills owned by
us. Site-specific closure and post-closure engineering cost
estimates are prepared for the landfills we own. The impact of
changes in estimates, based on an annual update, is accounted
for on a prospective basis. We calculate closure and
post-closure liabilities by estimating the total future
obligation in current dollars, increasing the obligations based
upon the expected date of the expenditure using an inflation
rate of 2.5% and discounting the resultant total to its present
value using an 8.0% credit-adjusted risk-free discount rate. We
expect our 2007 inflation and discount rates to approximate
those of 2006. Accretion of discounted cash flows associated
with the closure and post-closure obligations is accrued over
the estimated life of the landfill.
We use the asset and liability method to account for income
taxes. Significant management judgment is required in
determining the provision for income taxes, deferred tax assets
and liabilities and any valuation allowance recorded against net
deferred tax assets. In preparing the Consolidated Financial
Statements, we are required to estimate the income taxes in each
of the jurisdictions in which we operate. This process involves
estimating the actual current tax liability together with
assessing temporary differences resulting from differing
treatment of items, such as deferred revenue, depreciation on
property, plant and equipment and losses for tax and accounting
purposes. These differences result in deferred tax assets, which
include tax loss carry-forwards, and liabilities, which are
included within the consolidated balance sheet. We then assess
the likelihood that deferred tax assets will be recovered from
future taxable income, and to the extent that recovery is not
likely or there is
25
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insufficient operating history, a valuation allowance is
established. To the extent a valuation allowance is established
or increased in a period, we include an expense within the tax
provision of the consolidated statement of operations.
In July 2006, the FASB issued SFAS Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes-an
interpretation of SFAS Statement No. 109”
(“FIN 48”). FIN 48 applies to all “tax
positions” accounted for under SFAS 109. FIN 48
refers to “tax positions” as positions taken in a
previously filed tax return or positions expected to be taken in
a future tax return which are reflected in measuring current or
deferred income tax assets and liabilities reported in the
financial statements. FIN 48 further clarifies a tax
position to include, but not limited to, the following:
FIN 48 clarifies that a tax benefit may be reflected in the
financial statements only if it is “more likely than
not” that a company will be able to sustain the tax return
position, based on its technical merits. If a tax benefit meets
this criterion, it should be measured and recognized based on
the largest amount of benefit that is cumulatively greater than
50% likely to be realized. This is a change from currently
occurring practice, whereby companies may recognize a tax
benefit only if it is probable a tax position will be sustained.
FIN 48 also requires that we make qualitative and
quantitative disclosures, including a discussion of reasonably
possible changes that might occur in unrecognized tax benefits
over the next 12 months; a description of open tax years by
major jurisdictions; and a roll-forward of all unrecognized tax
benefits, presented as a reconciliation of the beginning and
ending balances of the unrecognized tax benefits on an
aggregated basis.
This statement became effective for us on January 1, 2007
and, based on our analysis, we do not expect FIN 48 to have
a material effect on our consolidated results of operations,
cash flows or financial position.
Our
U.S.-based
automobile, general liability and workers’ compensation
insurance coverage is subject to certain deductible limits. We
retain up to $0.5 million and $0.25 million of risk
per claim, plus claims handling expense under our workers’
compensation and our auto and general liability insurance
programs, respectively. Claims in excess of such deductible
levels are fully insured subject to our policy limits. However,
we have a limited claims history for our U.S. operations
and it is reasonably possible that recorded reserves may not be
adequate to cover future payments of claims. We have collateral
requirements that are set by the insurance companies, which
underwrite our insurance programs. Collateral requirements may
change from time to time, based on, among other factors, the
size of our business, our claims experience, financial
performance or credit quality and retention levels. As of
December 31, 2006 we had posted letters of credit with our
U.S. insurer of $9.3 million to cover the liability
for losses within the deductible limit. Provisions for retained
claims are made by charges to expense based upon periodic
evaluations by management of the estimated ultimate liabilities
on reported and unreported claims. Adjustments, if any, to the
estimated reserves resulting from ultimate claim payments will
be reflected in operations in the periods in which such
adjustments become known.
Effective January 1, 2006, we adopted the fair value
recognition provisions of SFAS No. 123 (revised 2004),
“Share-Based Payment” (“SFAS 123(R)”),
using the modified prospective transition method. Under that
transition method, employee stock-based compensation cost
recognized in 2006 includes: (i) compensation cost for all
share-based
payments granted prior to, but not yet vested as of
January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of
SFAS No. 123, “Accounting for Stock-Based
Compensation” (“SFAS 123”) and
(ii) compensation cost for all share-based payments granted
subsequent to January 1, 2006, based on the grant date fair
value estimated in accordance with the provisions of
SFAS 123(R). Results for
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prior periods have not been restated. Stock-based employee
compensation cost (benefit) is recognized as a component of
selling, general and administrative expense in the Statement of
Operations.
Prior to January 1, 2006 we accounted for our stock-based
compensation plans under the recognition and measurement
provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees (“APB 25”), and related
Interpretations, as permitted by SFAS 123. For the years
ended December 31, 2005 and 2004, stock-based employee
compensation expense (benefit) was $0.3 million and
$(1.4) million, respectively. For 2005 and 2004,
compensation expense (benefit) recognized for employee stock
options subject to variable accounting is based on the intrinsic
value (the difference between the exercise price and quoted
market price) of the options at the end of each reporting
period. Changes in the intrinsic value are recognized until such
options are exercised, expire or are forfeited.
As a result of adopting SFAS 123(R) on January 1,
2006, our net loss and loss before income taxes for the year
ended December 31, 2006, is approximately $1.9 million
higher than if we had continued to account for share-based
compensation under APB 25. The adoption of this standard
had no impact on our provision for income taxes because: of
(i) the valuation allowance for our U.S. deferred tax
assets due to our lack of operating history relative to our
U.S. operations and (ii) the non-deductibility of
options issued to our Canadian employees. Prior to the adoption
of SFAS 123(R), we presented all tax benefits, if any, of
tax deductions resulting from the exercise of stock options as
operating cash flows in the Statement of Cash Flows. As a result
of adopting SFAS 123(R), tax benefits resulting from tax
deductions in excess of the compensation cost recognized for
options (excess tax benefits) are classified as financing cash
flows. We estimate the fair value of option grants made to
employees using a Black-Scholes pricing model. Within that model
we make the following assumptions: (i) the annual dividend
yield is zero as we do not pay dividends, (ii) the weighted
average expected life of an option is approximated to equal the
length of it’s vesting period, (iii) the risk free
interest rate is taken to equal the prevailing rate on the US
Treasury Yield Rate Curve for a period equal to the weighted
average expected life, and (iv) the volatility is based on
the level of fluctuations in our historical share price for a
period equal to the weighted average expected life.
We account for the issuance of options or warrants for services
from non-employee consultants in accordance with Emerging Issues
Task Force Issue
96-18,
“Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services”
(“EITF 96-18”),
by estimating the fair value of options or warrants issued using
a Black-Scholes pricing model. Variables used in the calculation
of fair value include the option or warrant exercise price, the
market price of our shares on the grant date, the risk-free
interest rate, the life of the option or warrant, expected
volatility of our stock and expected dividends.
A portion of our operations is domiciled in Canada; as such, for
each reporting period we translate the results of operations and
financial condition of our Canadian operations into
U.S. dollars, in accordance with SFAS No. 52,
“Foreign Currency Translation”,
(“SFAS 52”). Therefore, the reported results of
our operations and financial condition are subject to changes in
the exchange relationship between the two currencies. For
example, as the relationship of the Canadian dollar strengthens
against the U.S. dollar, revenue is favorably affected and
conversely expenses are unfavorably affected. Assets and
liabilities of Canadian operations are translated from
Canadian dollars into U.S. dollars at the exchange
rates in effect at the relevant balance sheet dates, and revenue
and expenses of Canadian operations are translated from Canadian
dollars into U.S. dollars at the average exchange rates
prevailing during the period. Unrealized gains and losses on
translation of the Canadian operations into U.S. dollars
are reported as a separate component of shareholders’
equity and are included in comprehensive income (loss).
Separately, monetary assets and liabilities, as well as
intercompany receivables, denominated in U.S. dollars held
by our Canadian operations are re-measured from
U.S. dollars into Canadian dollars and then translated into
U.S. dollars. The effects of re-measurement are reported
currently as a component of net income (loss). Currently, we do
not hedge our exposure to changes in foreign exchange rates.
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Operating
Results
Results
of Operations for each of the Three Years Ended
December 31, 2006, 2005 and 2004
The following tables set forth our consolidated results of
operations for each of the three years ended December 31,
2006, 2005 and 2004 (in thousands):
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A summary of our revenue, by service line, for each of the three
years ended December 31, 2006, 2005 and 2004 is as follows
(in thousands):
A summary of our revenue for each of the three years ended
December 31, 2006, 2005 and 2004, by reportable segment, is
as follows (in thousands):
Revenue was $396.1 million and $356.1 million for the
years ended December 31, 2006 and 2005, respectively, an
increase of $40.0 million or 11.3%. The increase in revenue
in 2006 for our Florida operations of $16.3 million or 8.7%
was driven by price increases of $12.6 million, of which
$4.1 million related to fuel surcharges, increased volume
at our landfill sites of $9.7 million, other organic volume
growth of $0.5 million and acquisitions net of dispositions
of $3.8 million. Offsetting these increases were net
decreases of $10.3 million, primarily related to the
expiration or assignment of certain lower margin residential
contracts.
