-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HozZoKyrrc64lddnhfBfL5AZ+bCaXisB2pLRGbxKOIqk8FmpypBMhpmLyrtEHD8a GIqVZO3IRmNZkBB3nvPkFw== 0001072613-03-001374.txt : 20030813 0001072613-03-001374.hdr.sgml : 20030813 20030813165231 ACCESSION NUMBER: 0001072613-03-001374 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASTE CONNECTIONS INC/DE CENTRAL INDEX KEY: 0001057058 STANDARD INDUSTRIAL CLASSIFICATION: REFUSE SYSTEMS [4953] IRS NUMBER: 943283464 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-31507 FILM NUMBER: 03842079 BUSINESS ADDRESS: STREET 1: 620 COOLIDGE DRIVE STREET 2: SUITE 350 CITY: FOLSOM STATE: CA ZIP: 95630 BUSINESS PHONE: 9166088200 MAIL ADDRESS: STREET 1: 620 COOLIDGE DRIVE STREET 2: SUITE 350 CITY: FOLSOM STATE: CA ZIP: 95630-3155 10-Q 1 form10-q_12139.txt FORM 10-Q (QUARTER ENDED JUNE 30, 2003) ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2003 COMMISSION FILE NO. 0-23981 WASTE CONNECTIONS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE -------------------------------------------------------------- (State or other jurisdiction of incorporation or organization) 94-3283464 ------------------------------------ (I.R.S. Employer Identification No.) 35 IRON POINT CIRCLE, SUITE 200, FOLSOM, CA 95630 ------------------------------------------------- (Address of principal executive offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (916) 608-8200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [_] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock: As of July 31, 2003: 28,412,540 Shares of Common Stock ================================================================================ PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Condensed Consolidated Balance Sheets - December 31, 2002 and June 30, 2003 Condensed Consolidated Statements of Income for the three and six months ended June 30, 2002 and 2003 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2003 Notes to Condensed Consolidated Financial Statements Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3 - Quantitative and Qualitative Disclosures About Market Risk Item 4 - Controls and Procedures PART II - OTHER INFORMATION Item 1 - Legal Proceedings Item 4 - Submission of Matters to a Vote of Security Holders Item 6 - Exhibits and Reports on Form 8-K Signatures PART I - FINANCIAL INFORMATION Item 1 - Financial Statements WASTE CONNECTIONS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share and per share amounts)
DECEMBER 31, JUNE 30, ASSETS 2002 2003 - ------ ------------ ------------ Current assets: Cash and equivalents $ 4,067 $ 6,000 Accounts receivable, less allowance for doubtful accounts of $2,509 and $2,419 at December 31, 2002 and June 30, 2003, respectively 63,488 65,961 Prepaid expenses and other current assets 8,652 9,662 ------------ ------------ Total current assets 76,207 81,623 Property and equipment, net 578,040 579,550 Goodwill, net 548,975 555,931 Intangible assets, net 33,498 39,019 Other assets, net 25,162 25,942 ------------ ------------ $ 1,261,882 $ 1,282,065 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 30,688 $ 33,982 Accrued liabilities 45,905 39,095 Deferred revenue 19,016 21,757 Current portion of long-term debt and notes payable 3,646 5,309 ------------ ------------ Total current liabilities 99,255 100,143 Long-term debt and notes payable 578,481 557,165 Other long-term liabilities 14,813 6,485 Deferred income taxes 94,543 103,661 ------------ ------------ Total liabilities 787,092 767,454 Commitments and contingencies Minority interests 23,078 23,347 Stockholders' equity: Preferred stock: $0.01 par value; 7,500,000 shares authorized; none issued and outstanding -- -- Common stock: $0.01 par value; 50,000,000 shares authorized; 28,046,535 and 28,392,522 shares issued and outstanding at December 31, 2002 and June 30, 2003, respectively 280 284 Additional paid-in capital 332,705 339,637 Deferred stock compensation (775) (605) Retained earnings 123,498 154,832 Unrealized loss on market value of interest rate swaps (3,996) (2,884) ------------ ------------ Total stockholders' equity 451,712 491,264 ------------ ------------ $ 1,261,882 $ 1,282,065 ============ ============
See accompanying notes. WASTE CONNECTIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except share and per share amounts)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------ ------------------------------ 2002 2003 2002 2003 ------------ ------------ ------------ ------------ Revenues $ 128,091 $ 138,883 $ 233,833 $ 267,337 Operating expenses: Cost of operations 72,174 77,427 131,489 149,248 Selling, general and administrative 12,465 13,179 21,855 26,060 Depreciation and amortization 10,085 11,282 18,113 21,862 ------------ ------------ ------------ ------------ Operating income 33,367 36,995 62,376 70,167 Interest expense (7,769) (7,786) (15,138) (15,836) Other income (expense), net (181) (205) (581) (167) ------------ ------------ ------------ ------------ Income before income tax provision and minority interests 25,417 29,004 46,657 54,164 Minority interests (2,470) (2,593) (4,236) (4,875) ------------ ------------ ------------ ------------ Income before income tax provision 22,947 26,411 42,421 49,289 Income tax provision (8,605) (9,772) (15,908) (18,237) ------------ ------------ ------------ ------------ Income before cumulative effect of change in accounting principle 14,342 16,639 26,513 31,052 Cumulative effect of change in accounting principle, net of tax expense of $166 (Note 2) -- -- -- 282 ------------ ------------ ------------ ------------ Net income $ 14,342 $ 16,639 $ 26,513 $ 31,334 ============ ============ ============ ============ Basic earnings per common share: Income before cumulative effect of change in accounting principle $ 0.52 $ 0.59 $ 0.96 $ 1.10 Cumulative effect of change in accounting principle -- -- -- 0.01 ------------ ------------ ------------ ------------ Net income per common share $ 0.52 $ 0.59 $ 0.96 $ 1.11 ============ ============ ============ ============ Diluted earnings per common share: Income before cumulative effect of change in accounting principle $ 0.49 $ 0.55 $ 0.91 $ 1.04 Cumulative effect of change in accounting principle -- -- -- 0.01 ------------ ------------ ------------ ------------ Net income per common share $ 0.49 $ 0.55 $ 0.91 $ 1.05 ============ ============ ============ ============ Shares used in the per share calculations: Basic 27,723,136 28,265,001 27,676,913 28,173,817 ============ ============ ============ ============ Diluted 32,347,458 32,799,715 32,214,488 32,729,293 ============ ============ ============ ============
See accompanying notes. WASTE CONNECTIONS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
SIX MONTHS ENDED JUNE 30, ------------------------------ 2002 2003 ------------ ------------ Cash flows from operating activities: Net income $ 26,513 $ 31,334 Adjustments to reconcile net income to net cash provided by operating activities: Loss (gain) on disposal of assets (45) 219 Depreciation 17,317 21,198 Amortization of intangibles 796 664 Deferred income taxes -- 9,118 Minority interests 4,236 4,875 Cumulative effect of change in accounting principle -- (448) Amortization of debt issuance costs 1,031 1,182 Stock-based compensation 679 55 Interest income on restricted cash (361) (189) Net change in operating assets and liabilities, net of acquisitions 10,141 5,726 ------------ ------------ Net cash provided by operating activities 60,307 73,734 ------------ ------------ Cash flows from investing activities: Proceeds from disposal of assets 1,875 526 Payments for acquisitions, net of cash acquired (100,511) (21,074) Capital expenditures for property and equipment (24,929) (30,772) Decrease in other assets (750) (1,719) ------------ ------------ Net cash used in investing activities (124,315) (53,039) ------------ ------------ Cash flows from financing activities: Proceeds from long-term debt 300,000 27,000 Principal payments on notes payable and long-term debt (233,181) (48,153) Distributions to minority interest holders (4,165) (4,606) Proceeds from option and warrant exercises 5,604 7,050 Debt issuance costs (6,378) (53) ------------ ------------ Net cash provided by (used in) financing activities 61,880 (18,762) ------------ ------------ Net increase (decrease) in cash and equivalents (2,128) 1,933 Cash and equivalents at beginning of period 7,279 4,067 ------------ ------------ Cash and equivalents at end of period $ 5,151 $ 6,000 ============ ============
See accompanying notes. WASTE CONNECTIONS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in thousands, except share, per share and per ton amounts) 1. BASIS OF PRESENTATION AND SUMMARY The accompanying condensed consolidated financial statements relate to Waste Connections, Inc. and its subsidiaries (the "Company") as of June 30, 2003 and for the three and six month periods ended June 30, 2002 and 2003. The consolidated financial statements of the Company include the accounts of Waste Connections, Inc. and its wholly-owned and majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. Operating results for the three and six month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. The Company's consolidated balance sheet as of June 30, 2003, the consolidated statements of income for the three and six months ended June 30, 2002 and 2003, and the consolidated statements of cash flows for the six months ended June 30, 2002 and 2003 are unaudited. In the opinion of management, such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial position, results of operations, and cash flows for the periods presented. The consolidated financial statements presented herein should be read in conjunction with the Company's annual report on Form 10-K for the year 2002. 2. ADOPTION OF NEW ACCOUNTING STANDARDS SFAS No. 143 On January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"), which provides standards for accounting for obligations associated with the retirement of long-lived assets. The adoption of SFAS No. 143 impacted the calculation and accounting for landfill retirement obligations, which the Company has historically referred to as closure and post-closure obligations, as follows: (1) Landfill closure and post-closure liabilities are calculated by estimating the total obligation in current dollars, inflating the obligation based upon the expected date of the expenditure using an inflation rate of 3% and discounting the inflated total to its present value using an 8.5% discount rate. The 8.5% discount rate is higher than the 7.5% discount rate used prior to the adoption of SFAS No. 143 because SFAS No. 143 requires the use of a credit-adjusted risk-free rate. The resulting closure and post-closure obligation is recorded on the balance sheet as the landfill's total airspace is consumed. Discounting the obligation with a higher discount rate and recording the liability as airspace is consumed resulted in a decrease to the closure and post-closure liabilities recorded by the Company before it adopted SFAS No. 143. (2) Final capping costs are included in the calculation of closure and post-closure liabilities. Final capping costs are estimated using current dollars, inflated to the expected date of the final capping expenditures, discounted to a net present value and recorded on the balance sheet as a component of closure and post-closure liabilities as landfill airspace is consumed. (3) Interest accretion was reduced as a result of the decrease in the recorded closure and post-closure liabilities and has been reclassified from interest expense to cost of operations, thus causing a reduction in income from operations and an increase in net income. However, there has been no change in operating cash flow. (4) Depletion expense resulting from the closure and post-closure obligations recorded as a component of landfill site costs will generally be less during the early portion of a landfill's operating life and increase thereafter. In accordance with SFAS No. 143, the closure and post-closure liability is recorded as an addition to site costs and amortized to depletion expense on a units-of-consumption basis as landfill airspace is consumed. The impact of changes determined to be changes in estimates, based on an annual update, is accounted for on a prospective basis. These policies are unchanged from the accounting policies the Company followed for closure and post-closure obligations before it adopted SFAS No. 143. Adopting SFAS No. 143 required a cumulative adjustment to reflect the change in accounting for landfill obligations retroactively to the date of the inception of the landfill. Inception of the asset retirement obligation is the date operations commenced for landfills acquired in transactions accounted for as poolings-of-interests or the date the asset was acquired in a transaction accounted for as a purchase. Upon adopting SFAS No. 143 on January 1, 2003, the Company recorded a cumulative effect of the change in accounting principle of $448 ($282, net of tax), a decrease in its closure and post-closure liability of $9,142 and a decrease in net landfill assets of $8,667. The following is a reconciliation of the Company's closure and post-closure liability balance from December 31, 2002 to June 30, 2003: Closure and post-closure liability at December 31, 2002 $ 13,749 Decrease in closure and post-closure liability from adopting SFAS No. 143 (9,142) Liabilities incurred 209 Accretion expense 213 -------- Closure and post-closure liability at June 30, 2003 $ 5,029 ======== Pro forma financial information to reflect the reported results of operations for the three and six months ended June 30, 2002, as if SFAS No. 143 were adopted on January 1, 2002, is as follows:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, 2002 JUNE 30, 2002 ---------- ---------- Net income as reported $ 14,342 $ 26,513 Pro forma impact of applying SFAS No. 143, net of tax 41 78 ---------- ---------- Pro forma net income $ 14,383 $ 26,591 ========== ========== Basic earnings per share as reported $ 0.52 $ 0.96 Pro forma impact of applying SFAS No. 143, net of tax -- -- ---------- ---------- Pro forma basic earnings per share $ 0.52 $ 0.96 ========== ========== Diluted earnings per share as reported $ 0.49 $ 0.91 Pro forma impact of applying SFAS No. 143, net of tax -- 0.01 ---------- ---------- Pro forma diluted earnings per share $ 0.49 $ 0.92 ========== ==========
At June 30, 2003, the Company had restricted cash of $9,808 for purposes of settling future closure and post-closure liabilities. SFAS No. 146 In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No. 146"), effective for transactions occurring after December 31, 2002. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The Company's adoption of SFAS No. 146 did not have a material effect on its financial statements. FIN 45 In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). It clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee, including its ongoing obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur. The objective of the initial measurement of the liability is to determine the fair value of the guarantee at its inception. The initial recognition and initial measurement provisions of FIN 45 are effective on a prospective basis to guarantees issued or modified after December 31, 2002, and the Company will record the fair value of future material guarantees, if any. The Company did not have any material guarantees at June 30, 2003. FIN 46 In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires that unconsolidated variable interest entities be consolidated by their primary beneficiaries. A primary beneficiary is the party that absorbs a majority of the entity's expected losses or residual benefits. FIN 46 applies immediately to variable interest entities created after January 31, 2003 and to variable interest entities, regardless of when created, in quarterly periods beginning after June 15, 2003. The Company is continuing to evaluate the impact that adoption of FIN 46 will have on its financial statements, but does not believe the adoption of FIN 46 will have a material impact. SFAS No. 148 In December 2002, the Financial Accounting Standards Board issued FASB Statement No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("SFAS No. 148"). SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition to SFAS No. 123's fair value method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 and APB Opinion No. 28, "Interim Financial Reporting", to require disclosure in the summary of accounting policies of the effects of an entity's accounting policy with respect to stock-based employee compensation on reported net income and earnings per share in annual and interim financial statements. SFAS No. 148 does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method. The Company adopted the disclosure provisions of SFAS No. 148 and continues to account for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Under the intrinsic value method, compensation cost is the excess, if any, of the quoted market price or fair value of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement using a Black-Scholes option pricing model For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The following table summarizes the Company's pro forma net income and pro forma basic and diluted earnings per share for the three and six months ended June 30, 2002 and 2003:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------ ------------------------ 2002 2003 2002 2003 ---------- ---------- ---------- ---------- Net income, as reported $ 14,342 $ 16,639 $ 26,513 $ 31,334 Add: stock-based employee compensation expense included in reported net income, net of related tax effects 413 -- 424 35 Deduct: total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects (1,835) (1,816) (3,222) (3,467) ---------- ---------- ---------- ---------- Pro forma net income $ 12,920 $ 14,823 $ 23,715 $ 27,902 ========== ========== ========== ========== Earnings per share: Basic - as reported $ 0.52 $ 0.59 $ 0.96 $ 1.11 Basic - pro forma $ 0.47 $ 0.52 $ 0.86 $ 0.99 Diluted - as reported $ 0.49 $ 0.55 $ 0.91 $ 1.05 Diluted - pro forma $ 0.45 $ 0.50 $ 0.83 $ 0.95
