UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

 

 

Commission file number 000-25955

Waste Services, Inc.

(Successor registrant of Capital Environmental Resource Inc. now known as Waste Services (CA) Inc.)

(Exact name of registrant as defined in its charter)

 

 

Registrant’s telephone number, including area code:

(905) 319-1237

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

 

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes o     No þ

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in a definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

The approximate aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 30, 2009 was $133.6 million based on the closing price of the Registrant’s Common Shares as quoted on the NASDAQ Stock Market LLC as of that date.

 

The number of Common Shares of the Registrant outstanding as of February 22, 2010 was 46,253,107.

 

DOCUMENTS INCORPORATED BY REFERENCE — None

 

 

INDEX TO FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2009

 

 

PART I

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report on Form 10-K contains certain “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. Some of these forward-looking statements include forward-looking phrases such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “foresees,” “intends,” “may,” “should” or “will continue,” or similar expressions or the negatives thereof or other variations on these expressions, or similar terminology, or discussions of strategy, plans or intentions.

 

Such statements reflect our current views regarding future events and are subject to certain risks, uncertainties and assumptions. Many factors could cause the actual results, performance or achievements to be materially different from any future results, performance or achievements that forward-looking statements may express or imply, including, among others:

 

 

Some of these factors are discussed in more detail in this annual report on Form 10-K under “Item 1A — Risk Factors”. If one or more of these risks or uncertainties affects future events and circumstances, or if underlying assumptions do not materialize, actual results may vary materially from those described in this annual report as anticipated, believed, estimated or expected, and this could have a material adverse effect on our business, financial condition and the results of our operations. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances.

 

Overview

 

Waste Services, Inc. and its wholly owned subsidiaries (collectively, “Waste Services,” “we,” “us” or “our”) is a multi-regional, integrated solid waste services company. Waste Services, Inc. is a holding company and all of our operations are conducted by our subsidiaries. We provide collection, transfer, landfill disposal and recycling services for commercial, industrial and residential customers in the United States and Canada. All statistics and data presented in this annual report are as of December 31, 2009 unless otherwise indicated. We service an estimated 86,100 commercial and industrial customers and an estimated 7.2 million residential homes. We operate seven landfills, 21 transfer stations, 13 recycling facilities and 34 collection operations.

 

Our strategy is to operate in markets where we can obtain competitive advantages through economies of scale and preferential disposal alternatives. Scale in a market provides an opportunity to route collection activities more efficiently, maintain profitable pricing levels and negotiate or acquire disposal advantages to allow us to be a low cost provider. We believe we have leading market positions in each of our major markets in Ontario, Alberta, British Columbia and Florida, and we believe we are the third largest waste company by revenue in both Canada and Florida. In Florida, we believe we have the second best disposal assets and anticipate these assets will allow us to become number two in revenue over time.

 

Our operations are located in the U.S. and Canada. Our U.S. operations are located in Florida and our Canadian operations are located in Eastern Canada (Ontario) and Western Canada (Alberta, Saskatchewan and British Columbia). We divested our Jacksonville, Florida operations in March 2008, our Texas operations in June 2007 and our Arizona operations in March 2007 and as a result, these operations are presented as discontinued for all periods presented. We believe we would have been unable to obtain significant scale in our divested markets to meet our objectives. We do not have significant (in volume or dollars) inter-segment operation-related transactions. For more information regarding our segments refer to Note 18 to our accompanying Consolidated Financial Statements.

 

Our predecessor company, Capital Environmental Resource Inc. (“Capital Environmental”) was incorporated in Ontario, Canada in May 1997. In 2003, Capital Environmental incorporated us as one of its subsidiaries in Delaware under the name Omni Waste, Inc. In 2003, we changed our name to Waste Services, Inc. Under a plan of arrangement designed to domicile the corporate parent of our operations in the United States, we became the successor to Capital Environmental. The migration transaction was completed July 31, 2004 and was accomplished primarily by the exchange of shares of Capital Environmental into shares of Waste Services, Inc. As a result of the migration transaction, Capital Environmental became our subsidiary and we became the parent company. Capital Environmental also changed its name to Waste Services (CA) Inc. (“Waste Services (CA)”).