The increase in revenue in 2006 for our Canadian operations of
$21.7 million or 13.0% was due to price increases of
$10.9 million, of which $2.1 million related to fuel
surcharges, other organic volume growth of $5.9 million,
acquisitions of $1.5 million and the favorable effects of
foreign exchange movements of $12.0 million. Offsetting
these increases were decreases at our landfill sites, primarily
due to special waste projects in 2005 that did not recur in 2006
of $5.5 million and decreases related to the expiration of
certain contracts of $3.1 million.
The increase in revenue in 2006 for our other operating segments
of $2.0 million or 75.6%, was due to price increases of
$0.3 million, other organic volume growth of
$0.9 million and increased volume at our landfill sites of
$0.8 million.
Revenue was $356.1 million and $287.1 million for the
years ended December 31, 2005 and 2004, respectively, an
increase of $69.0 million or 24.0%. The increase in revenue
in 2005 for our Florida operations of $42.9 million or
29.8% was driven by price increases of $10.1 million, of
which $3.5 million related to fuel surcharges, increased
volume at our landfill sites of $5.2 million, other organic
volume growth of $5.8 million and acquisitions of
$33.3 million. Offsetting these increases were decreases of
$6.5 million related to 2004 hurricane volumes and other
decreases of $5.0 million, primarily related to our exiting
of certain lower margin residential collection contracts. These
contracts, which expired or were divested at, or around, the end
of the third quarter of 2005, had annualized revenue of
approximately $20.0 million.
The increase in revenue in 2005 for our Canadian operations of
$23.6 million or 16.5% was due to price increases of
$7.7 million, of which $3.1 million related to fuel
surcharges, increased volume at our landfill sites, primarily
due to special waste projects, of $3.7 million, other
organic volume growth of $1.4 million and the favorable
effects of foreign exchange movements of $11.2 million,
offset by other decreases of $0.4 million.
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The increase in revenue in 2005 for our other operating segments
of $2.4 million or in excess of 100.0% was due to increased
volume at our landfill sites of $1.0 million and other
organic volume growth of $1.4 million.
Cost of operations was $270.5 million and
$255.7 million for the years ended December 31, 2006
and 2005, respectively, an increase of $14.8 million or
5.8%. As a percentage of revenue, cost of operations was 68.3%
and 71.8% for the years ended December 31, 2006 and 2005,
respectively.
The decrease in cost of operations in 2006 for our
U.S. operations of $2.4 million or 1.6% was driven by
lower costs for third party disposal due to increased
internalization of $4.8 million, lower labor costs,
primarily due to our Florida operations exiting certain lower
margin residential collection contracts, of $1.2 million
and lower other operating costs of $0.5 million.
Dispositions in our Florida operations, net of acquisitions
completed in 2006, decreased cost of operations by
$1.4 million. Offsetting these cost decreases were higher
landfill operating costs related to increased host and royalty
fees due to increased disposal volumes of $2.3 million in
our Florida operations, fleet and facility repair and
maintenance increases of $2.0 million, increased fuel costs
of $0.8 million and higher insurance costs of
$0.4 million. As a percentage of revenue, cost of
operations for our domestic operations was 68.4% and 76.2% for
the years ended December 31, 2006 and 2005, respectively.
The improvement in our domestic gross margin is primarily due to
increased volumes at our domestic landfill sites, increased
internalization and the expiration of certain lower margin
residential collection contracts in Florida.
The increase in cost of operations in 2006 for our Canadian
operations of $17.2 million or 15.5% was due to increased
disposal volumes, rates and
sub-contractor
costs of $4.5 million, increased labor costs of
$3.5 million, increased fuel costs of $0.7 million,
fleet and facility repair and maintenance increases of
$0.6 million and the unfavorable effects of foreign
exchange movements of $8.2 million, offset by other decreases of
$0.3 million. As a percentage of revenue, cost of
operations for our Canadian operations was 68.2% and 66.8% for
the years ended December 31, 2006 and 2005, respectively.
The decline in our Canadian gross margin is primarily due to
lower special waste landfill volumes coupled with higher
operating costs.
Cost of operations was $255.7 million and
$205.5 million for the years ended December 31, 2005
and 2004, respectively, an increase of $50.2 million or
24.4%. As a percentage of revenue, cost of operations was 71.8%
and 71.6% for the years ended December 31, 2005 and 2004,
respectively.
The increase in cost of operations in 2005 for our
U.S. operations of $36.2 million or 33.4% was
primarily driven by a full period of cost related to
acquisitions made in Florida during the second quarter of 2004,
higher overall operating and labor costs in our Florida
operations, the opening of our landfill operations in Texas and
increased fuel costs. As a percentage of revenue, cost of
operations for our domestic operations was 76.2% and 75.2% for
the year ended December 31, 2005 and 2004, respectively.
The decline in our domestic gross margin is primarily due to the
acquisition of lower margin collection operations in Florida. As
compared to Canada, our lower margins in the United States are
primarily driven by lower-margin residential collection business
and higher operating costs in the United States.
The increase in cost of operations in 2005 for our Canadian
operations of $14.0 million or 14.5% was due to increased
fuel costs of $1.8 million or 1.9%, increased equipment and
building repair and maintenance costs of $1.7 million or
1.8%, increased disposal volumes and
sub-contractor
costs of $1.2 million or 1.2%, increased labor, insurance
and other costs of $1.8 million or 1.9% and the unfavorable
effects of foreign exchange movements of $7.5 million or
7.7%. As a percentage of revenue, cost of operations for our
Canadian operations was 66.8% from 68.0% for the years ended
December 31, 2005 and 2004, respectively. The improvement
in our Canadian gross margin is due to an increased percentage
of higher margin landfill business, offset by increased
operating costs.
Selling, general and administrative expense was
$58.9 million and $53.1 million for the years ended
December 31, 2006 and 2005, respectively, an increase of
$5.8 million or 11.0%. As a percentage of revenue, selling,
general and administrative expense was 14.9% for the years ended
December 31, 2006 and 2005. The overall increase in
selling, general and administrative expense is due to increased
legal fees of $4.7 million,
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primarily related to litigation with Waste Management, which is
more fully described in the notes to the consolidated financial
statements included elsewhere in this report, increased
stock-based compensation expense, inclusive of employees and
consultants of $2.0 million, relocation and transition
costs of $0.4 million relative to our U.S. corporate
office move from Scottsdale, Arizona to Boca Raton, Florida, the
unfavorable effects of foreign exchange movements of
$1.5 million and other net increases of $1.0 million,
primarily related to increased wages and incentive pay.
Offsetting these increases were decreases in accounting and
other professional fees of $2.6 million, primarily related
to the re-audit of the Florida Recycling financial statements in
2005, and decreased insurance costs of $1.2 million.
Selling, general and administrative expense was
$53.1 million and $50.3 million for the years ended
December 31, 2005 and 2004, respectively, an increase of
$2.8 million or 5.6%. As a percentage of revenue, selling,
general and administrative expense was 14.9% and 17.5% for the
years ended December 31, 2005 and 2004, respectively. The
overall increase in selling, general and administrative expense
is primarily due to increases in legal and professional fees,
labor and other related overhead costs, in part due to
acquisitions in 2004 of $1.5 million and the adverse effect
of foreign exchange movements of $1.5 million. Offsetting
these increases were lower provisions for corporate severance
related costs of $0.9 million and lower overall insurance
costs of $0.6 million. Separately, due to fourth quarter
2005 results not meeting management expectations we reversed
$0.3 million of accrued bonus. Our stock based compensation
expense (benefit) was $1.1 million and $(0.1) million
for the years ended December 31, 2005 and 2004,
respectively.
In April 2006, we ceased being actively engaged in negotiations
with Lucien Rémillard, one of our directors, concerning the
potential acquisition of the solid waste collection and disposal
business assets owned by a company controlled by
Mr. Rémillard in Quebec, Canada. During the first
quarter of 2006, we recognized an expense related to these
previously deferred acquisition costs of approximately
$5.6 million.
In April 2004, we completed the acquisition of the issued and
outstanding shares of Florida Recycling Services, Inc.