SFAS No. 149 In April 2003, the Financial Accounting Standards Board issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("SFAS No. 149"), SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". With certain exceptions, SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The Company's adoption of SFAS No. 149 is not expected to have a material effect on its financial statements. SFAS No. 150 In May 2003, the Financial Accounting Standards Board issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company's adoption of SFAS No. 150 is not expected to have a material effect on its financial statements. 3. LANDFILL ACCOUNTING The Company owned and operated 20 landfills and operated, but did not own, ten landfills at June 30, 2003. Of the ten landfills that the Company operated, but did not own, three landfills were operated under life-of-site contracts and seven landfills were operated under contracts with finite terms. The Company also owns one Subtitle D landfill site that is permitted for operation, but not constructed as of June 30, 2003. The Company's landfills have site costs with a net book value of $372,158 at June 30, 2003. With the exception of one owned landfill that only accepts construction and demolition waste, all landfills that the Company owns or operates are Subtitle D landfills. For the Company's seven landfills operated under contracts with finite terms, the owner of the property, generally a municipality, usually owns the permit and is generally responsible for closure and post-closure obligations. The Company is responsible for all closure and post-closure liabilities for the three operating landfills that it operates, but does not own, under life-of-site operating agreements. Based on remaining permitted capacity as of June 30, 2003, and projected annual disposal volumes, the average remaining landfill life for the Company's 20 owned and operated landfills and three landfills operated, but not owned, under life-of-site operating contracts, is approximately 53 years. The seven landfills that the Company operates under contracts with finite terms have remaining terms of one to twelve years. Many of the Company's existing landfills have the potential for expanded disposal capacity beyond the amount currently permitted. The Company's internal and third-party engineers perform surveys at least annually to estimate the disposal capacity at its landfills. The Company's landfill depletion rates are based on the remaining disposal capacity, considering both permitted and deemed permitted airspace, at its 20 owned and operated landfills and three landfills operated, but not owned, under life-of-site operating contracts. Deemed permitted airspace consists of additional disposal capacity being pursued through means of an expansion. Deemed permitted airspace that meets certain internal criteria is included in the estimate of total landfill airspace. The Company's internal criteria to determine when deemed permitted airspace may be included as disposal capacity are as follows: (1) The land where the expansion is being sought is contiguous to the current disposal site, and the Company either owns it or has an option to purchase it; (2) Total development costs and closure/post-closure costs have been determined; (3) Internal personnel have performed a financial analysis of the proposed expansion site and have determined that it has a positive financial and operational impact; (4) Internal or external personnel are actively working to obtain the necessary approvals to obtain the landfill expansion permit; (5) The Company considers it probable that the expansion will be achieved. For a pursued expansion to be considered probable, there must be no significant known technical, legal, community, business, or political restrictions or similar issues existing that are likely to impair the success of the expansion; and (6) The land where the expansion is being sought has the proper zoning or proper zoning can readily be obtained. The Company is currently seeking to expand permitted capacity at five of its owned landfills and two landfills that it operates, but does not own, under life-of-site operating contracts, and considers the achievement of these expansions to be probable. Although the Company cannot be certain that all future expansions will be permitted as designed, the average remaining life, when considering remaining permitted capacity, probable expansion capacity and projected annual disposal volume, of the Company's 20 owned and operated landfills and three landfills operated, but not owned, under life-of-site operating contracts is 61 years, with lives ranging from 6 to 313 years. The Company uses the units-of-production method to calculate the depletion rate at the landfills it owns and the landfills it operates, but does not own, under life-of-site operating contracts. This methodology divides the costs associated with acquiring, permitting and developing the entire landfill by the total remaining disposal capacity of that landfill. The resulting per unit depletion rate is applied to each ton of waste disposed at the landfill and is recorded as expense for that period. During the six months ended June 30, 2002 and 2003, the Company expensed approximately $5,733 and $6,123, respectively, or an average of $2.22 and $2.30 per ton consumed, respectively, related to landfill depletion and $287 and $213, respectively, or an average of $0.11 and $0.08 per ton consumed, respectively, related to closure and post-closure accretion expense. Landfill development costs include the costs of acquisition, construction associated with excavation, liners, site berms, groundwater monitoring wells and leachate collection systems. Estimated total future development costs of the Company's 20 owned and operated landfills and three landfills operated, but not owned, under life-of-site operating contracts were $334,327 at June 30, 2003. 4. ACQUISITIONS During the six months ended June 30, 2003, the Company acquired four non-hazardous solid waste collection businesses that were accounted for using the purchase method of accounting. Aggregate consideration for the acquisitions consisted of $21,074 in cash (net of cash acquired), exclusive of debt assumed totaling $1,500. The purchase prices have been allocated to the identified intangible assets and tangible assets acquired based on their estimated fair values at the dates of acquisition, with any residual amounts allocated to goodwill. The purchase price allocations are considered preliminary until the Company is no longer waiting for information that it has arranged to obtain and that is known to be available or obtainable. 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 consummation of a business combination. As of June 30, 2003, the Company had 14 acquisitions for which purchase price allocations were preliminary, mainly as a result of tax-related settlements. The Company believes the potential changes to its preliminary purchase price allocations will not have a material impact on its financial condition, results of operations or cash flows. A summary of the preliminary purchase price allocations for the acquisitions consummated in the six months ended June 30, 2003 is as follows: Acquired assets: Accounts receivable $ 338 Prepaid expenses and other current assets 9 Property and equipment 1,167 Goodwill 6,956 Long-term franchise agreements and contracts 6,102 Non-competition agreements 83 Assumed liabilities: Accounts payable (255) Accrued liabilities (449) Debt and other liabilities assumed (1,294) ---------- $ 12,657 ========== During the six months ended June 30, 2003, the Company paid $8,417 of accrued acquisition-related liabilities. Goodwill acquired in the six months ended June 30, 2003 totaling $6,270 is expected to be deductible for tax purposes. 5. INTANGIBLE ASSETS Intangible assets, exclusive of goodwill, consist of the following as of June 30, 2003: GROSS NET CARRYING ACCUMULATED CARRYING AMOUNT AMORTIZATION AMOUNT -------- -------- -------- Amortizable intangible assets: Long-term franchise agreements and contracts $ 20,639 $ (1,359) $ 19,280 Non-competition agreements 3,704 (2,265) 1,439 Other, net 2,416 (826) 1,590 -------- -------- -------- 26,759 (4,450) 22,309 Nonamortized intangible assets: Indefinite-lived intangible assets 16,710 -- 16,710 -------- -------- -------- Intangible assets, exclusive of goodwill $ 43,469 $ (4,450) $ 39,019 ======== ======== ======== The weighted-average amortization periods of long-term franchise agreements and non-competition agreements acquired during the six months ended June 30, 2003 are 40 years and 5 years, respectively. Estimated future amortization expense for the next five years of amortizable intangible assets is as follows: For the year ended December 31, 2003 $ 1,437 For the year ended December 31, 2004 1,336 For the year ended December 31, 2005 1,216 For the year ended December 31, 2006 1,034 For the year ended December 31, 2007 831 6. LONG-TERM DEBT In May 2003, the Company entered into two forward-starting interest rate swap agreements. Each interest rate swap agreement has a notional amount of $87,500 and effectively fixes the interest rate on the notional amount at interest rates ranging from 2.67% to 2.68%, plus applicable margin. The effective date of the swap agreements is February 2004 and each swap agreement expires in February 2007. These interest rate swap agreements are effective as cash flow hedges of our variable rate debt. The notional amounts and all other significant terms of the swap agreements are matched to the provisions and terms of the variable rate debt being hedged achieving 100% effectiveness. If significant terms do not match we will assess any ineffectiveness and any ineffectiveness will immediately be recorded in interest expense in our statements of income. 7. EARNINGS PER SHARE CALCULATION The following table sets forth the numerator and denominator used in the computation of earnings per common share:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------- ---------------------------- 2002 2003 2002 2003 ------------ ------------ ------------ ------------ Numerator: Net income for basic earnings per share $ 14,342 $ 16,639 $ 26,513 $ 31,334 Interest expense on convertible subordinated notes due 2006, net of tax effects 1,462 1,476 2,921 2,951 ------------ ------------ ------------ ------------ Net income for diluted earnings per share $ 15,804 $ 18,115 $ 29,434 $ 34,285 ============ ============ ============ ============ Denominator: Basic shares outstanding Dilutive effect of convertible 27,723,136 28,265,001 27,676,913 28,173,817 subordinated notes due 2006 3,944,775 3,944,775 3,944,775 3,944,775 Dilutive effect of options and warrants 679,547 587,243 592,800 606,511 Dilutive effect of restricted stock -- 2,696 -- 4,190 ------------ ------------ ------------ ------------ Diluted shares outstanding 32,347,458 32,799,715 32,214,488 32,729,293 ============ ============ ============ ============
8. COMPREHENSIVE INCOME Comprehensive income includes changes in the fair value of interest rate swaps that qualify for hedge accounting. The difference between net income and comprehensive income for the three and six months ended June 30, 2002 and 2003 is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ---------------------------- ---------------------------- 2002 2003 2002 2003 ------------ ------------ ------------ ------------ Net income $ 14,342 $ 16,639 $ 26,513 $ 31,334 Unrealized gain (loss) on interest rate swaps, net of tax benefit (expense) of $491 and $(119) for the three months ended June 30, 2002 and 2003, respectively, and $(345) and $(703) for the six months ended June 30, 2002 and 2003, respectively (818) 203 162 1,112 ------------ ------------ ------------ ------------ Comprehensive income $ 13,524 $ 16,842 $ 26,675 $ 32,446 ============ ============ ============ ============
The components of other comprehensive income and related tax effects for the three and six months ended June 30, 2002 and 2003 are as follows:
THREE MONTHS ENDED JUNE 30, 2002 -------------------------------------------- GROSS TAX EFFECT NET OF TAX ------------ ------------ ------------ Amounts reclassified into earnings $ 1,573 $ 590 $ 983 Changes in fair value of interest rate swaps (2,882) (1,081) (1,801) ------------ ------------ ------------ $ (1,309) $ (491) $ (818) ============ ============ ============
THREE MONTHS ENDED JUNE 30, 2003 -------------------------------------------- GROSS TAX EFFECT NET OF TAX ------------ ------------ ------------ Amounts reclassified into earnings $ 1,603 $ 593 $ 1,010 Changes in fair value of interest rate swaps (1,281) (474) (807) ------------ ------------ ------------ $ 322 $ 119 $ 203 ============ ============ ============ SIX MONTHS ENDED JUNE 30, 2002 -------------------------------------------- GROSS TAX EFFECT NET OF TAX ------------ ------------ ------------ Amounts reclassified into earnings $ 3,095 $ 1,161 $ 1,934 Changes in fair value of interest rate swaps (2,588) (816) (1,772) ------------ ------------ ------------ $ 507 $ 345 $ 162 ============ ============ ============ SIX MONTHS ENDED JUNE 30, 2003 -------------------------------------------- GROSS TAX EFFECT NET OF TAX ------------ ------------ ------------ Amounts reclassified into earnings $ 3,108 $ 1,150 $ 1,958 Changes in fair value of interest rate swaps (1,293) (447) (846) ------------ ------------ ------------ $ 1,815 $ 703 $ 1,112 ============ ============ ============
The estimated net amount of the existing losses as of June 30, 2003 (based on the interest rate yield curve at that date) included in accumulated other comprehensive income expected to be reclassified into pre-tax earnings as payments are made under the terms of the interest rate swap agreements within the next 12 months is approximately $3,769. The timing of actual amounts reclassified into earnings is dependent on future movements in interest rates. 9. CONTINGENCIES In April 2003, the Company entered into a consent order with the Oklahoma Department of Environmental Quality Land Protection Division (the "Department") to settle all issues by mutual consent related to a dispute arising in 2002 due to the Company's alleged failure to obtain the Department's prior approval of an out-of-state disposal plan for waste received at its Red Carpet Landfill in Oklahoma. In connection with the consent order, the Company implemented a disposal plan subject to certain conditions imposed by the Department and agreed to pay $160. Additionally, the Company is party to various legal proceedings in the ordinary course of business and as a result of the extensive governmental regulation of the solid waste industry. The Company's management does not believe that these proceedings, either individually or in the aggregate, are likely to have a material adverse effect on its business, financial condition, operating results or cash flows. The Company owns undeveloped property in Harper County, Kansas where it is seeking permits to construct and operate a Subtitle D landfill. In 2002, the Company received a special use permit from Harper County for zoning the landfill and in 2003 it received a draft permit from the Kansas Department of Health and Environment to construct and operate the landfill. In July 2003, the District Court of Harper County invalidated the previously issued zoning permit. The Company has appealed the District Court's decision to invalidate the zoning permit. The Kansas Department of Health and Environment has notified the Company that it will not issue a final permit to construct and operate the landfill until the zoning matter is resolved. At June 30, 2003, the Company had $3,400 of capitalized expenditures related to this landfill development project. Based on the advice of counsel, the Company believes that it will prevail in this matter and does not believe that an impairment of the capitalized expenditures exists. If the Company does not prevail on appeal, however, it will be required to expense in a future period the $3,400 of capitalized expenditures, less the recoverable value of the undeveloped property, which would likely have a material adverse effect on its reported income for that period. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the unaudited financial statements and notes thereto included elsewhere herein. FORWARD LOOKING STATEMENTS Certain information contained in this Quarterly Report on Form 10-Q, including, without limitation, information appearing under Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," is forward-looking in nature. These statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "will", "should" or "anticipates" or the negative thereof or comparable terminology, or by discussions of strategy. Our business and operations are subject to a variety of risks and uncertainties and, consequently, actual results may materially differ from those projected by any forward-looking statements in this Quarterly Report on Form 10-Q. Factors that could cause actual results to differ from those projected include, but are not limited to: (1) competition or unfavorable industry or economic conditions could lead to a decrease in demand for our services and to a decline in prices we realize for our services, (2) we depend in part on acquisitions for growth; we may be required to pay higher prices for acquisitions and we may experience difficulty in integrating and deriving synergies from acquisitions, or finding acquisition targets suitable to our growth strategy, (3) we may not always have access to the additional capital that we require to execute our growth strategy or our cost of capital may increase, (4) governmental regulations may require increased capital expenditures or otherwise affect our business, (5) businesses that we acquire may have undiscovered liabilities, (6) large, long-term collection contracts on which we depend may not be replaced when they expire or are terminated, and (7) we are highly dependent on the services of our senior management, who would be difficult or impossible to replace. These risks and uncertainties, as well as others, are discussed in greater detail in our other filings with the Securities and Exchange Commission. We make no commitment to revise or update any forward-looking statements to reflect events or circumstances after the date any such statement is made. OVERVIEW Waste Connections, Inc. is an integrated solid waste services company that provides solid waste collection, transfer, disposal and recycling services in mostly secondary markets in the Western, Midwestern, Southwestern and Southeastern U.S. As of June 30, 2003, we served more than 1,000,000 commercial, industrial and residential customers in Alabama, California, Colorado, Georgia, Illinois, Iowa, Kansas, Kentucky, New Mexico, Minnesota, Mississippi, Montana, Nebraska, Ohio, Oklahoma, Oregon, South Dakota, Tennessee, Texas, Utah, Washington, and Wyoming. As of that date, we owned 91 collection operations and operated or owned 29 transfer stations, 29 Subtitle D landfills, one construction and demolition landfill and 18 recycling facilities. We also own one Subtitle D landfill site that is permitted for operation, but not constructed as of June 30, 2003. We generally intend to pursue an acquisition-based growth strategy and as of June 30, 2003 have acquired 155 businesses since our inception in September 1997. We anticipate that a substantial part of our future growth will come from acquiring additional solid waste collection, transfer and disposal businesses and, therefore, we expect additional acquisitions could continue to affect period-to-period comparisons of our operating results. CRITICAL ACCOUNTING POLICIES We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Self-insurance liabilities. During the third quarter of 2002, we increased our scope of self-insurance, becoming primarily self-insured for automobile