 

Our corporate offices are located at 1122 International Blvd., Suite 601, Burlington, Ontario, Canada L7L 6Z8. Our telephone number is (905) 319-1237.

 

We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and other filings with the Securities and Exchange Commission (“SEC”). The public may read and copy any materials we file with the SEC at the SEC’s Office of Public Reference at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at (800) SEC-0330. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The internet address is www.sec.gov.

 

We make available, at no charge through our website address at www.wasteservicesinc.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these reports filed or furnished with the SEC, together with proxy materials circulated to our stockholders, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Information on our website does not form a part of this annual report.

 

Proposed Merger with IESI-BFC

 

On November 11, 2009, we entered into a merger agreement with IESI-BFC Ltd. (“IESI-BFC”), which provides for IESI-BFC to acquire us. IESI-BFC, through its subsidiaries, is one of North America’s largest

full-service waste management companies, providing non-hazardous solid waste collection and landfill disposal services to commercial, industrial, municipal and residential customers in ten states and the District of the Columbia in the U.S., and five Canadian provinces.

 

On January 19, 2010, IESI-BFC filed a registration statement with the SEC that included a preliminary proxy statement for the merger. Waste Services and IESI-BFC are working to complete the merger as quickly as practicable and we currently expect the merger to be completed during the second calendar quarter of 2010. However, neither Waste Services nor IESI-BFC can predict the effective time of the merger because it is subject to conditions beyond each company’s control, including approval of the merger by our stockholders and necessary regulatory approvals. If the merger is completed, each of our shareholders will receive 0.5833 IESI-BFC common shares (plus cash in lieu of any fractional share interests) for each share of our common stock held immediately prior to the completion of the merger, subject to adjustment to reflect certain changes in the number of common shares of IESI-BFC outstanding before the merger is completed.

 

If the merger agreement is terminated under certain circumstances, including circumstances involving the acceptance of a superior acquisition proposal by us or a change in recommendation by our board of directors or an intentional breach by us, we will be required to pay IESI-BFC a termination fee of $11.0 million, plus all out-of-pocket costs up to a maximum of $3.5 million for professional and advisory services and other expenses reasonably incurred by IESI-BFC in connection with the merger. Upon termination of the merger agreement by us resulting from IESI-BFC’s intentional breach of the merger agreement, IESI-BFC will be required to pay us $11.0 million plus an amount equal to all out-of-pocket costs up to $3.5 million for professional and advisory services and other expenses reasonably incurred by us in connection with the merger. Waste Services or IESI-BFC may be required to pay the other party an expense reimbursement amount of up to $3.5 million in certain other specified circumstances.

 

Business Strategy

 

Our strategy is to operate in markets where we can obtain competitive advantages through economies of scale and preferential disposal alternatives. Our goal is to be a highly profitable, multi-regional non-hazardous solid waste services company in North America with leading market positions in each of the markets we serve. In order to achieve this goal, we intend to:

 

Maximize Density and Vertically Integrate Operations.  We believe that achieving a high degree of density and vertical integration of operations leads to higher profitability and returns on invested capital. In each of our local markets, we seek to maximize the density of our collection routes. This allows us to leverage our facilities and vehicle fleet by increasing the number of customers served and revenue generated by each route. In addition, we seek to vertically integrate our operations where possible, using transfer stations to link collection operations with our landfills thereby increasing internalization of waste volume. By securing and controlling the waste stream from collection through disposal, we are able to achieve cost savings for our collection operations, while at the same time providing our landfills with more stable and predictable waste volume and enhancing margins through the internalization of collected volume. In our efforts to maximize vertical integration, we periodically evaluate markets where we are not internalized for possible collection or transfer station acquisitions or asset swap transactions to enhance density or internalization in existing markets where we are vertically integrated.