(“Florida Recycling”). Shortly after its acquisition,
the performance of the operations of Florida Recycling was below
our expectations and we engaged an independent third party to
conduct a review of Florida Recycling’s business. Based on
the results of this review, the 2003 financial statements of
Florida Recycling provided by the sellers contained
misstatements and could not be relied upon. During the first
half of 2005, these financial statements were re-audited by our
independent auditors. On September 24, 2004, we reached an
agreement with the selling shareholders of Florida Recycling to
adjust the purchase price paid for the shares of Florida
Recycling whereby, in October 2004, the selling shareholders
paid us $7.5 million in cash and returned 500,000
(pre-reverse split) shares of our common stock. The cash and the
shares received (valued at the closing market price as of
September 24, 2004) with a total value of
approximately $8.6 million, are recorded as income. In the
third quarter of 2005 and as part of the September 2004
settlement, we received title to the Sanford Recycling and
Transfer Station in Sanford, Florida. The facility is valued at
the cost incurred to acquire the property and construct the
facility to its percentage of completion at such date. We
believe such cost approximates fair value at such date. The gain
recognized on the settlement approximated $4.1 million for
2005.
Depreciation, depletion and amortization was $42.8 million
and $40.7 million for the years ended December 31,
2006 and 2005, respectively, an increase of $2.1 million or
5.3%. As a percentage of revenue, depreciation, depletion and
amortization was 10.8% and 11.4% for the years ended
December 31, 2006 and 2005, respectively. The overall
increase in depreciation, depletion and amortization is
primarily attributable to increased disposal volumes at our
domestic landfills, offset by lower volumes at our Canadian
landfills coupled with a decrease in the overall weighted
average depletion rates. The unfavorable effects of foreign
exchange movements increased depreciation, depletion and
amortization by $1.1 million. Landfill depletion rates for
our U.S. landfills ranged from $4.00 to $7.68 per ton
and from $3.84 to $8.10 per ton during the years ended
December 31, 2006 and
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2005, respectively. Landfill depletion rates for our Canadian
landfills ranged from C$2.70 to C$11.82 per tonne and
C$2.57 to C$17.80 per tonne during the years ended
December 31, 2006 and 2005, respectively.
Depreciation, depletion and amortization was $40.7 million
and $32.2 million for the years ended December 31,
2005 and 2004, respectively, an increase of $8.5 million or
26.4%. As a percentage of revenue, depreciation, depletion and
amortization remained relatively flat at 11.4% and 11.2% for the
years ended December 31, 2005 and 2004, respectively. The
overall increase in depreciation, depletion and amortization for
the year ended December 31, 2005, as compared to the prior
year, is primarily attributable to increases in landfill
disposal volumes at our domestic and Canadian landfill sites,
coupled with overall higher average depletion rates per ton. The
unfavorable effects of foreign exchange movements increased
depreciation, depletion and amortization by $1.3 million.
Landfill depletion rates ranged from $3.84 to $8.10 and $4.01 to
$7.73 per ton for our operating U.S. landfills during
the year ended December 31, 2005 and 2004, respectively.
The change in the depletion rate per ton was primarily due to
changes in engineering estimates as well as the opening of our
Texas landfill. Landfill depletion rates ranged from C$2.57 to
C$17.80 and C$3.31 to C$15.88 per tonne for our Canadian
landfills during the years ended December 31, 2005 and
2004, respectively. The change in the depletion rate per tonne
was primarily due to changes in engineering estimates.
Foreign exchange loss (gain) and other was $2.0 million,
$(0.2) million and $(0.4) million for the years ended
December 31, 2006, 2005 and 2004, respectively. The foreign
exchange loss and other relates to the re-measuring of
U.S. dollar denominated monetary accounts into Canadian
dollars. Other components primarily relate to sales of equipment
or properties. The increase in loss in 2006 is primarily due to
an increase in a U.S. monetary note receivable due from our
U.S. parent to our Canadian subsidiary.
The components of interest expense, including cumulative
mandatorily redeemable preferred stock dividends and
amortization of issue costs, for the years ended
December 31, 2006, 2005 and 2004 are as follows:
Interest expense was $50.6 million and $49.2 million
for the years ended December 31, 2006 and 2005,
respectively, an increase of $1.4 million or 2.8%. Interest
expense for the Credit Facility and the Senior Subordinate Notes
increased $2.5 million for the year ended December 31,
2006 due to higher prevailing short-term interest rates on the
Credit Facilities and higher balances outstanding under our term
loan facility, offset by the elimination of penalty interest
payable on our Senior Subordinated Notes and lower amended rates
on our Credit Facilities. The decrease in Preferred Stock
dividends and amortization of issue costs was due to issue costs
becoming fully amortized during the second quarter of 2006,
offset by higher principal amounts outstanding. The weighted
average interest rate on Credit Facility borrowings was 8.4% and
7.7% for the years ended December 31, 2006 and 2005,
respectively.
In December 2006, we redeemed the outstanding shares of
Preferred Stock through the proceeds of a private placement of
our common shares. The liquidation preference equaled the
carrying value on the date of redemption and approximated
$103.1 million. A portion of the redemption was funded by
an exchange and redemption agreement with Kelso pursuant to
which we agreed, through a private placement, to issue
2,894,737 shares of
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common stock to Kelso, at a price of $9.50 per share, in
exchange for shares of our Preferred Stock in an amount equal to
$27.5 million. We recognized a non-cash charge of
approximately $1.2 million for the exchange of common stock
for the Preferred Stock, representing the difference between the
issue price of the common stock to Kelso and the fair market
value of our common shares on the date of redemption, which is
included in cumulative mandatorily redeemable preferred stock
dividends and amortization of issue costs on the Statement of
Operations and Comprehensive Loss.
Interest expense was $49.2 million and $48.4 million
for the years ended December 31, 2005 and 2004,
respectively, an increase of $0.8 million or 1.7%. The
increase in interest expense for the year is due to overall
higher amended rates on our Credit Facilities coupled with
penalty interest on our Senior Subordinated Notes. Amortization
of debt issue costs decreased for the year due to the full
amortization in 2004 of the bridge financing fees of
$9.9 million offset by amortization on our Credit
Facilities and our Senior Subordinated Notes. The increase in
the Preferred Stock dividends is primarily due to compounding
and accretion. The weighted average interest rate on Credit
Facility borrowings was 7.8% and 7.1% for the years ended
December 31, 2005 and 2004, respectively. As is discussed
further in Liquidity and Capital Resources, through the first
three quarters of 2005 we incurred liquidated damages (penalty
interest) due to the delay of the registration of our Senior
Subordinated Notes. During the third quarter of 2005, the
registration statement was filed and declared effective and the
exchange offer was commenced and consummated. The liquidated
damages were $1.1 million and $0.2 million for the
years ended December 31, 2005 and 2004, respectively. As of
September 28, 2005, we were no longer subject to liquidated
damages.
Due to the nature of certain financial penalties within the
registration rights agreement in our April 2004 equity private
placement, the common shares, warrants and related proceeds from
the offering were classified outside of shareholders’
equity until the registration was declared effective during
August of 2004. Such amounts were reclassified to permanent
equity during the third quarter of 2004. There were no penalties
associated with this registration.
The income tax provision was $12.8 million,
$12.1 million and $7.6 million and for the years ended
December 31, 2006, 2005 and 2004, respectively. The income
tax provision is in excess of amounts at the combined federal
and state/provincial statutory rates due to the non-deductible
nature of dividends accrued on our Preferred Stock, coupled with
valuation allowances on our net operating losses in the United
States.
As of December 31, 2006, we have approximately
$109.2 million of domestic gross net operating loss
carry-forwards, which expire from 2023 to 2026. As of
December 31, 2006, we have domestic foreign tax credit
carry-forwards of approximately $1.2 million, which expire
during 2016. Due to the
start-up
nature of our U.S. operations, we have provided a 100%
valuation allowance for our net operating loss carry-forwards
generated in the United States. Since our domestic net
operating loss carry-forwards are not available to offset
Canadian taxable income, we expect our effective tax rate in
future periods will be higher. Separately, changes in our
ownership structure in the future could result in limitations on
the utilization of loss carry-forwards, as imposed by
Section 382 of the U.S. Internal Revenue Code.
Liquidity
and Capital Resources
Our principal capital requirements are to fund capital
expenditures, debt service and business and asset acquisitions.
Significant sources of liquidity are cash on hand, working
capital, borrowings from our Credit Facilities and proceeds from
debt and equity issuances.
Our Senior Secured Credit Facilities (the “Credit
Facilities”) are governed by our Second Amended and
Restated Credit Agreement, entered into on December 28,
2006, with Lehman Brothers Inc. as Arranger and the other
lenders named therein. The Credit Facilities consist of a
revolving credit facility in the amount of
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$60.0 million, up to $15.0 million of which is
available to our Canadian operations, and a term loan facility
in the amount of $245.3 million. The revolver commitments
terminate on April 30, 2009 and the term loans mature in
specified quarterly installments through March 31, 2011.
The Credit Facilities bear interest based upon a spread over
base rate or Eurodollar loans, as defined, at our option. The
Credit Facilities are secured by substantially all of the assets
of our U.S. restricted subsidiaries. Our Canadian
operations guarantee and pledge all of their assets only in
support of the portion of the revolving credit facility
available to them. Separately, 65% of the common shares of Waste
Services’ first tier foreign subsidiaries, including Waste
Services (CA), are pledged to secure obligations under the
Credit Facilities. As of December 31, 2006, there were no
amounts outstanding on the revolving credit facility, while
$22.1 million of capacity was used to support outstanding
letters of credit. As of February 28, 2007, there was
$10.0 million outstanding on the revolving credit facility,
while $23.4 million of capacity was used to support
outstanding letters of credit.