liability, general liability and workers' compensation claims. Previously, we were primarily self-insured only for automobile collision and employee group health claims. Our self-insurance accruals are based on claims filed and estimates of claims incurred but not reported and are developed by our management and by our third-party claims administrator. The self-insurance accruals are influenced by our past claims experience factors, for which we have a limited history, and by published industry development factors. If we experience insurance claims or costs above or below our historically evaluated levels, our estimates could be materially affected. The frequency and amount of claims or incidents could vary significantly over a period of time, which could materially affect our self-insurance liabilities. Additionally, the actual costs to settle the self-insurance liabilities could materially differ from the original estimates. Accounting for landfills. Our adoption of SFAS No. 143 on January 1, 2003 resulted in a significant change to our accounting policies for landfill closure and post-closure obligations. See discussion below under "New Accounting Pronouncements" for additional information and analyses of the impact that adopting SFAS No. 143 had on our balance sheet, and is expected to have on our results of operations for the year ending December 31, 2003. We recognize landfill depletion expense as airspace of the landfill is consumed. Our landfill depletion rates are based on the remaining disposal capacity at our landfills, considering both permitted and deemed permitted airspace. Landfill closure and post-closure liabilities are calculated by estimating the total obligation in current dollars, inflating the obligation based upon the expected date of the expenditure and discounting the inflated total to its present value using a credit-adjusted risk-free rate. The resulting closure and post-closure obligation is recorded on the balance sheet as the landfill's total airspace is consumed. The accounting methods discussed below require us to make certain estimates and assumptions. Changes to these estimates and assumptions could have a material effect on our financial position and results of operations. Any changes to our estimates are applied prospectively. Landfill development costs. Landfill development costs include the costs of acquisition, construction associated with excavation, liners, site berms, groundwater monitoring wells and leachate collection systems. We estimate the total costs associated with developing each landfill site to its final capacity. Total landfill costs include the development costs associated with "deemed" permitted airspace. Deemed permitted airspace is described below. Landfill development costs are dependent upon future events and thus actual costs could vary significantly from our estimates. Material differences between estimated and actual development costs may affect our cash flows by increasing our capital expenditures and thus affect our results of operations by increasing our landfill depletion expense. Closure and post-closure obligations. We reserve for estimated closure and post-closure maintenance obligations at the landfills we own and certain landfills that we operate, but do not own, under life-of-site operating contracts. We could have additional material financial obligations relating to closure and post-closure costs at other disposal facilities that we currently own or operate or that we may own or operate in the future. We calculate landfill closure and post-closure liabilities by estimating the total obligation in current dollars, inflating the obligation based upon the expected date of the expenditure using an inflation rate of 3% and discounting the inflated total to its present value using an 8.5% discount rate. A 1.0 percentage point increase in the inflation rate we currently use would increase our landfill depletion and accretion expense by $0.3 million in 2003. A 1.0 percentage point decrease in the discount rate we currently use would increase our landfill depletion and accretion expense by $0.2 million in 2003. The resulting closure and post-closure obligation is recorded on the balance sheet as an addition to site costs and amortized as depletion expense as the landfill's total airspace is consumed. Significant reductions in our estimates of the remaining lives of our landfills or significant increases in our estimates of the landfill closure and post-closure costs could have a material adverse effect on our financial condition and results of operations. Disposal capacity. Our internal and third-party engineers perform surveys at least annually to estimate the remaining disposal capacity at our landfills. Our landfill depletion rates are based on the remaining disposal capacity, considering both permitted and deemed permitted airspace, at the landfills that we own and at the landfills that we operate, but do not own, under life-of-site operating contracts. Deemed permitted airspace consists of additional disposal capacity being pursued through means of an expansion. Deemed permitted airspace that meets certain internal criteria is included in our estimate of total landfill airspace. Our internal criteria to determine when deemed permitted airspace may be included as disposal capacity is as follows: (1) The land where the expansion is being sought is contiguous to the current disposal site, and we either own it or have an option to purchase it; (2) Total development costs and closure/post-closure costs have been determined; (3) Internal personnel have performed a financial analysis of the proposed expansion site and have determined that it has a positive financial and operational impact; (4) Internal or external personnel are actively working to obtain the necessary approvals to obtain the landfill expansion permit; (5) We consider it probable that we will achieve the expansion. For a pursued expansion to be considered probable, there must be no significant known technical, legal, community, business, or political restrictions or similar issues existing that could impair the success of the expansion; and (6) The land where the expansion is being sought has the proper zoning or proper zoning can readily be obtained. We may be unsuccessful in obtaining permits for deemed permitted disposal capacity at our landfills. If we are unsuccessful in obtaining permits for deemed permitted disposal capacity, we will charge the previously capitalized development costs to expense. This will adversely affect our operating results and cash flows and could result in greater landfill depletion expense being recognized on a prospective basis. We periodically evaluate our landfill sites for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on regulatory factors, market conditions and operational performance of our landfills. Future events could cause us to conclude that impairment indicators exist and that our landfill carrying costs are impaired. Any resulting impairment loss could have a material adverse effect on our financial condition and results of operations. Impairment of intangible assets. We periodically evaluate acquired assets for potential impairment indicators. Our judgments regarding the existence of impairment indicators are based on regulatory factors, market conditions, anticipated cash flows and operational performance of our acquired assets. Future events could cause us to conclude that impairment indicators exist and that goodwill or other intangibles associated with our acquired businesses are impaired. Any resulting impairment loss could reduce our net worth and have a material adverse effect on our financial condition and results of operations. Additionally, our credit agreement contains a covenant requiring us to maintain a minimum funded debt-to-capitalization ratio, and net worth is one of the components of capitalization. A reduction in net worth, therefore, if substantial, could limit the amount that we can borrow under our credit agreement and any failure to comply with the agreement could result in an event of default under the credit agreement. As of June 30, 2003, goodwill and intangible assets represented 46.4% of our total assets. Allocation of acquisition purchase price. We allocate acquisition purchase prices to identified intangible assets and tangible assets acquired and liabilities assumed based on their estimated fair values at the dates of acquisition, with any residual amounts allocated to goodwill. We deem the total remaining permitted and deemed permitted airspace of an acquired landfill to be a tangible asset. Therefore, for acquired landfills, we initially allocate the purchase price to identified intangible and tangible assets acquired, excluding landfill airspace, and liabilities assumed based on their estimated fair values at the date of acquisition. Any residual amount is allocated to landfill airspace. We often consummate single acquisitions that include a combination of collection operations and landfills. For each separately identified collection operation and landfill acquired in a single acquisition, we perform an initial allocation of total purchase price to the identified collection operations and landfills based on their relative fair values. Following this initial allocation of total purchase price to the identified collection operations and landfills, we further allocate the identified intangible assets and tangible assets acquired and liabilities assumed for each collection operation and landfill based on their estimated fair values at the dates of acquisition, with any residual amounts allocated to either goodwill or landfill site costs, as discussed above. Allowance for doubtful accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers deteriorates, impairing their ability to make payments, additional allowances may be required. In addition, if certain customer and billing information is not properly integrated from acquisitions that we close, additional allowances may be required. GENERAL Our revenues consist mainly of fees we charge customers for solid waste collection, transfer, disposal and recycling services. Our collection business also generates revenues from the sale of recyclable commodities, which have significant price variability. A large part of our collection revenues comes from providing commercial, industrial and residential services. We frequently perform these services under service agreements or franchise agreements with counties or municipal contracts. Our existing franchise agreements and all of our existing municipal contracts give us the exclusive right to provide specified waste services in the specified territory during the contract term. These exclusive arrangements are awarded, at least initially, on a competitive bid basis and subsequently on a bid or negotiated basis. We also provide residential collection services on a subscription basis with individual households. Approximately 50% of our revenues for the three and six months ended June 30, 2003 were derived from market areas where services are provided predominantly under exclusive franchise agreements, long-term municipal contracts and governmental certificates. Governmental certificates grant us perpetual and exclusive collection rights in the covered areas. Contracts with counties and municipalities and governmental certificates provide relatively consistent cash flow during the terms of the contracts. Because we bill most residential customers quarterly, subscription agreements also provide a stable source of revenues for us. Our collection business also generates revenues from the sale of recyclable commodities. We charge transfer station and landfill customers a tipping fee on a per ton basis for disposing of their solid waste at the transfer stations and the landfill facilities we own and landfill facilities that we operate, but do not own. Many of our transfer and landfill customers have entered into one to ten year disposal contracts with us, most of which provide for annual indexed price increases. We typically determine the prices for our solid waste services by the collection frequency and level of service, route density, volume, weight and type of waste collected, type of equipment and containers furnished, the distance to the disposal or processing facility, the cost of disposal or processing, and prices charged by competitors for similar services. The terms of our contracts sometimes limit our ability to pass on price increases. Long-term solid waste collection contracts often contain a formula, generally based on a published price index that automatically adjusts fees to cover increases in some, but not all, operating costs. Costs of operations include labor, tipping fees paid to third-party disposal facilities, equipment maintenance and worker's compensation and vehicle insurance and claims expense, third-party transportation expense, fuel, the cost of materials we purchase for recycling, district and state taxes and host community fees and royalties. In 2002, we increased our scope of self-insurance, becoming primarily self-insured for general liability, workers' compensation and automobile liability. Previously, we were primarily self-insured only for automobile collision and employee group health claims. The frequency and amount of claims or incidents for the areas in which we are primarily self-insured could vary significantly from quarter to quarter and/or year to year, resulting in increased volatility of our cost of operations. As of June 30, 2003, we owned and/or operated 29 transfer stations, which reduce our costs by allowing us to use collection personnel and equipment more efficiently and by consolidating waste to reduce transportation costs to remote sites and gain more favorable disposal rates that may be available for larger quantities of waste. Selling, general and administrative ("SG&A") expenses include management, clerical and administrative compensation overhead costs associated with our marketing and sales force, professional services and community relations expense. Depreciation expense includes depreciation of fixed assets over their estimated useful lives using the straight-line method. Depletion expense includes depletion of landfill site costs and total future development costs as remaining airspace of the landfill is consumed. Remaining airspace at our landfills includes both permitted and deemed permitted airspace. Amortization expense includes the amortization of definite-lived intangible assets, consisting primarily of long-term franchise agreements and contracts and non-competition agreements, over their estimated useful lives using the straight-line method. Goodwill and indefinite-lived intangible assets, consisting primarily of certain perpetual rights to provide solid waste collection and transportation services in specified territories, are not amortized. At June 30, 2003, we had 288.2 million tons of permitted remaining airspace capacity and 44.9 million tons of deemed probable expansion airspace capacity at our 20 owned and operated landfills and three landfills operated, but not owned, under life-of-site operating contracts. The disposal tonnage that we received in the six months ended June 30, 2002 and 2003 at all of our landfills is shown below (tons in thousands): JUNE 30, 2002 JUNE 30, 2003 --------------------- --------------------- NUMBER TOTAL NUMBER TOTAL OF SITES TONS OF SITES TONS -------- -------- -------- -------- Owned and operated landfills 20 2,408 20 2,426 Operated landfills 8 337 7 366 Operated landfills under life-of-site contracts 2 171 3 234 -------- -------- -------- -------- 30 2,916 30 3,026 ======== ======== ======== ======== We capitalize some third-party expenditures related to pending acquisitions or development projects, such as legal, engineering and interest expenses. We expense indirect acquisition costs, such as executive and corporate overhead, public relations and other corporate services, as we incur them. We charge against net income any unamortized capitalized expenditures and advances (net of any portion that we believe we may recover, through sale or otherwise) that may become impaired, such as those that relate to any operation that is permanently shut down and any pending acquisition or landfill development project that we believe will not be completed. We routinely evaluate all capitalized costs, and expense those related to projects that we believe are not likely to succeed. At June 30, 2003, we had less than $0.1 million in capitalized interest related to landfill development projects and $0.5 million in capitalized expenditures relating to pending acquisitions. We own undeveloped property in Harper County, Kansas where we are seeking permits to construct and operate a Subtitle D landfill. In 2002, we received a special use permit from Harper County for zoning the landfill and in 2003 we received a draft permit from the Kansas Department of Health and Environment to construct and operate the landfill. In July 2003, the District Court of Harper County invalidated the previously issued zoning permit. We have appealed the District Court's decision to invalidate the zoning permit. The Kansas Department of Health and Environment has notified us that it will not issue a final permit to construct and operate the landfill until the zoning matter is resolved. At June 30, 2003, we had $3.4 million of capitalized expenditures related to this landfill development project. Based on the advice of counsel, we believe that we will prevail in this matter and do not believe that an impairment of the capitalized expenditures exists. If we do not prevail on appeal, however, we will be required to expense in a future period the $3.4 million of capitalized expenditures, less the recoverable value of the undeveloped property, which would likely have a material adverse effect on our reported income for that period. We continually evaluate the value and future benefits of our intangible assets, including goodwill. We assess the recoverability from future operations using cash flows and income from operations of the related acquired businesses as measures. Under this approach, the carrying value is reduced if it becomes probable that our best estimate for expected future cash flows of the related business would be less than the carrying amount of the intangible assets. As of June 30, 2003, there have been no adjustments to the carrying amounts of intangibles, including goodwill, resulting from these evaluations. As of June 30, 2003, goodwill and other intangible assets represented approximately 46.4% of total assets and 121.1% of stockholders' equity. NEW ACCOUNTING PRONOUNCEMENTS For a description of the new accounting standards that affect us, see Note 2 to our Condensed Consolidated Financial Statements included under Item 1 of this Form 10-Q. RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2003 The following table sets forth items in Waste Connections' consolidated statement of operations as a percentage of revenues for the periods indicated.