 

Provide Consistent, Superior Customer Service.  Our long-term growth and profitability will be driven, in large part, by our ability to provide consistent, superior service to our customers. We believe that our local and regional operating focus allows us to respond effectively to customer needs on a local basis, as well as maintain strong relationships with our commercial, municipal and residential accounts. In each of our markets, customer retention and new account generation are key areas of focus for our local managers.

 

Maintain a Decentralized Operating Management Structure with Centralized Controls and Information Systems.  The solid waste industry is a local and regional business by nature. We believe that asset investment, customer relationships, pricing and operational productivity are most effectively managed on a local and regional basis. We have structured our operating management team on a geographically decentralized basis because we believe that talented, experienced and focused local management are in the best position to make

effective, profitable decisions regarding local operations, including customer acquisition and retention, and to provide strong customer service. Our senior management team provides significant oversight and guidance for our local management, developing operating goals and standards tailored to each market. Our senior management does not impose corporate directives regarding certain local operating decisions.

 

While our operating management structure is decentralized, all of our operations are required to adhere to uniform corporate policies and financial controls and use integrated information systems. Our information systems provide both corporate and local management with comprehensive, consistent and timely operating and financial data, enabling them to maintain detailed, ongoing visibility of the performance and trends in each of our local market operations.

 

Execute a Disciplined, Disposal-Based Growth Strategy.  Our growth strategy consists of both making “tuck-in” acquisitions within an existing market, which typically consist of collection operations or transfer stations, and making new geographic market entries by acquiring disposal capacity. In any acquisition, we focus on maximizing long-term cash flow and return on invested capital.

 

For tuck-in acquisitions, we pursue opportunities that:

 

 

For new market entries, we pursue opportunities where we can:

 

 

Operations

 

We provide our services on a geographic basis in Florida and in two regions in Canada: Eastern Canada (Ontario) and Western Canada (Alberta, British Columbia and Saskatchewan). For a discussion on the seasonality of our business, see Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Seasonality.”

 

A summary of our collection, transfer station, recycling and landfill disposal facilities as of December 31, 2009 is as follows:

 

 

Collection Services

 

We provide collection services to approximately 86,100 commercial and industrial customers and service approximately 7.2 million residential homes. We have a front-line collection fleet size of approximately 1,230 vehicles with an average fleet age of approximately 6.7 years.

 

Commercial and Industrial Collection.  We perform commercial and industrial collection services principally under one to five year service agreements, which typically contain provisions for automatic renewal and prohibit the customer from terminating the agreement prior to its expiration date without incurring a penalty. Roll-off containers are also provided to our customers for temporary services, such as for construction projects, under

short-term purchase orders. Stationary compactors are rented to customers, allowing them to compact their waste at their premises prior to its collection. Commercial and industrial collection vehicles normally require one operator. We provide one to eight cubic yard containers to commercial customers and 10 to 40 cubic yard roll-off containers to industrial customers.

 

Charges for our commercial and industrial services are determined by a variety of factors, including collection frequency, level of service, route density, the type, volume and weight of the waste collected, type of equipment and containers furnished, the distance to the disposal or processing facility, the cost of disposal or processing and prices charged by competitors for similar services. Our contracts with commercial and industrial customers typically allow us to pass on increased costs resulting from variable items such as disposal and fuel costs and surcharges. Our ability to pass on price increases is, however, sometimes limited by the terms of our contracts.

 

Residential Collection.  Our residential waste collection services are provided under a variety of contractual arrangements, including contracts with municipalities, owners and operators of large residential complexes and mobile home parks, and homeowners associations. In certain markets, we also provide residential subscription services to individual homeowners.