Our Credit Facilities, as amended, contain certain financial and
other covenants that restrict our ability to, among other
things, make capital expenditures, incur indebtedness, incur
liens, dispose of property, repay debt, pay dividends,
repurchase shares and make certain acquisitions. Our financial
covenants include: (i) minimum consolidated interest
coverage; (ii) maximum total leverage; and
(iii) maximum senior secured leverage. The covenants and
restrictions limit the manner in which we conduct our operations
and could adversely affect our ability to raise additional
capital. The following table sets forth our financial covenant
levels for each of the next four quarters:
As of December 31, 2006, we are in compliance with the
financial covenants, as amended, and we expect to continue to be
in compliance in future periods.
On April 30, 2004, we completed a private offering of
91/2% Senior
Subordinated Notes (“Senior Subordinated Notes”) due
2014 for gross proceeds of $160.0 million. The Senior
Subordinated Notes mature on April 15, 2014. Interest on
the Senior Subordinated Notes is payable semi annually on
October 15 and April 15. The Senior Subordinated Notes are
redeemable, in whole or in part, at our option, on or after
April 15, 2009, at a redemption price of 104.75% of the
principal amount, declining ratably in annual increments to par
on or after April 15, 2012, together with accrued interest
to the redemption date. In addition, prior to April 15,
2007, we may redeem up to 35.0% of the aggregate principal
amount of the Senior Subordinated Notes with the proceeds of
certain equity offerings, at a redemption price equal to 109.5%
of the principal amount. Upon a change of control, as such term
is defined in the Indenture, we are required to offer to
repurchase all the Senior Subordinated Notes at 101.0% of the
principal amount, together with accrued interest and liquidated
damages, if any, and obtain the consent of our senior lenders to
such payment or repay indebtedness under our Credit Facilities.
The Senior Subordinated Notes are unsecured and are subordinate
to our existing and future senior secured indebtedness,
including our Credit Facilities, structurally subordinated to
existing and future indebtedness of our non-guarantor
subsidiaries, rank equally with any unsecured senior
subordinated indebtedness and senior to our existing and future
subordinated indebtedness. Our obligations with respect to the
Subordinated Notes, including principal, interest, premium, if
any, and liquidated damages, if any, are fully and
unconditionally guaranteed on an unsecured, senior subordinated
basis by all of our existing and future domestic restricted
subsidiaries. Our Canadian operations are not guarantors
under the Subordinated Notes.
The Senior Subordinated Notes contain certain covenants that, in
certain circumstances and subject to certain limitations and
qualifications, restrict, among other things: (i) the
incurrence of additional debt; (ii) the payment of
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dividends and repurchases of stock; (iii) the issuance of
preferred stock and the issuance of stock of our subsidiaries;
(iv) certain investments; (v) the repurchase of our
Preferred Stock; (vi) transactions with affiliates; and
(vii) certain sales of assets.
In April 2004, we entered into a Registration Rights Agreement
with the initial purchaser of the Senior Subordinated Notes in
which we agreed to file a registration statement for the
exchange of the Senior Subordinated Notes for registered notes
with identical terms and have such registration declared
effective within specified time frames. Prior to the third
quarter of 2005, as we had not complied with these requirements
of the Registration Rights Agreement, we were required to pay
liquidated damages to the holders of the notes. These liquidated
damages were expensed as incurred and were payable, in cash, at
the same time as interest payments due under the Subordinated
Notes. During the third quarter of 2005, the registration
statement was filed and declared effective, and the exchange
offer was commenced and consummated. As of September 28,
2005 we were no longer required to pay liquidated damages.
On December 15, 2006, we issued 7,000,001 shares of
our common stock to Westbury and Prides for a purchase price of
$66.5 million. We also issued 2,894,737 shares of our
common stock to Kelso in exchange for shares of our previously
outstanding Preferred Stock in an amount equal to
$27.5 million, all of which were owned by Kelso.
On March 4, 2005, we exercised our put rights under our
standby purchase agreement with Michael DeGroote, thereby
requiring Mr. DeGroote to purchase 2,640,845 (pre-reverse
split) shares of our common stock and 264,085 (pre-reverse
split) common stock purchase warrants for $7.5 million on
or before March 28, 2005. This equity infusion was required
as a condition to our amended Credit Facility.
On April 30, 2004, we raised approximately
$50.7 million, after deducting expenses of approximately
$2.9 million, from the sale of 13,400,000 (pre-reverse
split) common shares and 1,340,000 (pre-reverse split) common
stock purchase warrants in private placement transactions to
certain investors. Sanders Morris Harris Inc. acted as the
placement agent for the issuance and was paid a placement agent
fee of approximately $2.7 million. Don A. Sanders, a
director of ours at the time of such issuance, is a principal of
Sanders Morris Harris Inc.
In May 2003, we issued 55,000 shares of Preferred Stock to
Kelso pursuant to the terms of an agreement dated as of
May 6, 2003, as amended in February 2004, (the
“Subscription Agreement”), at a price of
$1,000 per share. We also issued to Kelso 7,150,000
(pre-reverse split) warrants to purchase shares of our common
stock for $3.00 (pre-reverse split) per share. The warrants had
an allocated value of $14.8 million and are classified as a
component of equity. The warrants are exercisable at any time
until May 6, 2010. The issuance of the Preferred Stock
resulted in proceeds of approximately $49.5 million, net of
fees of approximately $5.5 million. The shares of Preferred
Stock were non-voting and entitled the holders to cash dividends
of 17.75% per annum compounding and accruing quarterly in
arrears.
In December 2006, we exchanged
and/or
redeemed the outstanding shares of Preferred Stock through the
proceeds of a private placement of our common shares. The
liquidation preference on the date of redemption approximated
$103.1 million. A portion of the redemption was funded by
an exchange and redemption agreement with Kelso pursuant to
which we agreed, through a private placement, to issue
2,894,737 shares of common stock to Kelso, at a price of
$9.50 per share, in exchange for shares of our Preferred
Stock in an amount equal to $27.5 million. We recognized a
non-cash charge of approximately $1.2 million for the
exchange of common stock for the Preferred Stock, representing
the difference between the issue price of the common stock to
Kelso and the fair market value of our common shares on the date
of redemption, which is included in cumulative mandatorily
redeemable preferred stock dividends and amortization of issue
costs on the Statements of Operations and Comprehensive Loss.
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Effective July 31, 2004, we entered into a migration
transaction by which our corporate structure was reorganized so
that Waste Services became the ultimate parent company of our
corporate group. Prior to the migration transaction, we were a
subsidiary of Waste Services (CA). After the migration
transaction, Waste Services (CA) became our subsidiary.
The migration transaction occurred by way of a plan of
arrangement under the Business Corporations Act (Ontario) and
consisted primarily of: (i) the exchange of 87,657,035
common shares of Waste Services (CA) for 87,657,035 (pre-reverse
split) shares of our common stock; and (ii) the conversion
of the remaining 9,229,676 common shares of Waste Services (CA)
held by
non-U.S. residents
who elected to receive exchangeable shares into 9,229,676
exchangeable shares of Waste Services (CA). The transaction was
approved by the Ontario Superior Court of Justice on
July 30, 2004 and by our shareholders at a special meeting
held on July 27, 2004.
The terms of the exchangeable shares of Waste Services (CA) are
the economic and functional equivalent of our common stock.
Holders of exchangeable shares will (i) receive the same
dividends as holders of shares of our common stock and
(ii) be entitled to vote on the same matters as holders of
shares of our common stock. Such voting is accomplished through
the one share of Special Voting Preferred Stock held by
Computershare Trust Company of Canada as trustee, who will vote
on the instructions of the holders of the exchangeable shares
(one-third of one vote for each exchangeable share).
Upon the occurrence of certain events, such as the liquidation
of Waste Services (CA), or after the redemption date, our
Canadian holding company, Capital Environmental Holdings Company
will have the right to purchase each exchangeable share for
one-third of one share of our common stock, plus all declared
and unpaid dividends on the exchangeable share and payment for
any fractional shares. Unless certain events occur, such
redemption date will not be earlier than December 31, 2016.
Holders of exchangeable shares also have the right at any
anytime at their option, to exchange their exchangeable shares
for shares of our common stock on the basis of one-third of a
share of our common stock for each one exchangeable share.
Municipal solid waste services contracts and permits and
licenses to operate transfer stations, landfills and recycling
facilities may require performance or surety bonds, letters of
credit or other means of financial assurance to secure
contractual performance. As of December 31, 2006, we had
provided customers, various regulatory authorities and our
insurer with such bonds and letters of credit amounting to
approximately $74.6 million to collateralize our
obligations, of which $20.7 million relates to estimated
closure and post closure obligations at our landfills and
transfer stations. We expect future increases in these levels of
financial assurance relative to our closure and post closure
obligations as we utilize capacity at our landfills.