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------- --------------------- 2002 2003 2002 2003 -------- -------- -------- -------- Revenues 100.0% 100.0% 100.0% 100.0% Cost of operations 56.3 55.8 56.2 55.8 Selling, general and administrative expenses 9.7 9.5 9.3 9.8 Depreciation and amortization expense 7.9 8.1 7.8 8.2 -------- -------- -------- -------- Operating income 26.1 26.6 26.7 26.2 Interest expense, net (6.1) (5.6) (6.5) (5.9) Other expense, net (0.2) (0.1) (0.3) (0.1) Minority interests (1.9) (1.9) (1.8) (1.8) Income tax expense (6.7) (7.0) (6.8) (6.8) Cumulative effect of change in accounting principle -- -- -- 0.1 -------- -------- -------- -------- Net income 11.2% 12.0% 11.3% 11.7% ======== ======== ======== ========
Revenues. Total revenues increased $10.8 million, or 8.4%, to $138.9 million for the three months ended June 30, 2003 from $128.1 million for the three months ended June 30, 2002. The increase in revenues in the three months ended June 30, 2003 resulted from the full-quarter inclusion of revenues from acquisitions closed during the three months ended June 30, 2002 and the inclusion of revenues from acquisitions closed subsequent to June 30, 2002, which together totaled approximately $10.5 million. Of the remaining change in revenues, improved recyclable commodity prices increased revenues by $0.5 million, and price and volume changes in our existing business resulted in a net revenue decline of $0.2 million. This decline was primarily the result of competitive pressures, reduced special waste and transfer station volumes in certain markets and the loss of certain municipal contracts that expired subsequent to June 30, 2002 and were not renewed, partially offset by increased prices charged to our customers. Revenues for the six months ended June 30, 2003 increased $33.5 million, or 14.3%, to $267.3 million from $233.8 million for the six months ended June 30, 2002. The increase in revenues in the six months ended June 30, 2003 resulted from the full-quarter inclusion of revenues from acquisitions closed during the six months ended June 30, 2002 and the inclusion of revenues from acquisitions closed subsequent to June 30, 2002, which together totaled approximately $33.2 million. Of the remaining change in revenues, improved recyclable commodity prices increased revenues by $1.5 million and price and volume changes in our existing business resulted in a net revenue decline of $1.1 million. This decline was primarily the result of competitive pressures, reduced special waste and transfer station volumes in certain markets, severe winter weather conditions encountered at some of our operations during the first quarter of 2003 and the loss of certain municipal contracts that expired subsequent to June 30, 2002 and were not renewed, partially offset by increased prices charged to our customers. Cost of Operations. Total cost of operations increased $5.3 million, or 7.3%, to $77.4 million for the three months ended June 30, 2003 from $72.2 million for the three months ended June 30, 2002. Cost of operations for the six months ended June 30, 2003 increased $17.7 million, or 13.5%, to $149.2 million from $131.5 million for the six months ended June 30, 2002. The increases were primarily attributable to acquisitions closed over the balance of 2002 and the first six months of 2003, partially offset by reduced insurance costs associated with the high deductible insurance program we implemented in August 2002. Cost of operations as a percentage of revenues decreased 0.5 percentage points to 55.8% for the three months ended June 30, 2003 from 56.3% for the three months ended June 30, 2002. Cost of operations as a percentage of revenues for the six months ended June 30, 2003 decreased 0.4 percentage points to 56.2% from 55.8% for the six months ended June 30, 2002. The decreases as a percentage of revenues were primarily attributable to price increases, reduced insurance costs, and improved operations at certain locations, partially offset by the decline in higher margin one-time projects and the mix of revenues associated with acquisitions closed over the balance of 2002 and the first six months of 2003, which had operating margins below our company average. SG&A. SG&A expenses increased $0.7 million, or 5.7%, to $13.2 million for the three months ended June 30, 2003 from $12.5 million for the three months ended June 30, 2002. SG&A expenses for the six months ended June 30, 2003 increased $4.2 million, or 19.2%, to $26.1 million from $21.9 million for the six months ended June 30, 2002. Our SG&A expenses for the three and six months ended June 30, 2003 increased from the prior year periods as a result of additional personnel from acquisitions closed over the balance of 2002 and the first six months of 2003, additional corporate, regional and district level overhead, increased legal expenses, increased management information system expenses incurred to support our administrative activities and additional stock compensation expense related to the issuance of restricted stock to district-level personnel in May 2002, net of the incurrence in the three months ended June 30, 2002 of $1.3 million of one-time employment expenses, which included $0.6 million of stock compensation expense, associated with the termination of our search for a chief operating officer and the hiring of two new corporate officers. SG&A as a percentage of revenues decreased 0.2 percentage points to 9.5% for the three months ended June 30, 2003 from 9.7% for the three months ended June 30, 2002. The decrease was due to the incurrence in the three months ended June 30, 2002 of $1.3 million of employment expense that did not recur in 2003, partially offset by percentage of revenue increases in corporate overhead, legal expenses, management information system expense and stock compensation expense. SG&A as a percentage of revenues for the six months ended June 30, 2003 increased 0.5 percentage points to 9.8% from 9.3% for the six months ended June 30, 2002. The increase was due to percentage of revenue increases in corporate overhead, legal expenses, management information system expense and stock compensation expense, partially offset by the $1.3 million of employment expense incurred in 2002 that did not recur in 2003. Depreciation and Amortization. Depreciation and amortization expense increased $1.2 million, or 11.9%, to $11.3 million for the three months ended June 30, 2003 from $10.1 million for the three months ended June 30, 2002. Depreciation and amortization expenses for the six months ended June 30, 2003 increased $3.8 million, or 20.7%, to $21.9 million from $18.1 million for the six months ended June 30, 2002. The increase was primarily attributable to depreciation and depletion associated with acquisitions closed over the balance of 2002 and the first six months of 2003 and increased depreciation expense resulting from new equipment acquired to support our base operations, partially offset by decreased depletion expense at landfills acquired prior to 2002 due to decreased landfill volumes. Depreciation and amortization as a percentage of revenues increased 0.2 percentage points to 8.1% for the three months ended June 30, 2003 from 7.9% for the three months ended June 30, 2002. Depreciation and amortization as a percentage of revenues for the six months ended June 30, 2002 increased 0.4 percentage points to 8.2% from 7.8% for the six months ended June 30, 2002. The increases in depreciation and amortization as a percentage of revenues were the result of depreciation expense associated with new equipment acquired subsequent to June 30, 2002, which had depreciation rates that were in excess of our historical average. Operating Income. Operating income increased $3.6 million, or 10.9%, to $37.0 million for the three months ended June 30, 2003 from $33.4 million for the three months ended June 30, 2002. Operating income for the six months ended June 30, 2003 increased $7.8 million, or 12.5%, to $70.2 million from $62.4 million for the six months ended June 30, 2002. The increases were primarily attributable to the growth in revenues and the incurrence of $1.3 million of employment expenses in 2002 that did not recur in 2003, partially offset by increased operating costs and recurring SG&A expenses to support the revenue growth and increased depreciation and amortization expenses. Operating income as a percentage of revenues increased 0.5 percentage points to 26.6% for the three months ended June 30, 2003 from 26.1% for the three months ended June 30, 2002. The increase was due to the incurrence in the three months ended June 30, 2002 of $1.3 million of employment expenses that did not recur in 2003 and improved gross margins, partially offset by increased recurring SG&A expenses and increased depreciation expenses. Operating income as a percentage of revenues for the six months ended June 30, 2003 decreased 0.5 percentage points to 26.2% from 26.7% for the six months ended June 30, 2002. The decrease resulted from increased recurring SG&A expenses and increased depreciation expenses, partially offset by improved gross margins and the incurrence in 2002 of $1.3 million of employment expenses that did not recur in 2003. Interest Expense. Interest expense was relatively unchanged at $7.8 million for the three months ended June 30, 2002 and 2003. Interest expense for the six months ended June 30, 2003 increased $0.7 million, or 4.6%, to $15.8 million from $15.1 million for the six months ended June 30, 2002. The increase for the six months ended June 30, 2003 was primarily attributable to higher debt levels incurred to fund our acquisitions, partially offset by lower interest rates on our floating rate borrowings. Other Income (Expense). Other income (expense) was unchanged at a total of $(0.2) million for the three months ended June 30, 2002 and 2003. Other expense decreased from an expense total of $(0.6) million for the six months ended June 30, 2002 to an expense total of ($0.2) million for the six months ended June 30, 2002. The primary components of other expense are net losses incurred on the disposal of certain assets. Minority Interests. Minority interests increased $0.1 million, or 5.0%, to $2.6 million for the three months ended June 30, 2003, from $2.5 million for the three months ended June 30, 2002. Minority interests increased $0.6 million, or 15.1%, to $4.9 million for the six months ended June 30, 2003, from $4.2 million for the six months ended June 30, 2002. The increases in minority interests were due to increased earnings by our majority-owned subsidiaries. Provision for Income Taxes. Income taxes increased $1.2 million, or 13.6%, to $9.8 million for the three months ended June 30, 2003, from $8.6 million for the three months ended June 30, 2002. Income taxes increased $2.3 million, or 14.6%, to $18.2 million for the six months ended June 30, 2003, from $15.9 million for the six months ended June 30, 2002. These increases were due to increased pre-tax earnings, partially offset by a 0.5 percentage point reduction in our effective tax rate due to the reduction in our blended state tax rate. The effective income tax rate for the three and six months ended June 30, 2003 was 37.0%, which is above the federal statutory rate of 35.0% primarily due to state and local taxes. Cumulative Effect of Change in Accounting Principle. Cumulative effect of change in accounting principle consists of a $0.3 million gain, net of tax effects, resulting from our adoption of SFAS No. 143 on January 1, 2003. Our adoption of SFAS No. 143 required us to record a cumulative change in accounting for landfill closure and post-closure obligations retroactively to the date of the acquisition of each landfill. Net Income. Net income increased $2.3 million, or 16.0%, to $16.6 million for the three months ended June 30, 2003, from $14.3 million for the three months ended June 30, 2002. The increase was primarily attributable to increased operating income and a reduction in our effective tax rate. Net income increased $4.8 million, or 18.2%, to $31.3 million for the six months ended June 30, 2003, from $26.5 million for the six months ended June 30, 2002. The increase was primarily attributable to increased operating income and a reduction in our effective tax rate, partially offset by increased interest and minority interest expense. LIQUIDITY AND CAPITAL RESOURCES Our business is capital intensive. Our capital requirements include acquisitions and fixed asset purchases. We expect that we will also make capital expenditures for landfill cell construction, landfill development and landfill closure activities in the future. We plan to meet our capital needs through various financing sources, including internally generated funds, debt and equity financings. As of June 30, 2003, we had a working capital deficit of $18.5 million, including cash and equivalents of $6.0. million. Our working capital deficit decreased $4.5 million from $23.0 million at December 31, 2002, due primarily to using cash generated from operations to pay $8.4 million of accrued acquisition-related liabilities. Our strategy in managing our working capital is generally to apply the cash generated from our operations that remains after satisfying our working capital and capital expenditure requirements to reduce our indebtedness under our credit facility and to minimize our cash balances. We have a $435 million revolving credit facility with a syndicate of banks for which Fleet Boston Financial Corp. acts as agent. As of June 30, 2003, we had an aggregate of $197.0 million outstanding under the credit facility, exclusive of stand-by letters of credit. The credit facility allows us to issue up to $80 million in stand-by letters of credit, which reduce the amount of total borrowings available under the credit facility. As of June 30, 2003, we had $23.6 million of outstanding letters of credit issued under the credit facility. Thus, at June 30, 2003 we had approximately $214.4 million in borrowing capacity available under our credit facility. Virtually all of our assets, including our interest in the equity securities of our subsidiaries, secure our obligations under the credit facility. The credit facility matures in 2005 and bears interest at a rate per annum equal to, at our discretion, either the Fleet National Bank Base Rate plus applicable margin, or the LIBOR rate plus applicable margin. The credit facility places certain business, financial and operating restrictions on Waste Connections relating to, among other things, incurring additional indebtedness, investments, acquisitions, asset sales, mergers, dividends, distributions, and repurchases and redemption of capital stock. The credit facility also requires us to maintain the following financial covenants: (i) an interest coverage ratio; (ii) funded debt to EBITDA; (iii) senior funded debt to EBITDA; (iv) funded debt to capitalization; and (v) profitable operations, all as defined in the credit facility solely for the purpose of determining compliance with the covenants. The interest coverage ratio requires that at the end of any fiscal quarter we will not permit the ratio of (A) our consolidated net income plus interest expense and income taxes ("EBIT") for the four fiscal quarters then ending to (B) consolidated total interest expense for such period, to be less than 2 to 1. The funded debt to EBITDA covenant requires that at the end of any fiscal quarter, we will not permit the ratio of (A) all funded debt to (B) EBIT plus depreciation and amortization expense ("EBITDA") for the four fiscal quarters then ending to exceed 4.25 to 1. The senior funded debt to EBITDA covenant requires that at the end of any fiscal quarter, we will not permit the ratio of (A) all senior funded debt to (B) EBITDA for the four fiscal quarters then ending to exceed 3.25 to 1. The funded debt to capitalization covenant requires that at the end of any fiscal quarter we will not permit the ratio of (A) funded debt to (B) the sum of funded debt plus consolidated net worth to exceed 65%. The profitable operations covenant requires that at the end of any fiscal quarter we will not permit consolidated net income to be less than $1.00. As of June 30, 2003, we were in compliance with all covenants under our credit facility. The credit facility also requires the lenders' approval of acquisitions in certain circumstances. We use the credit facility for acquisitions, capital expenditures, working capital, standby letters of credit and general corporate purposes. If we are unable to incur additional indebtedness under our credit facility or obtain additional capital through future debt or equity financings, our rate of growth through acquisitions may decline. As of June 30, 2003, we had the following contractual obligations and commercial commitments (in thousands):
PAYMENTS DUE BY PERIOD ---------------------------------------------------------------------- CONTRACTUAL LESS THAN OBLIGATIONS TOTAL 1 YEAR 1 TO 3 YEARS 4 TO 5 YEARS OVER 5 YEARS - ----------- ---------- ---------- ---------- ---------- ---------- Long-term debt (1) $ 562,474 $ 5,309 $ 354,212 $ 4,356 $ 198,597 Operating leases 24,467 3,408 5,749 3,945 11,365 Unconditional purchase obligations 3,901 3,901 -- -- -- ---------- ---------- ---------- ---------- ---------- Total contractual cash obligations $ 590,842 $ 12,618 $ 359,961 $ 8,301 $ 209,962 ========== ========== ========== ========== ==========
(1) Long-term debt payments include $197.0 million due in 2005 under our credit facility. As of June 30, 2003, our credit facility allows us to borrow up to $435 million.