 

Our contracts with municipalities are typically for a fixed term of three to ten years. Charges for residential services to municipalities are determined based on the number of homes serviced as well as the frequency of service. These contracts often contain a formula, generally based on a predetermined published price index, for adjustments to charges to cover increases in some, but not all, of our operating costs. Certain of our contracts with municipalities also contain renewal provisions or require capital commitments.

 

Charges for residential non-hazardous solid waste collection services provided on a subscription basis are based primarily on route density, the frequency and level of service, the distance to the disposal or transfer facility, the cost of disposal or transfer and prices we charge in the market for similar services.

 

Transfer Station Services

 

Our transfer stations receive our own and third party non-hazardous solid waste. Waste received at our transfer stations is compacted and transferred, generally by third-party subcontractors, for disposal to our own or third-party landfills. We charge third-parties fees to dispose of their waste at our transfer stations. Transfer station fees are generally based on the cost of processing, transportation and disposal. We also may enter into long-term put or pay disposal arrangements whereby third-party customers can secure disposal capacity with us at pre-arranged fixed rates or pay a penalty equal to the number of tons below the required tonnage multiplied by that disposal rate.

 

We believe that the benefits of using our transfer stations include improved utilization of our collection infrastructure and better relationships with municipalities and private operators that deliver waste to our transfer stations, which can lead to additional growth opportunities. We believe that transfer stations will become increasingly important to our operations as new landfills are opening further away from metropolitan areas and waste travels further for disposal in large metropolitan markets.

 

Commercial and Residential Recycling Services

 

We offer collection and processing services to our municipal, commercial and industrial customers for a variety of recyclable materials, including cardboard, office paper, plastic containers, glass bottles, fiberboard and ferrous and aluminum metals. In some markets, we operate material recovery facilities that are used to sort, bale and ship recyclable materials to market. We also deliver recyclable materials that we collect to third parties for processing and resale. In an effort to reduce our exposure to commodity price fluctuations on recycled materials, where competitive pressures permit, we charge collection or processing fees for recycling volume collected from our commercial customers. We may also manage our exposure to commodity price fluctuations through the use of commodity brokers, which arrange for the sale of recyclable material collected in our operations to third party purchasers. We believe that recycling will continue to be an important component of municipal non-hazardous solid waste management plans due to the public’s environmental awareness and regulations that mandate or encourage recycling.

Landfill Disposal Services

 

We charge our landfill customers a tipping fee on a per ton or per cubic yard basis for disposing of their non-hazardous solid waste at our landfills. We generally base our landfill tipping fees on market factors and the type and either weight or volume of the waste deposited. We may enter into long-term put or pay disposal arrangements whereby third-party customers can secure disposal capacity at our landfills at pre-arranged fixed rates or pay a penalty equal to the number of tons below the required tonnage multiplied by that disposal rate.

 

We dispose of the non-hazardous solid waste we collect in one of the following ways: (i) at our own landfills; (ii) through our own transfer stations; (iii) at municipally-owned landfills; or (iv) at third-party landfills, transfer stations or incinerators. In markets where we do not have our own landfills, we seek to secure favorable long-term disposal arrangements with municipalities or private owners of landfills or transfer stations. In some markets, we may enter into put or pay disposal arrangements with third party operators of disposal facilities. These types of arrangements allow us to fix our disposal costs, but also expose us to the risk that if our tonnage declines and we are unable to deliver the minimum tonnage, we will be required to pay the penalty.

 

Other Specialized Services

 

We offer other specialized services consisting primarily of sales and leasing of compactor equipment, portable toilet services for special events or construction sites and waste audits.

 

Local/Regional Operating Structure

 

We manage our business on a local/regional basis. Each of our operating regions also has a number of operating districts where the business is managed on a local basis. From a management perspective, each region (Florida, Eastern Canada and Western Canada) has a regional executive who reports to our President and Chief Executive Officer. Reporting to the regional executives are local managers who are responsible for the day-to-day operations of their districts, including supervising their sales force, maintaining service quality, implementing our health and safety and environmental programs and overseeing contract administration. Local managers work closely with the regional executives to execute business plans and identify business development opportunities. This structure is designed to provide decision-making authority to our local managers who are closest to the needs of the customers they serve in the community. This localized approach allows us to quickly identify and address customer needs, manage local operating dynamics and take advantage of market opportunities.