The following discussion relates to the major components of the
changes in cash flows for the years ended December 31,
2006, 2005 and 2004.
Cash provided by operating activities of our continuing
operations was $35.5 million and $21.8 million for the
years ended December 31, 2006 and 2005, respectively. The
increase in cash provided by operating activities is primarily
due to increased cash generated from our operations, which
primarily relates to improved operating margins in our domestic
segments, offset by investments in working capital.
Cash provided by operating activities of our continuing
operations was $21.8 million and $26.7 million for the
years ended December 31, 2005 and 2004, respectively.
Improvements in operations were offset by decreased cash
provided by working capital.
Cash flows from discontinued operations — Cash
flows from our discontinued operations are disclosed separately
on the Consolidated Statements of Cash Flows included elsewhere
in this document. Following the
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conclusion of the sale of our Arizona operations we will cease
to be impacted by these cashflows, and we do not anticipate any
subsequent adverse affect on our future liquidity or financial
covenants.
Cash used in investing activities of our continuing operations
was $147.3 million and $31.2 million for the years
ended December 31, 2006 and 2005, respectively. The
increase in cash used in investing activities is primarily due
to increased capital expenditures and business acquisitions.
Company-wide capital expenditures were $49.5 million and
$33.6 million for the years ended December 31, 2006
and 2005, respectively. The increase in capital expenditures was
primarily driven by landfill development projects. We expect our
capital expenditures, excluding the potential impact from
additional acquisitions, to range from $55.0 million to
$60.0 million for all of 2007. Cash used in business
acquisitions of $103.5 million for 2006 primarily relates
to the acquisitions of Taft Recycling, Liberty Waste, Sun
Country Materials, the SLD Landfill and Pro Disposal.
Cash used in investing activities of our continuing operations
was $31.2 million and $181.1 million for the years
ended December 31, 2005 and 2004, respectively. The
decrease in cash used in investing activities is primarily due
to the various business acquisitions we completed during 2004,
which used $155.9 million of cash, coupled with lower
capital expenditures as compared to 2004. Company-wide capital
expenditures were $33.6 million and $46.2 million for
the years ended December 31, 2005 and 2004, respectively.
Cash used in deposits for business acquisitions primarily
relates to ongoing negotiations with Lucien Rémillard, one
of our directors, concerning the potential acquisition of the
solid waste collection and disposal business assets owned by a
company controlled by Mr. Rémillard in Quebec, Canada.
In connection with these negotiations, we have reimbursed
Mr. Rémillard’s company for services provided by
third parties in connection with preparing audited financial
statements of the businesses to be acquired, with ongoing
efforts to expand the capacity of a solid waste landfill, and in
March 2006 we advanced $0.4 million directly to
Mr. Rémillard. In April 2006, we concluded it is
more-likely-than-not that we will not complete this acquisition
for the foreseeable future and accordingly we recognized an
expense related to these previously deferred acquisition costs
of approximately $5.6 million during the first quarter of
2006.
Cash provided by financing activities of our continuing
operations was $109.8 million and $14.9 million for
the years ended December 31, 2006 and 2005, respectively.
For the year ended December 31, 2006, cash flows from
financing activities relate to additional proceeds of
$123.0 million from our term loan facility and gross
proceeds of $66.5 million from a private placement of
shares of our common stock at $9.50 per share, offset by
the retirement of our Preferred Stock of $75.6 million.
In March 2005, pursuant to a bank amendment entered into in
October 2004, we received an equity investment of
$7.5 million ($6.8 million net). As consideration we
issued 2,640,845 (pre-reverse split) shares of our common stock
and 264,085 (pre-reverse split) warrants to purchase our common
stock at $2.84 (pre-reverse split) per share.
Cash provided by financing activities was $14.9 million and
$160.7 million for the years ended December 31, 2005
and 2004, respectively. The decrease in cash provided by
financing activities is due to our debt and equity private
placements of $336.6 million in 2004 not recurring to the
same extent in 2005. In 2005, we issued $25.0 million under
our credit facilities and equity private placements of
$7.5 million.
In December 2006, the Financial Accounting Standards Board
(“FASB”) issued FASB Staff Position
EITF 00-19-2,
“Accounting for Registration Payment Arrangements”
(“FSP EITF
00-19-2”).
FSP EITF
00-19-2
specifies that the contingent obligation to make future payments
or otherwise transfer consideration under a registration payment
arrangement, whether issued as a separate agreement or included
as a provision of a financial instrument or other agreement,
should be separately recognized and measured in accordance with
SFAS No. 5, “Accounting for Contingencies.”
FSP EITF
00-19-2
further clarifies that a financial instrument subject to a
registration payment arrangement should be accounted for in
accordance with other applicable GAAP without regard to the
contingent obligation to transfer consideration pursuant to the
registration payment arrangement. FSP EITF
00-19-2 is
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effective for registration payment arrangements and the
financial instruments subject to those arrangements that are
entered into or modified subsequent to December 21, 2006.
For registration payment arrangements and financial instruments
subject to those arrangements that were entered into prior to
the issuance of FSP EITF
00-19-2, the
standard is effective for financial statements issued for fiscal
years beginning after December 15, 2006, and interim
periods within those fiscal years. Early adoption for interim or
annual periods for which financial statements or interim reports
have not been issued is permitted. We adopted the provisions of
FSP EITF
00-19-2
during the fourth quarter of 2006, however, we did not have any
cumulative effect adjustments relative to this adoption.
In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements” (“SFAS 157”),
which defines fair value, establishes a framework for measuring
fair value in GAAP, and expands disclosures about fair value
measurements. SFAS 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value
by providing a fair value hierarchy used to classify the source
of the information. SFAS 157 is effective for financial
statements issued for fiscal years beginning after
November 15, 2007. We do not expect the adoption of
SFAS 157 to have a material effect on our financial
position or results of operations.
In September 2006 the Securities and Exchange Commission
(“SEC”) issued Staff Accounting
Bulletin No. 108 “Considering the effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements”
(“SAB 108”). SAB 108 provides guidance for
quantifying the effect on current year financial statement of
uncorrected prior year misstatements. SAB 108 is effective
for any report for an interim period of the first fiscal period
ending after November 15, 2006. The adoption of
SAB 108 did not have a material effect on our financial
position or results of operations.
In July 2006, the FASB issued SFAS Interpretation
No. 48, “Accounting for Uncertainty in Income Taxes-an
interpretations of SFAS Statement No. 109”
(FIN 48) applies to all “tax positions”
accounted for under SFAS 109. FIN 48 refers to
“tax positions” as positions taken in a previously
filed tax return or positions expected to be taken in a future
tax return which are reflected in measuring current or deferred
income tax assets and liabilities reported in the financial
statements. FIN 48 further clarifies a tax position to
include, but not limited to, the following:
FIN 48 clarifies that a tax benefit may be reflected in the
financial statements only if it is “more likely than
not” that a company will be able to sustain the tax return
position, based on its technical merits. If a tax benefit meets
this criterion, it should be measured and recognized based on
the largest amount of benefit that is cumulatively greater than
50% likely to be realized. This is a change from occurring
practice, whereby companies may recognize a tax benefit only if
it is probable a tax position will be sustained.
FIN 48 also requires that we make qualitative and
quantitative disclosures, including a discussion of reasonably
possible changes that might occur in unrecognized tax benefits
over the next 12 months; a description of open tax years by
major jurisdictions; and a roll-forward of all unrecognized tax
benefits, presented as a reconciliation of the beginning and
ending balances of the unrecognized tax benefits on an
aggregated basis.
This statement became effective for us on January 1, 2007
and , based on our analysis, we do not expect FIN 48 to
have a material effect on our consolidated results of
operations, cash flows or financial position.
We expect the results of our Canadian operations to vary
seasonally, with revenue typically lowest in the first quarter
of the year, higher in the second and third quarters, and lower
in the fourth quarter than in the third quarter. The seasonality
is attributable to a number of factors. First, less solid waste
is generated during the late fall, winter and early spring
because of decreased construction and demolition activity.
Second, certain operating costs are higher in the winter months
because winter weather conditions slow waste collection
activities, resulting in higher labor costs, and rain and snow
increase the weight of collected waste, resulting in higher
disposal costs, which are calculated on a per ton basis. Also,
during the summer months, there are more tourists and part-time
residents in some of our service areas, resulting in more
residential and commercial collection. Consequently, we expect
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operating income to be generally lower during the winter. The
effect of seasonality on our results of operations from our
U.S. operations, which are located in warmer climates than
our Canadian operations, is less significant than on our
Canadian operations.
We have no off-balance sheet debt or similar obligations, other
than our letters of credit and performance and surety bonds
discussed previously, which are not debt. We have no
transactions or obligations with related parties that are not
disclosed, consolidated into or reflected in our reported
results of operations or financial position. We do not guarantee
any third party debt. We have entered into a put or pay disposal
agreement with RCI Environment Inc., Centres de Transbordement
et de Valorisation Nord Sud Inc., RCM Environnement Inc.