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD ---------------------------------------------------------------------- CONTRACTUAL LESS THAN COMMITMENTS TOTAL 1 YEAR 1 TO 3 YEARS 4 TO 5 YEARS OVER 5 YEARS - ----------- ---------- ---------- ---------- ---------- ---------- Standby letters of credit $ 23,635 $ 23,635 $ -- $ -- $ -- Financial surety bonds (2) 76,045 71,709 4,336 -- -- ---------- ---------- ---------- ---------- ---------- Total commercial commitments $ 99,680 $ 95,344 $ 4,336 $ -- $ -- ========== ========== ========== ========== ==========
Our commercial commitments consist of financial assurance instruments issued in the normal course of business and are not debt of Waste Connections. Since we have no current liability for these financial assurance instruments, they are not reflected in the accompanying Condensed Consolidated Balance Sheets. The underlying obligations of our financial assurance instruments would be valued and recorded in the Condensed Consolidated Balance Sheets if it were probable that we would be unable to perform our obligations under the financial assurance contracts. We do not expect this to occur. (2) We use financial surety bonds for a variety of corporate guarantees. The two largest uses of financial surety bonds are for municipal contract performance guarantees and landfill closure and post-closure financial assurance required under certain environmental regulations. As a result of recent changes in the insurance industry, we have experienced less availability and increased costs of surety bonds for landfill closure and post-closure requirements. We generally have not experienced significant difficulty in obtaining surety bonds for performance under our municipal collection contracts or landfill operating agreements. Environmental regulations require demonstrated financial assurance to meet closure and post-closure requirements for landfills. In addition to surety bonds, these requirements may also be met through alternative financial assurance instruments, including insurance, letters of credit and restricted cash deposits. At June 30, 2003, we had provided customers and various regulatory authorities with surety bonds in the aggregate amount of approximately $47.9 million to secure our landfill closure and post-closure requirements and $27.1 million to secure performance under collection contracts and landfill operating agreements. These surety bonds were issued by our current surety bond underwriters under non-binding commitments. These non-binding commitments do not have a stated expiration date; however, individual bonds issued typically have a term of one year. If our current bond underwriters are unwilling to issue additional bonds under the current non-binding commitments, renew existing bonds upon expiration, or increase their total commitment upon reaching the maximum issuance amount under the current non-binding commitments, or if we are unable to obtain surety bonds through new underwriters as such needs arise, we would need to arrange other means of financial assurance, such as a cash trust or a letter of credit, to secure contract performance or meet closure and post-closure requirements. While such alternate financial assurance has been readily available, it may result in additional expense or capital outlays. For the six months ended June 30, 2003, net cash provided by operations was approximately $73.7 million. Of this, $5.7 million was provided by working capital for the period. The remaining components of the reconciliation of net income to net cash provided by operations for the six months ended June 30, 2003 consist of non-cash expenses including $21.8 million of depreciation and amortization, $4.9 million of minority interest expense and $1.2 million of debt issuance cost amortization, and the deferral of $9.1 million of income tax expense resulting from timing differences between the recognition of income and expenses for financial reporting and tax. . For the six months ended June 30, 2003, net cash used in investing activities was $53.0 million. Of this, $21.1 million was used to fund the cash portion of acquisitions and to pay a portion of acquisition costs that were included as a component of accrued liabilities at December 31, 2002. Cash used for capital expenditures was $30.8 million, which was primarily for investments in fixed assets, consisting of trucks, containers, other equipment and landfill development. Other cash outflows from investing activities include $1.9 million of restricted cash funding for our landfill closure and post-closure obligations. For the six months ended June 30, 2003, net cash used in financing activities was $18.8 million, which included $21.2 million of net repayments under our various debt arrangements and $4.6 million of cash distributions to minority interest holders, less $7.1 million of proceeds from stock option and warrant exercises. We made approximately $30.8 million in capital expenditures during the six months ended June 30, 2003. We expect to make capital expenditures of approximately $60.0 million in 2003 in connection with our existing business. We intend to fund our planned 2003 capital expenditures principally through existing cash, internally generated funds, and borrowings under our existing credit facility. In addition, we may make substantial additional capital expenditures in acquiring solid waste collection and disposal businesses. If we acquire additional landfill disposal facilities, we may also have to make significant expenditures to bring them into compliance with applicable regulatory requirements, obtain permits or expand our available disposal capacity. We cannot currently determine the amount of these expenditures because they will depend on the number, nature, condition and permitted status of any acquired landfill disposal facilities. We believe that our credit facility and the funds we expect to generate from operations will provide adequate cash to fund our working capital and other cash needs for the foreseeable future. From time to time we evaluate our existing operations and their strategic importance to Waste Connections. If we determine that a given operating unit does not have future strategic importance, we may sell or otherwise dispose of those operations. Although we believe our operations would not be impaired by such dispositions, we could incur losses on them. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In the normal course of business, we are exposed to market risk, including changes in interest rates and certain commodity prices. We use hedge agreements to manage a portion of our risks related to interest rates. While we are exposed to credit risk in the event of non-performance by counterparties to our hedge agreements, in all cases such counterparties are highly rated financial institutions and we do not anticipate non-performance. We do not hold or issue derivative financial instruments for trading purposes. We monitor our hedge positions by regularly evaluating the positions at market and by performing sensitivity analyses. In May 2003, we entered into two forward-starting interest rate swap agreements. Each interest rate swap agreement has a notional amount of $87.5 million and effectively fixes the interest rate on the notional amount at interest rates ranging from 2.67% to 2.68%, plus applicable margin. The effective date of the swap agreements is February 2004 and each swap agreement expires in February 2007. At June 30, 2003, we had two additional interest rate swap agreements that expire in 2003. The first swap agreement effectively fixes the interest rate on a notional amount of $125 million at 6.17%, plus applicable margin. The second interest rate swap agreement effectively fixes the interest rate on a notional amount of $15 million at 7.01%, plus applicable margin. We have performed sensitivity analyses to determine how market rate changes will affect the fair value of our market risk sensitive hedge positions and all other debt. Such an analysis is inherently limited in that it reflects a singular, hypothetical set of assumptions. Actual market movements may vary significantly from our assumptions. Fair value sensitivity is not necessarily indicative of the ultimate cash flow or earnings effect we would recognize from the assumed market rate movements. We are exposed to cash flow risk due to changes in interest rates with respect to the $57.0 million remaining floating rate balance owed under our credit facility, $175 million of our Floating Rate Convertible Subordinated Notes due 2022, $8.5 million of floating rate debt under various notes payable to third parties and floating rate municipal bond obligations of approximately $8.9 million. A one percentage point increase in interest rates on our variable-rate debt as of June 30, 2003 would decrease our annual pre-tax income by approximately $2.5 million. All of our remaining debt instruments are at fixed rates, or effectively fixed under the interest rate swap agreements described above; therefore, changes in market interest rates under these instruments would not significantly impact our cash flows or results of operations. We market a variety of recyclable materials, including cardboard, office paper, plastic containers, glass bottles and ferrous and aluminum metals. We own and operate 18 recycling processing facilities and sell other collected recyclable materials to third parties for processing before resale. We often share the profits from our resale of recycled materials with other parties to our recycling contracts. For example, certain of our municipal recycling contracts in Washington, negotiated before we acquired those businesses, specify benchmark resale prices for recycled commodities. If the prices we actually receive for the processed recycled commodities collected under the contract exceed the prices specified in the contract, we share the excess with the municipality, after recovering any previous shortfalls resulting from actual market prices falling below the prices specified in the contract. To reduce our exposure to commodity price risk with respect to recycled materials, we have adopted a pricing strategy of charging collection and processing fees for recycling volume collected from third parties. Although there can be no assurance of market recoveries in the event of a decline, because of the provisions within certain of our contracts that pass commodity risk along to the customers, we believe, given historical trends and fluctuations in the recycling commodities market, that a 10% decrease in average recycled commodity prices from the prices that were in effect at June 30, 2003 would not materially affect our cash flows or pre-tax income. ITEM 4. CONTROLS AND PROCEDURES The Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as of June 30, 2003. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported as and when required. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS See "Legal Proceedings" in our quarterly report on Form 10-Q for the quarter ended March 31, 2003. Additionally, we are a party to various legal proceedings in the ordinary course of business and as a result of the extensive governmental regulation of the solid waste industry. Our management does not believe that these proceedings, either individually or in the aggregate, are likely to have a material adverse effect on our business, financial condition, operating results or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Our Annual Meeting of stockholders was held on May 23, 2003. Michael W. Harlan was elected as director by the votes indicated: Total Votes For: 25,123,075 Total Votes Withheld: 994,293 William J. Razzouk was elected as director by the votes indicated: Total Votes For: 25,123,440 Total Votes Withheld: 993,928 The terms for Messrs. Harlan and Razzouk expire on the date of the annual meeting in 2006. The following proposal was adopted at the annual meeting by the votes indicated: To ratify the appointment of Ernst & Young LLP as independent auditors for Waste Connections for the year 2003: Total Votes For: 25,656,755 Total Votes Against: 443,109 Total Votes Abstained: 17,504 The following proposal was defeated at the annual meeting because it failed to receive votes in favor of the proposal equal to or greater than a majority of the 28,152,853 shares of common stock outstanding on the record date of the annual meeting: To approve the amendment of our Certificate of Incorporation to increase the authorized number of shares of common stock from 50,000,000 to 150,000,000 shares: Total Votes For: 13,924,013 Total Votes Against: 12,171,492 Total Votes Abstained: 21,863 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibits: Exhibit Number Description of Exhibits ------ ----------------------- 10.1 Employment Agreement between Waste Connections, Inc. and David G. Eddie 10.2 Employment Agreement between Waste Connections, Inc. and Worthing F. Jackman 31 Certifications 32 Certificate of Chief Executive Officer and Chief Financial Officer b. Reports on Form 8-K: On April 23, 2003, we filed a report on Form 8-K announcing the results of our earnings for the first quarter of 2003. On April 29, 2003, we filed a report on Form 8-K announcing new appointments to our executive management team. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. WASTE CONNECTIONS, INC. BY: /s/ Ronald J. Mittelstaedt ---------------------------- Date: August 13, 2003 Ronald J. Mittelstaedt, President and Chief Executive Officer BY: /s/ Steven F. Bouck ---------------------------- Date: August 13, 2003 Steven F. Bouck, Executive Vice President and Chief Financial Officer EX-10.1 3 exh10-1_12139.txt EMPLOYMENT AGREEMENT (DAVID G. EDDIE) EXHIBIT 10.1 ------------ EMPLOYMENT AGREEMENT -------------------- THIS EMPLOYMENT AGREEMENT is made and entered into as of May 15, 2001 or such earlier date as the parties agree (the "Effective Date"), by and between David Eddie (the "Employee") and Waste Connections, Inc., a Delaware corporation (the "Company"), with reference to the following facts. Thc Company desires to engage the services and employment of the Employee, and the Employee is willing to accept employment by the Company, on the terms and conditions set forth below. NOW THEREFORE, in consideration of the premises and the mutual covenants and conditions herein, the Company and the Employee agree as follows: 1. EMPLOYMENT. The Company agrees to employ the Employee, and the Employee agrees to accept employment with the Company, on the terms and conditions stated herein. 2. POSITION AND RESPONSIBILITIES. During the Term the Employee shall serve as the Director of Finance of the Company, reporting directly to the Company's Chief Accounting Officer. The Employee shall be based in the Company's corporate headquarters in California and shall be responsible for specific components of financial and accounting functions relating to the Company's operations and properties. The employee shall perform such other duties and responsibilities as the President or the Board of Directors (the "Board") of the Company may reasonably assign to the Employee from time to time. The Employee shall devote such time and attention to his duties as are necessary to the proper discharge of his responsibilities hereunder. The Employee agrees to perform all duties consistent with (a) policies established from time to time by the Company and(b) all applicable legal requirements. 3. TERM. The period of the Employee's employment under this Agreement (the "Term") shall commence on the Effective Date and continue until the third anniversary of the Effective Date, unless terminated earlier as provided herein or extended by the Board. At the end of the initial Term, this Agreement shall be renewed automatically for successive Terms of one year, unless either party shall have given the other notice of termination hereof as provided herein. 4. COMPENSATION BENEFITS AND REIMBURSEMENT OF EXPENSES. (a) COMPENSATION. The Company shall compensate the Employee during the Term of this Agreement as follows: (1) BASE SALARY. The Employee shall be paid a base salary ("Base Salary") of not less than ninety thousand dollars ($90,000) per year in installments consistent with the Company's usual practices. The Board shall review the Employee's Base Salary on each anniversary of the Effective Date or more frequently. at the times prescribed in salary administration practices applied generally to management employees of the Company. (2) PERFORMANCE BONUS. The Employee shall be entitled to an annual cash bonus (the "Bonus") based on the Company's attainment of reasonable financial objectives to be determined annually by the Board. The maximum annual Bonus will equal twenty-five percent (25%) of the applicable year's beginning Base Salary and will be payable if the Board determines, in its sole and exclusive discretion, that that year's financial objectives have been fully met. The Bonus shall be paid in accordance with the Company's bonus plan, as approved by the Board; provided that in no case shall any portion of the Bonus with respect to any fiscal year be paid more than seventy-five (75) days after the end of such fiscal year. For the Employee's bonus to be paid in 2002, for the fiscal 2001 year, any bonus earned shall be prorated from the first day of employment to the end of the year. (3) GRANT OF OPTIONS OR RESTRICTED STOCK. On the Effective Date, the Company sha11 grant to the Employee, for no additional consideration, the following awards: (a.) Nonqualified stock options (the "Options") to purchase an amount of the Company's Common Stock under the Company's Amended and Restated 1997 Stock Option Plan, such that the exercise price subtracted from the market price of the stock, multiplied by the number of shares issued equals one hundred thousand dollars ($100,000) on the grant date. For example, if on the first day of employment, the Company's Common Stock closes at $26.00 per share; then the Company would issue twenty thousand (20,000) stock options at $21.00 exercise price to yield ($26.00 - $21.00 = $5.00/share multiplied by 20,000 options = $100,000 of "in the money" value). All stock options granted shall vest and become exercisable with respect to 25% of the shares granted on the first, second, third, and fourth anniversaries of the grant date. The option shall have a term of 10 years from the date of such grant. And, (b.) A grant of seven thousand, five hundred (7,500) non-qualified stock options of the Company's Common Stock. These stock options will be issued to the Employee in his name effective on the first day of employment. The price of each stock option will be equal to the close of market price for one share of the Company's common stock on the first day of employment. The ownership of these shares shall vest 33 1/3% on the first, second and third anniversaries of the grant date to the Employee, pursuant to the 1997 Stock Option Plan. The terms of the Options shall be described in more detail in a Stock Option Agreement to be entered into between the Employee and the Company. If at any time while any of the Options are still outstanding the Company amends its Stock Option Plan to provide for a less favorable vesting schedule for stock options than that provided herein, any Options then outstanding shall thereupon be converted to warrants entitling the Employee to purchase the number of shares of Common Stock for which the Employee's then outstanding Options may be exercised, on the same terms as provided under such Options. (b) OTHER BENEFITS. During the Term, the Company shall provide the Employee with a cellular telephone and will pay or reimburse the Employee's monthly service fee and costs of calls attributable to Company business. During the Term, the Employee shall be entitled to receive all other benefits of employment generally available to other management employees of the Company and those benefits for which management employees are or shall become eligible, including, without limitation and to the extent made available by the Company, Medical, dental, disability, and prescription coverage, life insurance and tax-qualified retirement benefits. If the Employee is not eligible for coverage under the Company's health insurance policy at the commencement of the Term, the Company shall reimburse the Employee for the expenses of health insurance coverage under COBRA from the commencement of the Term until the Employee becomes eligible for the health insurance benefits offered by the Company. The Employee shall be entitled to two (2) weeks of paid vacation during each of the first three twelve-month periods of his employment, and three (3) weeks per twelve-month period beginning with the fourth twelve-month period of employment under this agreement. (c) REIMBURSEMENT OF OTHER EXPENSES. The Company agrees to pay or reimburse the Employee for a11 reasonable travel and other expenses incurred by the Employee in connection with the performance of his duties under this Agreement on presentation of proper expense statements or vouchers. All such supporting information shall comply with all applicable Company policies relating to reimbursement for travel and other expenses. (d) WITHHOLDING. All compensation payable to the Employee hereunder is subject to all withholding requirements under applicable law. 5. CONFIDENTIALITY. During the Term of his employment, the Employee shall not, without the prior written consent of the Company, divulge to any third party or use for his own benefit or the benefit of any third party or for any purpose other than the exclusive benefit of the Company, any confidential or proprietary business or technical information revealed, obtained or developed in the course of his employment with the Company and which is otherwise the property of the Company or any of its affiliated corporations, including, but not limited to, trade secrets, customer lists, formulae and processes of manufacture; provided, however, that nothing herein contained shall restrict the Employee's ability to make such disclosures during the course of his employment as may be necessary or appropriate to the effective and efficient discharge of his duties to the Company. 