 

Sales and Marketing

 

We market our services on a decentralized basis principally through our local managers and direct sales representatives. Our sales representatives visit customers on a regular basis and call upon potential new customers within a specified territory or service area. These sales representatives receive a portion of their compensation based on meeting certain incentive targets. We have a diverse customer base, with no single contract or customer representing more than 3.5% of consolidated revenue for the year ended December 31, 2009 and no single contract or customer representing more than 2.5% of consolidated revenue for the years ended December 31, 2008 and 2007.

 

Competition

 

The non-hazardous solid waste services industry is highly competitive and fragmented. We compete with large, national non-hazardous solid waste services companies, as well as smaller regional non-hazardous solid waste services companies of varying sizes and resources. Some of our competitors are better capitalized, have greater name recognition and greater financial, operational and marketing resources than we have. We also compete with operators of alternative disposal facilities, and with municipalities that maintain their own waste collection and disposal operations. Public sector operators may have financial advantages over us because of their access to user fees or tax revenue, as well as their ability to regulate the flow of waste streams.

 

The U.S. non-hazardous solid waste industry currently includes two large national waste companies: Waste Management, Inc. and Republic Services, Inc. Waste Management of Canada Corporation and IESI-BFC are our significant competitors in Canada.

We compete for collection, transfer and disposal volume based primarily on price and quality of service. From time to time, competitors may reduce the prices of their services in an effort to expand their market share or service areas or to win competitively bid municipal contracts. These practices may cause us to reduce the prices of our services or, if we elect not to do so, to lose business. Occasionally, we have elected not to renew or bid for certain contracts due to the relatively low operating margins associated with them.

 

Competition exists not only for collection, transfer and disposal volume, but also for acquisition candidates. We generally compete for acquisition candidates with publicly owned regional and large national non-hazardous solid waste services companies.

 

Government Regulation

 

Our facilities and operations in the United States and Canada are subject to significant and evolving federal, state, provincial and local environmental, health and safety and land use laws and regulations that impose significant compliance burdens and risks upon us and require us to obtain permits or approvals from various government agencies. We incur capital costs and recurring, annual operating costs in complying with this regulatory regime. Most permits or approvals must be periodically renewed. Renewals of our landfill permits may result in the imposition of additional conditions that could increase cell development and operating costs above currently anticipated levels, or may limit the type, quantity or quality of waste that may be accepted at the site, thereby reducing operating revenue. Approvals and permits may also be modified or revoked by the issuing agency, impacting operating revenue, and civil or criminal fines and penalties may be imposed for our failure to comply with the terms of our permits and approvals and applicable regulations. In addition, in connection with landfill expansions or increases in transfer station capacities, we will incur significant capital costs in order to meet applicable environmental standards that are a condition to the approval of such expansions or increases. Municipal solid waste landfills, like our JED Landfill in Florida, are a source of greenhouse gas emissions. While we are already subject to limitations on these emissions under the Clean Air Act, if additional legislation is enacted limiting carbon emissions, this could increase the expenses we incur in monitoring and controlling greenhouse gas emissions and could require us to incur capital expenditures to comply with such legislation.

 

The principal statutes and regulations that affect our operations in Florida are summarized below:

 

The Resource Conservation and Recovery Act of 1976, as amended, or RCRA, regulates the generation, treatment, storage, handling, transportation and disposal of solid waste and requires states to develop programs to ensure the safe disposal of solid waste. The Subtitle D Regulations govern the design, operation and management of solid waste landfills, including location restrictions, facility design standards, operating criteria, closure and post-closure requirements, financial assurance requirements, groundwater monitoring requirements, methane gas emission control requirements, groundwater remediation standards and corrective action requirements. The Subtitle D Regulations also require certain landfill sites to meet stringent liner design criteria to keep leachate out of groundwater. States are entitled to develop their own permitting programs incorporating the federal landfill criteria or criteria that are more stringent than those set by the federal government. Florida has adopted regulations or programs as stringent as, or more stringent than, the Subtitle D Regulations.