(collectively the “RCI Companies”) and Intersan
Inc. pursuant to which we have posted a letter of credit for
C$4.0 million to secure our obligations and those of the
RCI Companies to Intersan Inc. Concurrently with the put or pay
disposal agreement with the RCI Companies, we entered into a
three year agreement with Waste Management of Canada Corporation
(formerly Canadian Waste Services Inc.) to allow us to deliver
non-hazardous solid waste to their landfill in Michigan. Details
of these agreements are further described in the notes to our
Consolidated Financial Statements. The companies within the RCI
group are controlled by a director of ours
and/or
individuals related to that director.
Tabular
Disclosure of Contractual Obligations
We have various commitments primarily related to funding of
short-term debt, closure and post-closure obligations and
capital and operating lease commitments. You should also read
our discussion regarding “Liquidity and Capital
Resources” earlier in this Item 7 —
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations”. The following table
provides details regarding our contractual obligations and other
commercial commitments subsequent to December 31, 2006 (in
thousands):
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In January of 2007, we entered into certain purchase agreements
to acquire a roll-off collection and transfer operation, a
transfer station development project and a landfill development
project for an aggregate purchase price of $51.2 million in
cash. Of the total $51.2 million purchase price,
$10.0 million is solely contingent upon the receipt of
certain operating permits and $19.5 million is due and
payable at the earlier of the receipt of all operating permits
for the landfill site or the expiration of eighteen months from
the date of the agreement. The existing transfer station is
permitted to accept construction and demolition waste volume. We
expect to close on these acquisitions in the second quarter of
2007.
As a condition of the purchase of the Cactus Landfill in
Arizona, the sellers are entitled to additional purchase
consideration upon the landfill achieving certain average tons
per day thresholds in any quarter. Should the landfill achieve a
maximum 5,000 tons per day, the total contingent payments would
not exceed $18.0 million. During 2005, we paid
$3.0 million relative to our obligation under this
agreement. No other amounts have been paid under this agreement
in 2006 or 2004.
From time to time and in the ordinary course of business, we may
enter into certain acquisitions of disposal facilities whereby
we will also enter into a royalty agreement. These agreements
are usually based upon the amount of waste deposited at our
landfill sites or in certain instances, our transfer stations.
Royalties are expensed as incurred and recognized as a cost of
operations.
In the normal course of our business, we have other commitments
and contingencies relating to environmental and legal matters.
For a further discussion of commitments and contingencies, see
our Consolidated Financial Statements contained elsewhere in
this annual report. In addition certain of our executives are
retained under employment agreements. These employment
agreements vary in term and related benefits. Refer to
Item 11 — “Executive Compensation”
contained elsewhere in this annual report for a more detailed
discussion of our employment agreements.
In November 2006, we entered into a subscription agreement with
Westbury and Prides pursuant to which we agreed through a
private placement to issue an aggregate of 7,000,001 shares
of our common stock to Westbury and Prides for a purchase price
of $66.5 million. We also entered into an exchange and
redemption agreement with Kelso pursuant to which we have agreed
through a private placement to issue 2,894,737 shares of
our common stock to Kelso in exchange for shares of our
Preferred Stock in an amount equal to $27.5 million. In
connection with this private placement, we entered into a
registration rights agreement with these purchasers whereby
within 15 days of the closing date of the private placement
(December 15, 2006) we have agreed to have an
effective registration statement filed with the SEC to register
the common shares for resale under the Securities Act. After the
filing of the registration statement, we have 90 days to
have the registration agreement declared effective by the SEC.
Should we be late or are unable to keep the registration
statement effective, we may be subject to penalties of 1.0% of
the proceeds per 30 day period, not to exceed 12.0% in the
aggregate
During 2006, we issued 6,114,866 shares of our common stock
in connection with our acquisitions of Liberty Waste and Sun
Country Materials, which are subject to a registration rights
agreement that provides for the shares to be registered six
months after request for registration. The request for
registration was received on June 30, 2006. Should a
registration statement not be declared effective in accordance
with the registration rights agreement, partial damages shall be
paid to the holders in an amount equal to 8.0% per annum of
the fair value, as defined, of the shares issued. Accordingly,
as of December 31, 2006 we have accrued the necessary
penalties.
In March 2005, pursuant to a bank amendment entered into in
October 2004, we received an equity investment of
$7.5 million ($6.8 million net). As consideration we
issued 2,640,845 (pre-reverse split) shares of our common stock
and 264,085 (pre-reverse split) warrants to purchase our common
stock at $2.84 (pre-reverse split) per share. We also entered in
to a registration rights agreement that required us to use our
best commercial efforts to obtain and
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maintain an effective registration statement. The registration
rights agreement does not provide for penalties or monetary
consideration for our failure to obtain, or maintain, an
effective registration statement.
On December 21, 2006 we filed a
Form S-3
seeking to register all of these shares and on February 5,
2007 the registration statement was declared effective.
A portion of our operations are domiciled in Canada; as such, we
translate the results of our operations and financial condition
of our Canadian operations into U.S. dollars. Therefore,
our reported results of operations and financial condition are
subject to changes in the exchange relationship between the two
currencies. For example, as the relationship of the Canadian
dollar strengthens against the U.S. dollar our revenue is
favorably affected and conversely our expenses are unfavorably
affected. Assets and liabilities of Canadian operations have
been translated from Canadian dollars into U.S. dollars at
the exchange rates in effect at the relevant balance sheet date,
and revenue and expenses of Canadian operations have been
translated from Canadian dollars into U.S. dollars at the
average exchange rates prevailing during the period. Unrealized
gains and losses on translation of the Canadian operations into
U.S. dollars are reported as a separate component of
shareholders’ equity and are included in comprehensive
income (loss). Separately, monetary assets and liabilities
denominated in U.S. dollars held by our
Canadian operation are re-measured from U.S. dollars
into Canadian dollars and then translated into
U.S. dollars. The effects of re-measurement are reported
currently as a component of net income (loss). Currently, we do
not hedge our exposure to changes in foreign exchange rates. For
the years ended December 31, 2006 and 2005 we estimate that
a 5.0% increase or decrease in the relationship of the Canadian
dollar to the U.S. dollar would increase or decrease
operating profit from our Canadian operations by less than
$0.6 million.
As of December 31, 2006, we were exposed to variable
interest rates under our Credit Facilities, as amended. The
interest rates payable on our revolving and term facilities are
based on a spread over base Eurodollar loans as defined. A
25 basis point increase in base interest rates relative to
our revolving and term facilities would increase annual cash
interest expense by approximately $0.6 million.
All financial statements and supplementary data that are
required by this Item are listed in Part IV, Item 15
of this annual report and are presented beginning on
Page F-1.
Not Applicable
We maintain disclosure controls and procedures designed to
ensure that information required to be disclosed in our filings
under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported accurately within the time
periods specified in the Securities and Exchange
Commission’s rules and forms. As of the end of the period
covered by this report, an evaluation was performed under the
supervision and with the participation of management, including
the Chief Executive Officer and Principal Financial Officer, of
the effectiveness of the design and operation of our disclosure
controls and procedures (pursuant to Exchange Act
Rule 13a-15).
Based upon this evaluation, the Chief Executive Officer and
Principal Financial Officer concluded that our disclosure
controls and procedures are effective. The conclusions of the
Chief Executive Officer and Principal Financial Officer from
this evaluation were communicated to the Audit Committee.
There were no changes in our internal control over financial
reporting that occurred during the quarter ended
December 31, 2006, that have materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
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Management’s
Report on Internal Control Over Financial Reporting
The report is included in Item 8 of this annual report.
The report is included in Item 8 of this annual report.
None.
Information relating to the Registrant’s executive officers
is included under the heading “Executive Officers” in
Part I of this Annual Report on
Form 10-K.
Information relating to directors of the Registrant, including
its audit committee and audit committee financial experts, and
its executive officers will be in the Registrant’s
definitive Proxy which will be filed within 120 days of the
end of our fiscal year ended December 31, 2006 (“the
2007 Proxy Statement”) and is incorporated herein by
reference.
Information relating to the Registrant’s executive officer
and director compensation will be in the 2007
Proxy Statement and is incorporated herein by reference.
Information relating to security ownership of certain beneficial
owners of the Registrant’s common stock and information
relating to the security ownership of the Registrant’s
management will be in the 2007 Proxy Statement and is
incorporated herein by reference.
The following table summarizes our equity compensation plans as
of December 31, 2006:
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Information regarding certain relationships and related
transactions will be in the 2007 Proxy Statement and is
incorporated herein by reference.
Information regarding principle accountant fees and services
will be in the 2007 Proxy Statement and is incorporated herein
by reference.
PART IV
Consolidated
Financial Statements
(1) Consolidated Financial Statements
Management’s Report on Internal Control over Financial
Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Loss
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule II — Valuation and Qualifying Accounts
schedule has been omitted as the required information is
included in the Notes to Consolidated Financial Statements
included herewith.