6. PROPERTY. Both during the Term of his employment and thereafter, the Employee shall not remove from the Company's offices or premises any Company documents, records, notebooks, files, correspondence, reports, memoranda and similar materials or property of any kind unless necessary in accordance with the duties and responsibilities of his employment. In the event that any such material or property is removed, it shall be returned to its proper file or place of safekeeping as promptly as possible. The Employee shall not make, retain, remove or distribute any copies, or divulge to any third person the nature or contents of any of the foregoing or of any other oral or written information to which he may have access, except as disclosure shall be necessary in the performance of his assigned duties. On the termination of his employment with the Company, the Employee sha11 leave with or return to the Company all originals and copies of the foregoing then in his possession or subject to his control, whether prepared by the Employee or by others. 7. TERMINATION. (a) TERMINATION BY THE COMPANY FOR CAUSE OR BY THE EMPLOYEE. The employment of the Employee may be terminated for cause at any time by the "Board" on written Notice of Termination (as defined in Section 8(a)) delivered to the Employee describing with specificity the grounds for termination. The employment of the Employee may also be terminated at any time by the Employee on written Notice of Termination delivered to the Company. Immediately on termination pursuant to this Section 7(a), the Company shall pay to the Employee in a lump sum his then current Base Salary under Section 4(a)(1)on a prorated basis to the Date of Termination (as defined in Section 8(b)). On termination pursuant to this Section 7(a), the Employee shall forfeit (i) his Bonus under Section 4(a)(2) for the year in which such termination occurs, and (ii)all outstanding but unvested Options and other options and rights relating to capital stock of the Company. For purposes of this Agreement, Cause shall mean: (1) a material breach of any of the terms of this Agreement that is not immed1ately corrected following written notice of default specifying such breach; (2) a breach of any of the provisions of Section 10; (3) repeated intoxication with alcohol or drugs while on Company premises during its regular business hours to such a degree that, in the reasonable judgment of the other managers of the Company, the Employee is abusive or incapable of performing his duties and respons1b1l1tles under this Agreement; (4) conviction of a felony; or (5) misappropriation of property belonging to the Company and/or any of its affiliates. (b) TERMINATION WITHOUT CAUSE. The employment of the Employee may be terminated without Cause at any time by the Board on delivery to the Employee of a written Notice of Termination (as defined in Section 8(a)). On the Date of Termination(as defined in Section 8(b)) pursuant to this Section 7(b), the Company shall pay to the Employee in a lump sum an amount equal to (i) the Base Salary payable under Section 4(a)(1)at the rate in effect on the Date of Termination a period of one year provided the Employee agrees to a full time transition period to assist the Company of up to one hundred and twenty (120) days as directed by the Company. At the end of this transition period, the Company shall pay the Employee the one year's lump sum payment. In addition, on termination of the Employee under this Section 7(b),all of the Employee's outstanding but unvested Options and other options and rights relating to capital stock of the Company shal1 immediately vest and become exercisable. The term of any such options and rights shall be extended to the third anniversary of the Employee's termination. The Employee acknowledges that extending the term of any option pursuant to this Section 7(b), or Section 7(c) or 7(d), could cause such option to lose its tax-qualified status if it is an incentive stock option under the Code and agrees that the Company shall have no obligation to compensate the Employee for any additional taxes he incurs as a result. (c) TERMINATION ON DISABILITY. If during the Term the Employee should fail to perform his duties hereunder on account of physical or mental illness or other incapacity which the Board shall in good faith determine renders the Employee incapable of performing his duties hereunder, and such illness or other incapacity shall continue for a period of more than six (6) consecutive months ("Disability"), the Company shall have the right, on Written Notice of Termination (as defined in Section 8(8)) delivered to the Employee to terminate the Employee's employment under this Agreement. During the period that the Employee shall have been incapacitated due to physical or mental illness, the Employee shall continue to receive the full Base Salary provided for in Section 4(a)(1) hereof at the rate then in effect until the Date of Termination (as defined in Section 8(b)) pursuant to this Section 7(c). On the Date of Termination pursuant to this Section 7(c), all of the Employee's outstanding but unvested Options and other options and rights relating to capital stock of the Company shall immediately vest and become exercisable. The term of any such options and rights shall be extended to the third anniversary of the Employee's termination. (d) TERMINATION ON DEATH. If the Employee shall die during the Term, the employment of the Employee shall thereupon terminate. On the Date of Termination (as defined in Section 8(b))pursuant to this Section 7(d), all of the Employee's outstanding but unvested Options and other options and rights relating to capital stock of the Company shall immediately vest and become exercisable. The term of any such options and rights shall be extended to the third anniversary of the Employee's termination. The provisions of the Section 7(d) shall not affect the entitlements of the Employee's heirs, executors, administrators, legatees, beneficiaries or assigns under any employee benefit plan, fund or program of the Company. 8. PROVISIONS APPLICABLE TO TERMINATION OF EMPLOYMENT. (a) NOTICE OF TERMINATION. Any purported termination of Employee's employment by thc Company or by the employee pursuant to Section 7 shall be communicated by Notice of Termination to the Employee or the Company, as the case may be, as provided herein ("Notice of Termination"). (b) DATE OF TERMINATION. For all purposes, "Date of Termination" shall mean the date on which a Notice of Termination is given. (c) BENEFITS ON TERMINATION. On termination of this Agreement pursuant to Section 7, all profit-sharing, deferred compensation and other retirement benefits payable to the Employee under benefit plans in which the Employee then participated shall be paid to the Employee in accordance with the provisions of the respective plans. Except as otherwise provided in Sections 7(b), 7(c), 7(d), and 9, if the Employee's employment by the Company is terminated before all of the Employee's options, warrants and rights with respect to the Company's capital stock have vested, the Employee shall forfeit any such options, warrants and rights that are unvested as of the termination date. 9. CHANGE IN CONTROL. (a) PAYMENTS ON CHANGE IN CONTROL. Notwithstanding any provision in this Agreement to the contrary, unless the Employee elects in writing to waive this provision, a Change in Control (as defined below) of the Company shall be deemed a termination of the Employee without Cause and the Employee shal1 be entitled to receive and the Company agrees to pay to the Employee in a lump sum the same amount determined under Section 7(b) that is payable to the Employee on termination without Cause. In addition, on a Change of Control, all of the Employee's outstanding but unvested Options and other options and rights relating to capital stock of the Company shall immediately vest and become exercisable, and the term of any such options and rights shall be extended to the third anniversary of the Employee's termination. After a Change in Control, if any previously outstanding Option or other option or right (the "Termination Option") relating to the Company's capital stock does not remain outstanding, the successor to the Company or its then Parent (as defined below) shall either: (i) Issue an option, warrant or right, as appropriate (the "Successor Option"), to purchase common stock of such successor or Parent in an amount such that on exercise of the Successor Option the Employee would receive the same number of shares of the successor's/Parent's common stock as the Employee would have received had the Employee exercised the Terminated Option immediately prior to the transaction resulting in the Change in Control and received shares of such successor/Parent in such transaction. The aggregate exercise price for all of the shares covered by such Successor Option shall equal the aggregate exercise price of the Terminated Option; or (ii) Pay the Employee a bonus within ten (10) days after the consummation of the Change in Control in an amount agreed to by the Employee and the Company. Such amount shall be at least equivalent on an after-tax basis to the net after-tax gain that the Employee would have realized if he had been issued a Successor Option under clause (i)above and had immediately exercised such Successor Option and sold the underlying stock, taking into account the different tax rates that apply to such bonus and to such gain, and such amount shall also reflect other differences to the Employee between receiving a bonus under this clause (ii) and receiving a Successor Option under clause (i) above. (b) Definitions. For the purposes of this Agreement. a Change in Control shall be deemed to have occurred if (i) there shall be consummated (aa) any reorganization, liquidation or consolidation of the Company, or any merger or other business combination of the Company with any other corporation, other than any such merger or other combination that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%)of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such transaction, (bb)any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or if (ii) any "person" (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), shall become the "beneficial owner"(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of fifty percent (50%)or more of the Company's outstanding voting securities (except that for purposes of this Section 10(b), "person" shall not include any person or any person that controls, is controlled by or is under common control with such person, who as of the date of this Agreement owns ten percent(10%) or more of the total voting power represented by the outstanding voting securities of the Company, or a trustee or other fiduciary holding securities under any employee benefit plan of the Company, or a corporation that is owned directly or indirectly by the stockholders of the Company in substantially the same percentage as their ownership of the Company) or if (iii)during any period of two consecutive years, individuals who at the beginning of such period constituted the entire Board shall cease for any reason to constitute at least one-half of the membership thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least one-half of the directors then still in office who were directors at the beginning of the period. The term "Parent" means a corporation, partnership. trust. limited liability company or other entity that is the ultimate "beneficial owner" (as defined above) of fifty percent(50%)or more of the Company's outstanding voting securities. 10. NON-COMPETITION AND NON-SOLICITATION. (a) In consideration of the provisions hereof, for the period commencing on the date hereof and ending on the later of the first anniversary of the termination of this Agreement, or one year after receipt by the Employee of all compensation owed under this Agreement, the Employee will not, except as specifically provided below, anywhere in any county in any state in which the Company is engaged in business as of such termination date, directly or indirectly, acting individually or as the owner, shareholder, partner or management employee in any entity,{i)engage in the operation of a solid waste collection, transporting or disposal business, transfer facility. recycling facility. materials recovery facility or solid waste landfill;(ii) enter the employ as a manager of, or tender any personal services to or for the benefit of, or assist in or facilitate the solicitation of customers for, or receive remuneration in the form of management salary, commissions or otherwise from, any business engaged in such activities in such counties; or (iii)receive or purchase a financial interest in, make a loan to, or make a gift in support of, any such business in any capacity, including without limitation, as a sole proprietor, partner, shareholder, officer, director, principal agent or trustee; provided, however, that the Employee may own, directly or indirectly, solely as an investment, securities of any business traded on any national securities exchange or quoted on any NASDAQ market, provided the Employee is not a controlling person of, or a member of a group which controls; such business and further provided that the Employee does not, in the aggregate, directly or indirectly, own two percent(2%)or more of any class of securities of such business. (b) After termination of this Agreement, the Employee shall not (i) solicit any residential or commercial customer of the Company to whom the Company provides service pursuant to a franchise agreement with a public entity in any county in any state in which the Company is engaged in business as of such termination date, (ii) solicit any residential or commercial customer of the Company to enter into a solid waste ool1ection account relationship with a competitor of the Company in any such county,(iii) solicit any such public entity to enter into a franchise agreement with any such competitor. (iv) solicit any officer, employee or contractor of the Company to enter into an employment or contractor agreement with a competitor of the Company or otherwise interfere in any such relationship, or (v) solicit on behalf of a competitor of the Company any prospective customer of the Company that the Employee called on or was involved in soliciting on behalf of the Company during the Term) in each case until the second anniversary of the date of such termination, unless otherwise permitted to do so by Section l0(a); provided that if the Employee is terminated by the Company without Cause by the Company pursuant to Section 7(b), the restrictions in this Section 10(b)shall apply only for as many months after such termination as are used to calculate the amount actually paid under Section 7(b){iii) to the Employee on such termination. For example, if the Employee waives his right to be paid any amount under Section 7(b)(iii) {relating to the Total Compensation paid to him during the previous twelve months, the restrictions in this Section l0(b) shall not apply at a1l; if the Employee elects to receive under Section 7(b)(iii)an amount equal to only eight months' Total Compensation. the restrictions shall apply for only eight months. (c) If the final judgment of a court of competent jurisdiction declares that any term or provision of this Section 10 is invalid 'or unenforceable, the parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration or area of the term or provision, to delete specified words or phrases or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. 11. INDEMNIFICATION. As an employee and agent of the Company: the Emp1oyee shall be fully "indemnified by the Company to the fullest extent permitted by applicable law in connection with his employment hereunder. 12. SURVIVAL OF PROVISIONS. The obligations of the Company under Section 11 of this Agreement, and of the Employee under Sections 5,6 and 10 of this Agreement, shall survive both the termination of the Employee's employment and this Agreement. 13. NO DUTY TO MITIGATE; NO OFFSET. The Employee shall not be required to mitigate damages or the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that thc Employee may receive from any other sources or offset against any other payments made to him or required to be made to him pursuant to this Agreement. 14. ASSIGNMENT; BINDING AGREEMENT. The Company may assign this Agreement to any parent, subsidiary, affiliate or successor of the Company. This Agreement is not assignable by the Employee and is binding on him and his executors and other legal representatives. This Agreement sha11 bind the Company and its successors and assigns and inure to the benefit of the Employee and his heirs, executors, administrators, personal representatives, legatees or devisees. The Company sha11 assign this Agreement to any entity that acquires its assets or business. 15. NOTICE. Any written notice under this Agreement shall be personally delivered to the other party or sent by certified or registered mail, return receipt requested and postage prepaid, to such party at the address set forth in the records of the Company or to such other address as either party may from time to time specify by written notice. 16. ENTIRE AGREEMENT; AMENDMENTS. This Agreement contains the entire agreement of the parties relating to the Employee's employment and supercedes all oral or written prior discussions, agreements and understandings of every nature between them. This Agreement may not be changed except by an agreement in writing signed by the Company and the Employee. 17. WAIVER. The waiver of a breach of any provision of this Agreement shall not operate or as be construed to be a waiver of any other provision or subsequent breach of this Agreement. 18. GOVERNING LAW AND JURISDICTIONAL AGREEMENT. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California. 