 

The Federal Water Pollution Control Act of 1972, as amended, or Clean Water Act, regulates the discharge of pollutants from landfill and other sites into waters of the United States. If run-off from our transfer stations or collected leachate from our landfills is discharged into surface waters, the Clean Water Act requires us to obtain a discharge permit, conduct sampling and monitoring and, under certain circumstances, reduce the quantity of pollutants in the discharge. Our landfills are also required to comply with the EPA’s storm water regulations issued in November 1990, which are designed to prevent contaminated landfill storm water run-off from flowing into surface waters.

 

The Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, or CERCLA, establishes a program for the investigation and cleanup of facilities from which a release of any hazardous substance into the environment has occurred or is threatened. CERCLA imposes strict joint and several liability for the cleanup of facilities on current owners and operators of the site, owners and operators of the site at the time of the disposal of the hazardous substances, any person who arranges for the transportation,

disposal or treatment of the hazardous substances, and transporters of waste containing hazardous substances, who select the disposal and treatment facilities. CERCLA also imposes liability for the cost of evaluation and remediation of any damage to natural resources. The costs of a CERCLA investigation and cleanup can be very substantial and liability is not dependent upon a deliberate discharge of a hazardous substance. If we were found to be a responsible party for a CERCLA cleanup, the enforcing agency could hold us, or any other generator, transporter or the owner or operator of the contaminated facility, responsible for all investigative and remedial costs, even if others were also liable. While CERCLA gives a responsible party the right to bring a contribution action against other responsible parties, the ability to obtain reimbursement from others could be limited by the ability to find other responsible parties, prove the extent of their responsibility and by the financial resources of these other parties.

 

The Clean Air Act of 1970, as amended, or Clean Air Act, regulates emissions of air pollutants. The Florida Department of Environmental Protection (“FDEP”) has developed air quality standards that apply to our landfills and require us to obtain emission permits. The EPA has also issued standards regulating the disposal of asbestos containing materials under the Clean Air Act. Our disposal and collection operations are required to meet certain permitting and emission requirements under the Clean Air Act. We may be required to install methane gas recovery systems at our landfills to meet emission standards under the Clean Air Act.

 

Violations of any of these statutes and regulations may result in the issuance of orders to comply, administrative penalties or the institution of civil suits or criminal action against us. The federal statutes described above also contain provisions authorizing, under certain circumstances, the institution of lawsuits by private citizens to enforce the provisions of the statutes. Some of these statutes also authorize an award of attorneys’ fees to parties successfully advancing such an action.

 

In addition to the federal and related state regulations described above which are applicable to our Florida operations, each state or province in which we operate has laws and regulations governing the generation, storage, treatment, handling, transportation and disposal of solid waste, occupational health and safety, water and air pollution and, in most cases, the siting, design, operation, maintenance, closure and post-closure care of landfills and transfer stations. Many municipalities also have ordinances, local laws and regulations that affect our operations. These include zoning and health measures which may limit solid waste management activities to specified sites or activities, impose flow control restrictions that direct the delivery of solid wastes to specific facilities or regulate discharges into municipal sewers from our solid waste facilities, laws that grant the right to establish franchises for collection services and then put these franchises out for bid, and bans or other restrictions on the movement of solid wastes into a municipality.

 

The Occupational Safety and Health Act of 1970, as amended (“OSHA”), and provincial occupation health and safety laws in Canada, establish employer responsibilities for worker health and safety, including the obligation to maintain a workplace free of recognized injury causing hazards and to implement certain health and safety training programs. Various OSHA standards apply to our operations, including standards concerning notices of hazards, the handling of asbestos and asbestos-containing materials and worker training and emergency response programs.