All other schedules have been omitted because they are not
applicable.
(3) Exhibits
Documents filed as exhibits to this report or incorporated by
reference:
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44
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45
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46
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Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WASTE SERVICES, INC.
David Sutherland-Yoest
Chairman of the Board,
Chief Executive Officer and Director
March 5, 2007
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
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Management including the Chief Executive Officer and the Chief
Financial Officer, is responsible for establishing and
maintaining adequate internal controls over financial reporting,
as defined in
Rules 13a-15(f)
and
15d-15(f) of
the Securities Exchange Act of 1934, as amended. Our internal
controls were designed to provide reasonable assurance as to the
reliability of our financial reporting and the preparation and
presentation of the consolidated financial statements for
external purposes in accordance with accounting principles
generally accepted in the United States, as well as to safeguard
assets from unauthorized use or disposition.
We conducted an evaluation of the effectiveness of our internal
controls over financial reporting as of December 31, 2006
based on the framework in Internal Control-Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. This evaluation
included review of the documentation of controls, evaluation of
the design effectiveness of controls, testing of the operating
effectiveness of controls and a conclusion on this evaluation.
Through this evaluation, we did not identify any material
weaknesses in our internal controls. There are inherent
limitations in the effectiveness of any system of internal
controls over financial reporting; however, based on our
evaluation, we have concluded that our internal controls over
financial reporting were effective as of December 31, 2006.
BDO Seidman, LLP, an independent registered public accounting
firm, has issued an attestation report on our assessment of
internal control over financial reporting, which is included
herein.
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Report of
Independent Registered Public Accounting Firm on
Internal Control over Financial Reporting
To the Board of Directors and Shareholders of
Waste Services, Inc.
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal Control over
Financial Reporting appearing under Item 8 of Part II
of this
Form 10-K,
that Waste Services, Inc. (the “Company”) maintained
effective internal control over financial reporting as of
December 31, 2006, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the “COSO criteria”). The Company’s management
is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an
opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company
maintained effective internal control over financial reporting
as of December 31, 2006, is fairly stated, in all material
respects, based on the COSO criteria. Also in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006,
based on the COSO criteria.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of the Company as of
December 31, 2006 and 2005 and the related consolidated
statements of operations and comprehensive loss,
shareholders’ equity and cash flows thereon for each of the
three years in the period ended December 31, 2006 and our
report dated March 5, 2007 expressed an unqualified opinion
on those consolidated financial statements.
/s/ BDO
Seidman, LLP
Phoenix, Arizona
March 5, 2007
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The Board of Directors and Shareholders of
Waste Services, Inc.
We have audited the accompanying consolidated balance sheets of
Waste Services, Inc. (the “Company”) as of
December 31, 2006 and 2005 and the related consolidated
statements of operations and comprehensive loss,
shareholders’ equity and cash flows for each of the three
years in the period ended December 31, 2006. These
financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Waste Services, Inc. at December 31, 2006 and
2005, and the results of its operations and its cash flows for
each of the three years in the period ended December 31,
2006 in conformity with accounting principles generally accepted
in the United States of America.
As discussed in Note 2 to the Consolidated Financial
Statements, effective January 1, 2006 the Company adopted
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment.
As discussed in Note 2 to the Consolidated Financial
Statements, effective January 1, 2004, the Company changed
its method of accounting for closure and post-closure
obligations and the associated asset retirement costs.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of the Company’s internal control over
financial reporting as of December 31, 2006 based on the
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 5, 2007
expressed an unqualified opinion thereon.
/s/ BDO
Seidman, LLP
Phoenix, Arizona
March 5, 2007
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WASTE
SERVICES, INC.
CONSOLIDATED BALANCE SHEETS (In thousands of U.S. dollars, except share amounts) As of December 31,
The accompanying notes are an integral part of these
Consolidated Financial Statements.
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WASTE
SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (In thousands of U.S. dollars, except per share amounts) For the Years Ended December 31,
The accompanying notes are an integral part of these
Consolidated Financial Statements.
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WASTE
SERVICES, INC.
The accompanying notes are an integral part of these
Consolidated Financial Statements.
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WASTE
SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands of U.S. dollars) For the Years Ended December 31,
The accompanying notes are an integral part of these
Consolidated Financial Statements.
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WASTE
SERVICES, INC.
The accompanying Consolidated Financial Statements include the
accounts of Waste Services, Inc. (“Waste Services”)
and its wholly owned subsidiaries (collectively, “we”,
“us”, or “our”). We are a multi-regional,
integrated solid waste services company, providing collection,
transfer, landfill disposal and recycling services for
commercial, industrial and residential customers. Our operating
strategy is disposal-based, whereby we enter geographic markets
with attractive growth or positive competitive characteristics
by acquiring and developing landfill disposal capacity, then
acquiring and developing waste collection and transfer
operations. Our operations are located in the United States and
Canada. Our U.S. operations are located in Florida, Texas
and Arizona and our Canadian operations are located in Eastern
Canada (Ontario) and Western Canada (Alberta, Saskatchewan and
British Columbia). Due to a pending sale, our Arizona operations
are presented as discontinued operations.
We are the successor to Capital Environmental Resource Inc. now
Waste Services (CA) Inc. (“Waste Services (CA)”), by a
migration transaction completed effective July 31, 2004.
The migration transaction occurred by way of a plan of
arrangement under the Business Corporations Act (Ontario) and
was approved by the Ontario Superior Court of Justice. Pursuant
to the plan of arrangement, holders of Waste Services (CA)
common shares received shares of our common stock unless they
elected to receive exchangeable shares of Waste Services (CA).
The terms of the exchangeable shares of Waste Services (CA) are
the functional and economic equivalent of our common stock. As a
result of the migration, Waste Services (CA) became our indirect
subsidiary and Waste Services became the parent company.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
(“GAAP”) requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual
results could differ from those estimates. Significant estimates
include the allowance for doubtful accounts, depletion of
landfill development costs, goodwill and other intangible
assets, liabilities for landfill capping, closure and
post-closure obligations, insurance reserves, liabilities for
potential litigation and deferred taxes.
Certain reclassifications have been made to prior period
financial statement amounts to conform to the current
presentation. All significant intercompany transactions and
accounts have been eliminated. All amounts are in thousands of
U.S. dollars, unless otherwise stated.
A portion of our operations is domiciled in Canada, for each
reporting period we translate the results of operations and
financial condition of our Canadian operations into
U.S. dollars, in accordance with SFAS No. 52,
“Foreign Currency Translation”,
(“SFAS 52”). Therefore, the reported results of
our operations and financial condition are subject to changes in
the exchange relationship between the two currencies. For
example, as the relationship of the Canadian dollar strengthens
against the U.S. dollar, revenue is favorably affected and
conversely expenses are unfavorably affected. Assets and
liabilities of our Canadian operations are translated from
Canadian dollars into U.S. dollars at the exchange rates in
effect at the relevant balance sheet dates, and revenue and
expenses of Canadian operations are translated from Canadian
dollars into U.S. dollars at the average exchange rates
prevailing during the period. Unrealized gains and losses on
translation of the Canadian operations into U.S. dollars
are reported as a separate component of shareholders’
equity and are included in comprehensive loss. Separately,
monetary assets and liabilities, as well as intercompany
receivables, denominated in U.S. dollars held by our
Canadian operations are re-measured from U.S. dollars into
Canadian dollars and then translated into U.S. dollars. The
effects of re-measurement are reported currently as a component
of net income (loss). Currently, we do not hedge our exposure to
changes in foreign exchange rates.
On June 30, 2006, we effected a reverse one for three split
of our common stock. As a result of the reverse split, each
holder of three outstanding shares of common stock received one
share of common stock. No fractional shares of common stock were
issuable in connection with the reverse stock split. In lieu of
such fractional shares, stockholders received a cash payment
equal to the product obtained by multiplying the fraction of
common stock by
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WASTE
SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$9.15. Corresponding amendments have been made to the
exchangeable shares of Waste Services (CA) Inc., so that each
one exchangeable share entitles the holder to one-third of one
share of our common stock, without regard to any fractional
shares. The reverse split has been retroactively applied to all
applicable information to the earliest period presented, unless
otherwise noted as being “pre-reverse split”.
We allocate the purchase price of an acquired business, on a
preliminary basis, to the identified assets and liabilities
acquired based on their estimated fair values at the dates of
acquisition, with any residual amounts allocated to goodwill.
Goodwill is allocated to our reporting units based on the
reporting units that will benefit from the acquired assets and
liabilities. The purchase price allocations are considered
preliminary until we have obtained all required information to
complete the allocation. Although the time required to obtain
the necessary information will vary with circumstances specific
to an individual acquisition, the “allocation period”
for finalizing purchase price allocations generally does not
exceed one year from the date of consummation of an acquisition.