19. SEVERABILITY. In case anyone or more of the provisions contained in this Agreement is, for any reason held invalid in any respect, such invalidity shall not affect the validity of any other provision of this Agreement, and such provision shall be deemed modified to the extent necessary to make it enforceable. 20. ENFORCEMENT. It is agreed that it is impossible to measure fully, in money, the damage which will accrue to the Company in the event of a breach or threatened breach of Sections 5, 6, or 10 of this Agreement, and, in any action or proceeding to enforce the provisions of Sections 5, 6, or 10 hereof, the Employee waives the claim or defense that the Company has an adequate remedy at law and will not assert the claim or defense that such a remedy at law exists. The Company is entitled to injunctive re1ief to enforce the provisions of such sections as well as any and all other remedies available to it at law or in equity without the posting of any bond. The Employee agrees that if the Employee broaches any provision of Section 10, the Company may recover as partial damages all profits realized by the Employee at any time prior to such recovery on the exercise of any warrant, option or right to purchase the Company's Common Stock and the subsequent sale of such stock, and may also cancel all outstanding such warrants, options and rights. 21. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original and both of which together shall constitute one and the same instrument. 22. DUE AUTHORIZATION. The execution of this Agreement has been duly authorized by the Company by all necessary corporate action. IN WITNESS WHEREOF, the parties have executed and delivered this Employment Agreement as of the day and year set forth above. WASTE CONNECTIONS,INC., a Delaware corporation By: ---------------------------------------- Printed Name: Ronald J. Mittelstaedt Title: President and Chief Executive Officer EMPLOYEE: - -------------------------------------------- David Eddie EX-10.2 4 exh10-2_12139.txt EMPLOYMENT AGREEMENT (WORTHING F. JACKMAN) EXHIBIT 10.2 ------------ EMPLOYMENT AGREEMENT -------------------- EMPLOYMENT AGREEMENT is made and entered into as of April 11, 2003, by and between Worthing Jackman (the "Employee") and Waste Connections, Inc., a Delaware corporation (the "Company"). The Company desires to engage the services and employment of the Employee for the period provided in this Agreement, and the Employee is willing to accept employment by the Company for such period, on the terms and conditions set forth below. NOW THEREFORE, in consideration of the premises and the mutual covenants and conditions herein, the Company and the Employee agree as follows: 1. Employment. The Company agrees to employ the Employee, and the Employee agrees to accept employment with the Company, for the Term stated in Section 3 hereof and on the other terms and conditions herein. 2. Position and Responsibilities. During the Term, the Employee shall serve as Vice President - Finance and Investor Relations of the Company, reporting directly to the Company's Executive Vice President and Chief Financial Officer, and shall perform such other duties and responsibilities as the Chief Executive Officer or the Board of Directors (the "Board") of the Company may reasonably assign to the Employee from time to time. The Employee shall be based at the Company's corporate headquarters in Folsom, California. The Employee shall devote such time and attention to his duties as are necessary to the proper discharge of his responsibilities hereunder. The Employee agrees to perform all duties consistent with (a) policies established from time to time by the Company and (b) all applicable legal requirements. 3. Term. The period of the Employee's employment under this Agreement (the "Term") shall commence on a date mutually agreeable to the Company and Employee (the "Start Date"), and shall continue through the third anniversary of the Start Date, unless terminated earlier as provided herein or extended by the Board. On each anniversary of the Start Date commencing in 2004, this Agreement shall be extended automatically for an additional year, thus extending the Term to three years from such date, unless either party shall have given the other notice of termination hereof as provided herein. 4. Compensation, Benefits and Reimbursement of Expenses. (a) Compensation. The Company shall compensate the Employee during the Term of this Agreement as follows: (1) Base Salary. The Employee shall be paid a base salary ("Base Salary") of not less than One Hundred Sixty Five Thousand Dollars ($165,000) per year in installments consistent with the Company's usual practices. The Board shall review the Employee's Base Salary on the anniversary date of this agreement each year or more frequently, at the times prescribed in salary administration practices applied generally to management employees of the Company. 1 (2) Performance Bonus. The Employee shall be entitled to an annual cash bonus (the "Bonus") based on the Company's attainment of reasonable financial objectives to be determined annually by the Board. The maximum annual Bonus will equal fifty percent (50%) of the applicable year's ending Base Salary and will be payable if the Board determines, in its sole and exclusive discretion, that that year's financial objectives have been fully met. The Bonus shall be paid in accordance with the Company's bonus plan, as approved by the Board; provided that in no case shall any portion of the Bonus with respect to any such fiscal year be paid more than seventy-five (75) days after the end of such fiscal year. For fiscal year 2003, the annual bonus will be prorated (based on the number of days employed versus the number of days in the year) and will be guaranteed. (3) Contract Signing Bonus. As an additional inducement for the Employee to enter into this Agreement, the Company shall pay the Employee an initial cash bonus of One Hundred Thousand Dollars ($100,000), which amount shall be paid in one or more installments of at least Twenty Five Thousand Dollars ($25,000) at any time prior to June 30, 2004, within fifteen days after request by the Employee. (4) Initial Option Grant. In connection with Employee entering into this Agreement, the Company shall grant Employee Options to purchase Seventy Five Thousand (75,000) shares of the Company's common stock at an exercise price equal to the fair market value on the date of grant. Such options shall vest one third each on the first, second and third anniversaries of the date of the grant. Such Options shall be nonqualified Stock Options issued pursuant to the Company's 2002 Senior Management Equity Incentive Plan. The terms of the Options shall be described in more detail in a Stock Option Agreement to be entered into between Employee and the Company. (5) Future Grants of Options. The Employee shall be eligible for annual grants of management stock options ("Options") commensurate with his position and with option grants to other management employees of the Company, based on the recommendation of the Company's Chief Executive Officer and as approved by the Board. The terms of the Options shall be described in more detail in Stock Option Agreements to be entered into between the Employee and the Company. (b) Other Benefits. The Company will provide Employee relocation benefits in accordance with a separate relocation agreement. During the Term, the Company shall provide the Employee with a cellular telephone and will pay or reimburse the Employee's monthly service fee and costs of calls attributable to Company business. During the Term, the Employee shall be entitled to receive all other benefits of employment generally available to other management employees of the Company and those benefits for which management employees are or shall become eligible, including, without limitation and to the extent made available by the Company, medical, dental, disability and prescription coverage, life insurance and tax-qualified retirement benefits. The Employee shall be entitled to three (3) weeks of paid vacation each year of his employment until the third anniversary of the Start Date, and four (4) weeks of paid vacation each year thereafter. (c) Reimbursement of Other Expenses. The Company agrees to pay or reimburse the Employee for all reasonable travel and other expenses (including 2 mileage for business use of employee's personal automobile at the maximum rate permitted under Internal Revenue Service regulations) incurred by the Employee in connection with the performance of his duties under this Agreement on presentation of proper expense statements or vouchers. All such supporting information shall comply with all applicable Company policies relating to reimbursement for travel and other expenses. (d) Withholding. All compensation payable to the Employee hereunder is subject to all withholding requirements under applicable law. 5. Confidentiality. During the Term of his employment, and at all times thereafter, the Employee shall not, without the prior written consent of the Company, divulge to any third party or use for his own benefit or the benefit of any third party or for any purpose other than the exclusive benefit of the Company, any confidential or proprietary business or technical information revealed, obtained or developed in the course of his employment with the Company and which is otherwise the property of the Company or any of its affiliated corporations, including, but not limited to, trade secrets, customer lists, formulae and processes of manufacture; provided, however, that nothing herein contained shall restrict the Employee's ability to make such disclosures during the course of his employment as may be necessary or appropriate to the effective and efficient discharge of his duties to the Company. 6. Property. Both during the Term of his employment and thereafter, the Employee shall not remove from the Company's offices or premises any Company documents, records, notebooks, files, correspondence, reports, memoranda and similar materials or property of any kind unless necessary in accordance with the duties and responsibilities of his employment. In the event that any such material or property is removed, it shall be returned to its proper file or place of safekeeping as promptly as possible. The Employee shall not make, retain, remove or distribute any copies, or divulge to any third person the nature or contents of any of the foregoing or of any other oral or written information to which he may have access, except as disclosure shall be necessary in the performance of his assigned duties. On the termination of his employment with the Company, the Employee shall leave with or return to the Company all originals and copies of the foregoing then in his possession or subject to his control, whether prepared by the Employee or by others. 7. Termination By Company. (a) Termination for Cause. The employment of the Employee may be terminated for Cause at any time by the Board; provided, however, that before the Company may terminate the Employee's employment for Cause for any reason that is susceptible to cure, the Company shall first send the Employee written notice of its intention to terminate this Agreement for Cause, specifying in such notice the reasons for such Cause and those conditions that, if satisfied by the Employee, would cure the reasons for such Cause, and the Employee shall have 60 days from receipt of such written notice to satisfy such conditions. If such conditions are satisfied within such 60-day period, the Company shall so advise the Employee in writing. If such conditions are not satisfied within such 60-day period, the Company may thereafter terminate this Agreement for Cause on written Notice of Termination (as defined in Section 9(a)) delivered to the Employee describing with specificity the grounds for termination. Immediately on termination pursuant to this Section 7(a), the Company shall pay to the Employee 3 in a lump sum his then current Base Salary under Section 4(a)(1) on a prorated basis to the Date of Termination (as defined in Section 9(b)). On termination pursuant to this Section 7(a), the Employee shall forfeit (i) his Bonus under Section 4(a)(2) for the year in which such termination occurs, (ii) all outstanding but unvested Options and other options and rights relating to capital stock of the Company and (iii) the Employee may exercise all vested Options within five business days after the date of termination (as defined in Section 9(b)). For purposes of this Agreement, Cause shall mean: (1) a material breach of any of the terms of this Agreement that is not immediately corrected following written notice of default specifying such breach; (2) a breach of any of the provisions of Section 12; (3) repeated intoxication with alcohol or drugs while on Company premises during its regular business hours to such a degree that, in the reasonable judgment of the other managers of the Company, the Employee is abusive or incapable of performing his duties and responsibilities under this Agreement; (4) conviction of a felony; or (5) misappropriation of property belonging to the Company and/or any of its affiliates. (b) Termination Without Cause. The employment of the Employee may be terminated without Cause at any time by the Board on delivery to the Employee of a written Notice of Termination (as defined in Section 9(a)). On the Date of Termination (as defined in Section 9(b)) pursuant to this Section 7(b), the Company shall, in lieu of any payments under Section 4(a)(1) and 4(a)(2) for the remainder of the Term, pay to the Employee an amount equal to the sum of (i) all Base Salary payable under Section 4(a)(1) through the termination date, (ii) the full (not pro-rated) maximum Bonus available to the Employee under Section 4(a)(2) for the year in which the termination occurs, and (iii) an amount equal to three times the Employee's current annual Base Salary under Section 4(a)(1) plus three times his maximum bonus under Section 4(a)(2) (whether or not the entire amount was actually earned or paid) for the year in which the termination occurs. Such amount shall be paid as follows: one third on the Date of Termination and, provided that Employee has complied with the provisions of Section 12 hereof, one third on each of the first and second anniversaries of the Date of Termination of the Employee's employment. In addition, on termination of the Employee under this Section 7(b), if not previously paid, the contract signing bonus payable pursuant to Section 4(a) (3) shall become immediately due and payable, and all of the Employee's outstanding but unvested Options and other options and rights relating to capital stock of the Company shall immediately vest and become exercisable. The term of any such Options and other options and rights shall be extended to the third anniversary of the Employee's termination. The Employee acknowledges that extending the term of any incentive stock options pursuant to this Section 7(b), or Section 7(c), 7(d) or 8(a), could cause such option to lose its tax-qualified status if it is an incentive stock option under the Code and agrees that the Company shall have no obligation to compensate the Employee for any additional taxes he incurs as a result. 4 (c) Termination on Disability. If during the Term the Employee should fail to perform his duties hereunder on account of physical or mental illness or other incapacity which the Board shall in good faith determine renders the Employee incapable of performing his duties hereunder, and such illness or other incapacity shall continue for a period of more than six (6) consecutive months ("Disability"), the Company shall have the right, on written Notice of Termination (as defined in Section 9(a)) delivered to the Employee to terminate the Employee's employment under this Agreement. During the period that the Employee shall have been incapacitated due to physical or mental illness, the Employee shall continue to receive the full Base Salary provided for in Section 4(a)(1) hereof at the rate then in effect until the Date of Termination (as defined in Section 9(b)) pursuant to this Section 7(c). On the Date of Termination pursuant to this Section 7(c), the Company shall pay to the Employee in a lump sum an amount equal to (i) the Base Salary remaining payable to the Employee under Section 4(a)(1) for the full remaining Term, plus (ii) a pro-rated portion of the maximum Bonus available to the Employee under Section 4(a)(2) for the year in which the termination occurs. In addition, on such termination, if not previously paid, the contract signing bonus payable pursuant to Section 4(a) (3) shall become immediately due and payable and all of the Employee's outstanding but unvested Options and other options and rights relating to capital stock of the Company shall immediately vest and become exercisable. The term of any such Options and other options and rights shall be extended to the third anniversary of the Employee's termination. (d) Termination on Death. If the Employee shall die during the Term, the employment of the Employee shall thereupon terminate. On the Date of Termination (as defined in Section 9(b)) pursuant to this Section 7(d), the Company shall pay to the Employee's estate the payments and other benefits applicable to termination without Cause set forth in Section 7(b) hereof. In addition, if not previously paid, the contract signing bonus payable pursuant to Section 4(a) (3) shall become immediately due and payable on termination of the Employee under this Section 7(d), all of the Employee's outstanding but unvested Options and other options and rights relating to capital stock of the Company shall immediately vest and become exercisable. The term of any such Options and other options and rights shall be extended to the third anniversary of the Employee's termination. The provisions of this Section 7(d) shall not affect the entitlements of the Employee's heirs, executors, administrators, legatees, beneficiaries or assigns under any employee benefit plan, fund or program of the Company. 8. Termination By Employee. (a) Termination for Good Reason. The Employee may terminate his employment hereunder for Good Reason (as defined below). On the Date of Termination pursuant to this Section 8(a), the Employee shall be entitled to receive, and the Company agrees to pay and deliver, the payments and other benefits applicable to termination without Cause set forth in Section 7(b) hereof at the times and subject to the conditions set forth therein. In addition, on termination of the Employee under this Section 8(a), all of the Employee's outstanding but unvested Options and other options and rights relating to capital stock of the Company shall immediately vest and become exercisable. The term of any such options and rights shall be extended to the third anniversary of the Employee's termination. For purposes of this Agreement, "Good Reason" shall mean: 5 (1) assignment to the Employee of duties inconsistent with his responsibilities as they existed on the date of this Agreement; a substantial alteration in the title(s) of the Employee (so long as the existing corporate structure of the Company is maintained); or a substantial alteration in the status of the Employee in the Company organization as it existed on the date of this Agreement; (2) the relocation of the Company's principal executive office to a location more than fifty (50) miles from its present location; (3) a reduction by the Company in the Employee's Base Salary without the Employee's prior approval; (4) a failure by the Company to continue in effect, without substantial change, any benefit plan or arrangement in which the Employee was participating or the taking of any action by the Company which would adversely affect the Employee's participation in or materially reduce his benefits under any benefit plan (unless such changes apply equally to all other management employees of Company); (5) any material breach by the Company of any provision of this Agreement without the Employee having committed any material breach of his obligations hereunder, which breach is not cured within twenty (20) days following written notice thereof to the Company of such breach; or (6) the failure of the Company to obtain the assumption of this Agreement by any successor entity. (b) Termination Without Good Reason. The Employee may terminate his employment hereunder without Good Reason on written Notice of Termination delivered to the Company setting forth the effective date of termination. If the Employee terminates his employment hereunder without Good Reason, he shall be entitled to receive, and the Company agrees to pay on the effective date of termination specified in the Notice of Termination, his current Base Salary under Section 4(a)(1) hereof on a prorated basis to such date of termination. On termination pursuant to this Section 8(b), the Employee shall forfeit (i) his Bonus under Section 4(a)(2) for the year in which such termination occurs, (ii) all outstanding but unvested Options and other options and rights relating to capital stock of the Company and (iii) the Employee may exercise all vested Options within five business days after the date of termination. 