 

Permits or other land use approvals for our landfills or transfer stations, as well as state, provincial or local laws and regulations, may specify the quantity of waste that may be accepted at the landfill or transfer station during a given time period, specify the types of waste that may be accepted or the areas from which waste may be accepted at a landfill. Changes in landfill design standards for landfills may require us to construct or operate future landfill cells and infrastructure to a higher and potentially more costly standard than currently anticipated.

 

There has been an increasing trend to mandate and encourage waste reduction at the source and waste recycling, and to prohibit or restrict the disposal of certain types of solid wastes, such as yard wastes, leaves and tires into landfills. In Ontario, the provincial government is currently reviewing and considering significant changes to the Waste Diversion Act including placing responsibility on the producers of products and packaging for the management of their products at the end of their life cycle. The enactment of these types of regulations that could reduce the volume and types of waste available for transport to and disposal in landfills could affect the ability of our transfer stations and landfills to operate at full capacity, which would negatively impact our operating results.

Employees

 

As of December 31, 2009, we employed approximately 2,090 full-time employees, including approximately 75 persons categorized as professionals or managers, approximately 1,740 employees involved in collection, transfer, disposal and recycling operations and approximately 275 sales, clerical, data processing or other administrative employees. In Canada, non-salaried employees in 15 of our 24 collection operations are governed by collective agreements, four of which are to be renewed or negotiated in 2010. We are not aware of any other current organizing efforts among our non-unionized employees and believe that relations with our employees are good.

 

 

Failure to complete the merger with IESI-BFC could negatively impact our stock price and our future business and financial results.

 

If the merger with IESI-BFC is not completed, our ongoing business may be adversely affected and, without realizing any of the benefits of having completed the merger, we will be subject to a number of risks, including the following:

 

 

We also could be subject to litigation related to the merger or any failure to complete the merger or related to any enforcement proceeding commenced against us to perform our respective obligations under the merger agreement. The price of our common stock may decline to the extent that the current market price of our stock reflects a market assumption that the merger will be completed and that the related benefits and synergies will be realized, or as a result of the market’s perceptions that the merger was not consummated due to an adverse change in our business. In addition, our business may be harmed, and the price of our stock may decline as a result, to the extent that employees and any third parties remain uncertain about our future prospects in the absence of the merger. Similarly, our current and prospective employees may experience uncertainty about their future roles with the resulting company and choose to pursue other opportunities that could adversely affect us if the merger is not completed. This may adversely affect our ability to attract and retain key personnel, which could harm our business and results. If the merger is not completed, these risks may materialize and may adversely affect our business, financial results and stock price.

 

Our indebtedness may make us more vulnerable to unfavorable economic conditions and competitive pressures, limit our ability to borrow additional funds, require us to dedicate or reserve a large portion of cash flow from operations to service debt, and limit our ability to take actions that would increase our revenue and execute our growth strategy

 

As of December 31, 2009, we had total outstanding debt and capital lease obligations of $402.0 million. Our debt is primarily comprised of (i) our Senior Secured Credit Facilities, which consist of a revolving credit facility of $124.8 million, which is available to our U.S. operations or our Canadian operations, in U.S. or Canadian dollars, and C$16.3 million, which is available to our Canadian operations; and term loans of $36.9 million to our U.S. operations and C$122.3 million to our Canadian operations; (ii) other secured and unsecured notes payable of $9.0 million and (iii) $210.0 million 91/2% senior subordinated notes due 2014. The revolver commitments under our Senior Secured Credit Facilities terminate on October 8, 2013 and the term loans mature in specified quarterly installments through October 8, 2013. The Senior Secured Credit Facilities are secured by all of our assets, including those of our domestic and foreign subsidiaries, and have the guarantee of our domestic and foreign subsidiaries.