Adjustments to the allocation of purchase price may decrease
those amounts allocated to goodwill and, as such, may increase
those amounts allocated to other tangible or intangible assets,
which may result in higher depreciation or amortization expense
in future periods. Assets acquired in a business combination
that will be sold are valued at fair value less cost to sell.
Results of operating these assets are recognized currently in
the period in which those operations occur. The value of shares
issued in connection with an acquisition is based upon the
average market price of our common stock during the five day
period consisting of the period two days before, the day of and
the two days after the terms of the acquisition are agreed to
and/or
announced.
Cash and cash equivalents are defined as cash and short-term
highly liquid deposits with initial maturities of three months
or less.
Financial instruments that potentially subject us to credit risk
consist primarily of cash and cash equivalents and trade
accounts receivable. We place our cash and cash equivalents only
with high credit quality financial institutions. Our customers
are diversified as to both geographic and industry
concentrations. Therefore, our trade accounts receivable are not
subject to a concentration of credit risk.
We maintain an allowance for doubtful accounts based on the
expected collectibility of our accounts receivable. We perform
credit evaluations of significant customers and establish an
allowance for doubtful accounts based on the aging of
receivables, payment performance factors, historical trends and
other information. In general, we reserve a portion of those
receivables outstanding more than 90 days and 100% of those
outstanding over 120 days. We evaluate and revise our
reserve on a monthly basis based upon a review of specific
accounts outstanding and our history of uncollectible accounts.
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WASTE
SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The changes to the allowance for doubtful accounts for the years
ended December 31, 2006, 2005 and 2004 are as follows:
Property and equipment are recorded at cost less accumulated
depreciation. Improvements or betterments, which extend the life
of an asset, are capitalized. Expenditures for maintenance and
repair costs are expensed as incurred. Gains or losses resulting
from property and equipment retirements or disposals are
credited or charged to earnings in the year of disposal.
Depreciation is computed over the estimated useful life using
the straight-line method as follows:
We periodically evaluate whether events and circumstances have
occurred that may warrant revision of the estimated useful life
of property and equipment or whether the remaining balance of
property and equipment, or other long-lived assets, should be
evaluated for possible impairment. Instances that may lead to an
impairment include: (i) a significant decrease in the
market price of a long-lived asset group; (ii) a
significant adverse change in the extent or manner in which a
long-lived asset or asset group is being used or in its physical
condition; (iii) a significant adverse change in legal
factors or in the business climate that could affect the value
of a long-lived asset or asset group, including an adverse
action or assessment by a regulator; (iv) an accumulation
of costs significantly in excess of the amount originally
expected for the acquisition or construction of a long-lived
asset or asset group; (v) a current-period operating or
cash flow loss combined with a history of operating or cash flow
losses or a projection or forecast that demonstrates continuing
losses associated with the use of a long-lived asset or asset
group; or (vi) a current expectation that, more likely than
not, a long-lived asset or asset group will be sold or otherwise
disposed of significantly before the end of its previously
estimated useful life.
We use an estimate of the related undiscounted cash flows,
excluding interest, over the remaining life of the property and
equipment and long-lived assets in assessing their
recoverability. We measure impairment loss as the amount by
which the carrying amount of the asset(s) exceeds the fair value
of the asset(s). We primarily employ two methodologies for
determining the fair value of a long-lived asset: (i) the
amount at which the asset could be bought or sold in a current
transaction between willing parties; or (ii) the present
value of estimated expected future cash flows grouped at the
lowest level for which there are identifiable independent cash
flows.
Table of Contents
WASTE
SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Landfill sites are recorded at cost. Capitalized landfill costs
include expenditures for land, permitting costs, cell
construction costs and environmental structures. Capitalized
permitting and cell construction costs are limited to direct
costs relating to these activities, including legal, engineering
and construction costs associated with excavation, liners and
site berms, leachate management facilities and other costs
associated with environmental equipment and structures.
Capitalized landfill costs may also include an allocation of the
purchase price paid for landfills. For landfills purchased as
part of a group of several assets, the purchase price assigned
to the landfill is determined based upon the discounted expected
future cash flows of the landfill relative to the other assets
within the acquired group. If the landfill meets our expansion
criteria, the purchase price is further allocated between
permitted airspace and expansion airspace based upon the ratio
of permitted versus probable expansion airspace to total
available airspace.
Landfill sites, including costs related to acquiring land,
excluding the estimated residual value of un-permitted,
non-buffer land, and costs related to permitting and cell
construction, are depleted as airspace is consumed using the
units-of-consumption
method over the total available airspace, including probable
expansion airspace, where appropriate. Environmental structures,
which include leachate collection systems, methane collection
systems and groundwater monitoring wells, are charged to expense
over the shorter of their useful life or the life of the
landfill.
We assess the carrying value of our landfill sites in accordance
with the provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 144 “Accounting for
the Impairment of Long-Lived Assets”
(“SFAS 144”). These provisions, as well as
possible instances that may lead to impairment, are addressed in
the Long-Lived Assets discussion. We consider certain impairment
indicators previously discussed that require significant
judgment and understanding of the waste industry when applied to
landfill development or expansion.
We have identified three sequential steps that landfills
generally follow to obtain expansion permits. These steps are as
follows: (i) obtaining approval from local authorities;
(ii) submitting a permit application to state or provincial
authorities; and (iii) obtaining permit approval from state
or provincial authorities.
Before expansion airspace is included in our calculation of
total available disposal capacity, the following criteria must
be met: (i) the land associated with the expansion airspace
is either owned by us or is controlled by us pursuant to an
option agreement; (ii) we are committed to supporting the
expansion project financially and with appropriate resources;
(iii) there are no identified fatal flaws or impediments
associated with the project, including political impediments;
(iv) progress is being made on the project; (v) the
expansion is attainable within a reasonable time frame; and
(vi) based upon senior management’s review of the
status of the permit process to date, we believe it is likely
the expansion permit will be received within the next five
years. Upon meeting our expansion criteria, the rates used at
each applicable landfill to expense costs to acquire, construct,
close and maintain a site during the post-closure period are
adjusted to include probable expansion airspace and all
additional costs to be capitalized or accrued associated with
the expansion airspace.
Once expansion airspace meets our criteria for inclusion in our
calculation of total available disposal capacity, management
continuously monitors each site’s progress in obtaining the
expansion permit. If at any point it is determined that an
expansion area no longer meets the required criteria, the
probable expansion airspace is removed from the landfill’s
total available capacity and the rates used at the landfill to
expense costs to acquire, construct, close and maintain a site
during the post-closure period are adjusted accordingly.
We account for goodwill in accordance with
SFAS No. 142, “Goodwill and Other Intangible
Assets” and test goodwill for impairment using the two-step
process. The first step is a screen for potential impairment,
while the second step measures the amount of the impairment, if
any. The first step of the goodwill impairment test compares the
fair value of a reporting unit with its carrying amount,
including goodwill. We have defined our reporting units
Table of Contents
WASTE
SERVICES, INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
to be consistent with our operating segments: Eastern Canada,
Western Canada, Florida, Texas and Arizona. In determining the
fair value, we may utilize: (i) discounted future cash
flows; (ii) operating results based upon a comparative
multiple of earnings or revenues; (iii) offers from
interested investors, if any; or (iv) appraisals.
Significant estimates used in the fair value calculation
utilizing discounted future cash flows include, but are not
limited to: (i) estimates of future revenue and expense
growth by reporting unit; (ii) future estimated effective
tax rates, which we estimate to range between 37% and 40%;
(iii) future estimated rate of capital expenditures as well
as future required investments in working capital;
(iv) estimated average cost of capital, which we estimate
to range between 9.0% and 10.0%; and (v) the future
terminal value of our reporting unit, which is based upon its
ability to exist into perpetuity. Significant estimates used in
the fair value calculation utilizing market value multiples
include but are not limited to: (i) estimated future growth
potential of the reporting unit; (ii) estimated multiples
of revenue or earnings a willing buyer is likely to pay; and
(iii) estimated control premium a willing buyer is likely
to pay.
In addition, we evaluate a reporting unit for impairment if
events or circumstances change between annual tests, indicating
a possible impairment. Examples of such events or circumstances
include: (i) a significant adverse change in legal factors
or in the business climate; (ii) an adverse action or
assessment by a regulator; (iii) a more likely than not
expectation that a reporting unit or a significant portion
thereof will be sold; or (iv) the testing for
recoverability under SFAS 144 of a significant asset group
within the reporting unit.
Other intangible assets primarily include customer relationships
and contracts and covenants
not-to-compete.
Other intangible assets are recorded at their cost, less
accumulated amortization and are amortized over the period we
are expected to benefit by such intangibles. We periodically
evaluate the carrying value and remaining estimated useful life
of our other intangible assets subject to amortization in
accordance with the provisions of SFAS 144.
Acquisition deposits and deferred acquisition costs include
capitalized incremental direct costs associated with proposed
business combinations that are currently being negotiated. These
costs remain deferred until we cease to be engaged on a regular
and ongoing basis with completion of the proposed acquisition,
at which point they are charged to earnings. In the event that
the target is acquired, these costs are incorporated in the cost
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