9. Provisions Applicable to Termination of Employment. (a) Notice of Termination. Any purported termination of Employee's employment by the Company pursuant to Section 7 shall be communicated by Notice of Termination to the Employee as provided herein, and shall state the specific termination provisions in this Agreement relied on and set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment ("Notice of Termination"). If the Employee terminates under Section 8, he shall give the Company a Notice of Termination. 6 (b) Date of Termination. For all purposes, "Date of Termination" shall mean, for Disability, thirty (30) days after Notice of Termination is given to the Employee (provided the Employee has not returned to duty on a full-time basis during such 30-day period), or, if the Employee's employment is terminated by the Company for any other reason or by the Employee, the date on which a Notice of Termination is given. (c) Benefits on Termination. On termination of this Agreement by the Company pursuant to Section 7 or by the Employee pursuant to Section 8, all profit-sharing, deferred compensation and other retirement benefits payable to the Employee under benefit plans in which the Employee then participated shall be paid to the Employee in accordance with the provisions of the respective plans. 10. Change In Control. (a) Payments on Change in Control. Notwithstanding any provision in this Agreement to the contrary, unless the Employee elects in writing to waive this provision, a Change in Control (as defined below) of the Company shall be deemed a termination of the Employee without Cause, and the Employee shall be entitled to receive and the Company agrees to pay to the Employee the same amount determined under Section 7(b) that is payable to the Employee on termination without Cause provided, however, that such amount shall be payable in a lump sum on the Date of Termination and not in installments as provided in Section 7(b). In addition, on a Change of Control, all of the Employee's outstanding but unvested Options and other options and rights relating to capital stock of the Company shall immediately vest and become exercisable, and the term of any such options and rights shall be extended to the third anniversary of the Employee's termination. After a Change in Control, if any previously outstanding Option or other option or right (the "Terminated Option") relating to the Company's capital stock does not remain outstanding, the successor to the Company or its then Parent (as defined below) shall either: (1) Issue an option, warrant or right, as appropriate (the "Successor Option"), to purchase common stock of such successor or Parent in an amount such that on exercise of the Successor Option the Employee would receive the same number of shares of the successor's/Parent's common stock as the Employee would have received had the Employee exercised the Terminated Option immediately prior to the transaction resulting in the Change in Control and received shares of such successor/Parent in such transaction. The aggregate exercise price for all of the shares covered by such Successor Option shall equal the aggregate exercise price of the Terminated Option; or (2) Pay the Employee a bonus within ten (10) days after the consummation of the Change in Control in an amount agreed to by the Employee and the Company. Such amount shall be at least equivalent on an after-tax basis to the net after-tax gain that the Employee would have realized if he had been issued a Successor Option under clause (i) above and had immediately exercised such Successor Option and sold the underlying stock, taking into account the different tax rates that apply to such bonus and to such gain, and such amount shall also reflect other differences to the Employee between receiving a bonus under this clause (ii) and receiving a Successor Option under clause (i) above. 7 (b) Definitions. For the purposes of this Agreement, a Change in Control shall be deemed to have occurred if (i) there shall be consummated (aa) any reorganization, liquidation or consolidation of the Company, or any merger or other business combination of the Company with any other corporation, other than any such merger or other combination that would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such transaction, (bb) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company, or if (ii) any "person" (as defined in Section 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), shall become the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of fifty percent (50%) or more of the Company's outstanding voting securities (except that for purposes of this Section 10(b), "person" shall not include any person (or any person that controls, is controlled by or is under common control with such person) who as of the date of this Agreement owns ten percent (10%) or more of the total voting power represented by the outstanding voting securities of the Company, or a trustee or other fiduciary holding securities under any employee benefit plan of the Company, or a corporation that is owned directly or indirectly by the stockholders of the Company in substantially the same percentage as their ownership of the Company) or if (iii) during any period of two consecutive years, individuals who at the beginning of such period constituted the entire Board shall cease for any reason to constitute at least one-half of the membership thereof unless the election, or the nomination for election by the Company's shareholders, of each new director was approved by a vote of at least one-half of the directors then still in office who were directors at the beginning of the period. The term "Parent" means a corporation, partnership, trust, limited liability company or other entity that is the ultimate "beneficial owner" (as defined above) of fifty percent (50%) or more of the Company's outstanding voting securities. 11. Gross Up Payments. If all or any portion of any payment or benefit that the Employee is entitled to receive from the Company pursuant to this Agreement (a "Payment") constitutes an "excess parachute payment" within the meaning of Section 280G of the Code, and as such is subject to the excise tax imposed by Section 4999 of the Code or to any similar Federal, state or local tax or assessment (the "Excise Tax"), the Company or its successors or assigns shall pay to the Employee an additional amount (the "Gross-Up Payment") with respect to such Payment. The amount of the Gross-Up Payment shall be sufficient that, after paying (a) any Excise Tax on the Payment, (b) any Federal, state or local income or employment taxes and Excise Tax on the Gross-Up Payment, and (c) any interest and penalties imposed in respect of the Excise Tax, the Employee shall retain an amount equal to the full amount of the Payment. For the purpose of determining the amount of any Gross-Up Payment, the Employee shall be deemed to pay Federal income taxes at the highest marginal rate applicable in the calendar year in which the Gross-Up Payment is made, and state and local income taxes at the highest marginal rate applicable in the state and locality where the Employee resides on the date the Gross-Up Payment is made, net of the maximum reduction in Federal income taxes that could be obtained from deducting such state and local taxes. 8 The Gross-Up Payment with respect to any Payment shall be paid to the Employee within ten (10) days after the Internal Revenue Service or any other taxing authority issues a notice stating that an Excise Tax is due with respect to the Payment, unless the Company undertakes to challenge the taxing authority on the applicability of such Excise Tax and indemnifies the Employee for (a) any amounts ultimately determined to be payable, including the Excise Tax and any related interest and penalties, (b) all expenses (including attorneys' and experts' fees) reasonably incurred by the Employee in connection with such challenge, as such expenses are incurred, and (c) all amounts that the Employee is required to pay to the taxing authorities during the pendency of such challenge (such amounts to be repaid by the Employee to the Company if they are ultimately refunded to the Employee by the taxing authority). 12. Non-Competition and Non-Solicitation. (a) In consideration of the provisions hereof, for the Restricted Period (as defined below), the Employee will not, except as specifically provided below, anywhere in any county in the State of California or anywhere in any other state in which the Company is engaged in business as of such termination date (the "Restricted Territory"), directly or indirectly, acting individually or as the owner, shareholder, partner or management employee of any entity, (i) engage in the operation of a solid waste collection, transporting or disposal business, transfer facility, recycling facility, materials recovery facility or solid waste landfill; (ii) enter the employ as a manager of, or render any personal services to or for the benefit of, or assist in or facilitate the solicitation of customers for, or receive remuneration in the form of management salary, commissions or otherwise from, any business engaged in such activities in such counties; or (iii) receive or purchase a financial interest in, make a loan to, or make a gift in support of, any such business in any capacity, including without limitation, as a sole proprietor, partner, shareholder, officer, director, principal agent or trustee; provided, however, that the Employee may own, directly or indirectly, solely as an investment, securities of any business traded on any national securities exchange or quoted on any NASDAQ market, provided the Employee is not a controlling person of, or a member of a group which controls, such business and further provided that the Employee does not, in the aggregate, directly or indirectly, own two percent (2%) or more of any class of securities of such business. The term "Restricted Period" shall mean the earlier of (i) the maximum period allowed under applicable law and (ii)(x) in the case of a Change of Control, until the third anniversary of the effective date of the Change of Control, (y) in the case of a termination by the Company without Cause pursuant to Section 7(b) or by the Employee for Good Reason pursuant to Section 8(a) and provided the Company has made the payments required under Section 7(b) or 8(a), as the case may be, until the third anniversary of the Date of Termination, or (z) in the case of Termination for Cause by the Company pursuant to Section 7(a) or by the Employee without Good Reason pursuant to Section 8(b), until the first anniversary of the Date of Termination. (b) After termination of this Agreement by the Company or the Employee pursuant to Section 7 or 8 or termination of this Agreement upon a Change in Control pursuant to Section 10, the Employee shall not (i) solicit any residential or commercial customer of the Company to whom the Company provides service pursuant to a franchise agreement with a public entity in the Restricted Territory (ii) solicit any residential or commercial customer of the Company to enter into a solid waste collection account relationship with a competitor of the Company in the Restricted Territory, (iii) solicit any such public entity to 9 enter into a franchise agreement with any such competitor, (iv) solicit any officer, employee or contractor of the Company to enter into an employment or contractor agreement with a competitor of the Company or otherwise interfere in any such relationship, or (v) solicit on behalf of a competitor of the Company any prospective customer of the Company in the Restricted Territory that the Employee called on or was involved in soliciting on behalf of the Company during the Term, in each case until the third anniversary of the date of such termination or the effective date of such change of control (whichever is later), unless otherwise permitted to do so by Section 12(a). (c) If the final judgment of a court of competent jurisdiction declares that any term or provision of this Section 12 is invalid or unenforceable, the parties agree that the court making the determination of invalidity or unenforceability shall have the power to reduce the scope, duration or area of the term or provision, to delete specified words or phrases or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement shall be enforceable as so modified after the expiration of the time within which the judgment may be appealed. 13. Indemnification. As an employee and agent of the Company, the Employee shall be fully indemnified by the Company to the fullest extent permitted by applicable law in connection with his employment hereunder. 14. Survival of Provisions. The obligations of the Company under Section 13 of this Agreement, and of the Employee under Section 12 of this Agreement, shall survive both the termination of the Employee's employment and this Agreement. 15. No Duty to Mitigate; No Offset. The Employee shall not be required to mitigate damages or the amount of any payment contemplated by this Agreement, nor shall any such payment be reduced by any earnings that the Employee may receive from any other sources or offset against any other payments made to him or required to be made to him pursuant to this Agreement. 16. Assignment; Binding Agreement. The Company may assign this Agreement to any parent, subsidiary, affiliate or successor of the Company. This Agreement is not assignable by the Employee and is binding on him and his executors and other legal representatives. This Agreement shall bind the Company and its successors and assigns and inure to the benefit of the Employee and his heirs, executors, administrators, personal representatives, legatees or devisees. The Company shall assign this Agreement to any entity that acquires its assets or business. 17. Notice. Any written notice under this Agreement shall be personally delivered to the other party or sent by certified or registered mail, return receipt requested and postage prepaid, to such party at the address set forth in the records of the Company or to such other address as either party may from time to time specify by written notice. 18. Entire Agreement; Amendments. This Agreement and the related Relocation Agreement contain the entire agreement of the parties relating to the Employee's employment and supersedes all oral or written prior discussions, agreements and understandings of every nature between them. This Agreement may not be changed except by an agreement in writing signed by the Company and the Employee. 10 19. Waiver. The waiver of a breach of any provision of this Agreement shall not operate or as be construed to be a waiver of any other provision or subsequent breach of this Agreement. 20. Governing Law and Jurisdictional Agreement. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of California. The parties irrevocably and unconditionally submit to the jurisdiction and venue of any court, federal or state, situated within Sacramento County, California, for the purpose of any suit, action or other proceeding arising out of, or relating to or in connection with, this Agreement. 21. Severability. In case any one or more of the provisions contained in this Agreement is, for any reason, held invalid in any respect, such invalidity shall not affect the validity of any other provision of this Agreement, and such provision shall be deemed modified to the extent necessary to make it enforceable. 22. Enforcement. It is agreed that it is impossible to measure fully, in money, the damage which will accrue to the Company in the event of a breach or threatened breach of Sections 5, 6, or 12 of this Agreement, and, in any action or proceeding to enforce the provisions of Sections 5, 6 or 12 hereof, the Employee waives the claim or defense that the Company has an adequate remedy at law and will not assert the claim or defense that such a remedy at law exists. The Company is entitled to injunctive relief to enforce the provisions of such sections as well as any and all other remedies available to it at law or in equity without the posting of any bond. The Employee agrees that if the Employee breaches any provision of Section 12, the Company may recover as partial damages all profits realized by the Employee at any time prior to such recovery on the exercise of any warrant, option or right to purchase the Company's Common Stock and the subsequent sale of such stock, and may also cancel all outstanding such warrants, options and rights. 23. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and both of which together shall constitute one and the same instrument. 24. Due Authorization. The execution of this Agreement has been duly authorized by the Company by all necessary corporate action. IN WITNESS WHEREOF, the parties have executed and delivered this Employment Agreement as of the day and year set forth above. 11 WASTE CONNECTIONS, INC., a Delaware corporation By: ------------------------------------------- Ronald J. Mittelstaedt President and Chief Executive Officer EMPLOYEE: ----------------------------------------------- Worthing Jackman 12 EX-31 5 exh31_12139.txt CERTIFICATIONS EXHIBIT 31 ---------- CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Ronald J. Mittelstaedt, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Waste Connections, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the three months ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 /s/ Ronald J. Mittelstaedt ------------------------------------- Ronald J. Mittelstaedt, President and Chief Executive Officer I, Steven F. Bouck, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Waste Connections, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the three months ended June 30, 2003 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 13, 2003 /s/ Steven F. Bouck ---------------------------- Steven F. Bouck, Executive Vice President and Chief Financial Officer EX-32 6 exh32_12139.txt CERTIFICATE OF CEO AND CFO EXHIBIT 32 ---------- CERTIFICATE OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PUSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, Ronald J. Mittelstaedt and Steven F. Bouck, being the duly elected and acting Chief Executive Officer and Chief Financial Officer, respectively, of Waste Connections, Inc., a Delaware corporation (the "Company"), hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the quarterly report of the Company on Form 10-Q for the quarter ended June 30, 2003, fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, as amended, and that information contained in such report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: August 13, 2003 By: /s/ Ronald J. Mittelstaedt -------------------------------------- Ronald J. Mittelstaedt, President and Chief Executive Officer Date: August 13, 2003 By: /s/ Steven F. Bouck -------------------------------------- Steven F. Bouck, Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Waste Connections, Inc. and will be retained by Waste Connections, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----