The amount of our indebtedness owed under the senior secured credit facilities, notes payable and senior subordinated notes may have adverse consequences for us, including making us more vulnerable to unfavorable economic conditions and competitive pressures, limiting our ability to borrow additional funds, requiring us to dedicate or reserve a large portion of cash flow from operations to service debt, limiting our ability to plan for or react to changes in our business and industry and placing us at a disadvantage compared to competitors with less debt in relation to cash flow.

 

The credit facilities contain covenants and restrictions that could limit the manner in which we conduct our operations and could adversely affect our ability to raise additional capital. Any failure by us to comply with these covenants and restrictions will, unless waived by the lenders, result in an immediate obligation to repay our indebtedness. If such events occurred, we would be required to refinance or obtain capital from other sources, including sales of additional debt or equity or the sale of assets, in order to meet our repayment obligations. We may not be successful in obtaining alternative sources of funding to repay these obligations should events of default occur.

 

Our business is capital intensive and may consume cash in excess of cash flow from our operations and borrowings

 

Our ability to remain competitive, sustain our growth and maintain our operations largely depends on our cash flow from operations and our access to capital. We intend to fund our cash needs through our operating cash flow and borrowings under our Senior Secured Credit Facilities. We may require additional equity or debt financing to fund our growth and debt repayment obligations.

 

Additionally, we have provided for our liabilities related to our closure and post-closure obligations. As we undertake acquisitions, expand our operations, and deplete our landfills, our cash expenditures will increase. As a result, working capital levels may decrease and require financing. If we must close a landfill sooner than we currently anticipate, or if we reduce our estimate of a landfill’s remaining available airspace, we may be required to incur such cash expenditures earlier than originally anticipated. Expenditures for closure and post-closure obligations may increase as a result of any federal, state, provincial or local government regulatory action taken to accelerate such expenditures. These factors could substantially increase our cash expenditures and therefore impair our ability to invest in our existing or new facilities and increase our indebtedness.

 

We will need to refinance our existing debt obligations to pay the principal amounts due at maturity. In addition, we may need additional capital to fund future acquisitions and the integration of the businesses that we acquire. Our business may not generate sufficient cash flow, we may not be able to obtain sufficient funds to enable us to pay our debt obligations and capital expenditures or we may not be able to refinance on commercially reasonable terms, if at all.

 

We may be unable to obtain or maintain the environmental and other permits, licenses and approvals we need to operate our business, which could adversely affect our earnings and cash flow

 

We are subject to significant environmental and land use laws and regulations. To own and operate solid waste facilities, including landfills and transfer stations, we must obtain and maintain licenses or permits, as well as zoning, environmental and other land use approvals. It has become increasingly difficult, costly and time-consuming to obtain required permits and approvals to build, operate and expand solid waste management facilities. The process often takes several years, requires numerous hearings and compliance with zoning, environmental and other requirements and is resisted by citizen, public interest and other groups. The cost of obtaining permits could be prohibitive. We may not be able to obtain and maintain the permits and approvals needed to own, operate or expand our solid waste facilities. Moreover, the enactment of additional laws and regulations or the more stringent enforcement of existing laws and regulations could increase the costs associated with our operations. Any of these occurrences could reduce our expected earnings and cash flow.

 

In some markets in which we operate, permitting requirements may be prohibitive and may differ between those required of us and those required of our competitors. Our inability to obtain and maintain permits for solid waste facilities may adversely affect our ability to service our customers and compete in these markets, thereby resulting in reduced operating revenue.

In addition, stringent controls on the design, operation, closure and post-closure care of solid waste facilities could require us to undertake investigative or remedial activities, curtail operations, close a facility temporarily or permanently, or modify, supplement or replace equipment or facilities at substantial costs resulting in reduced profitability and cash flow.

 

Any failure to maintain the required financial assurance or insurance to support existing or future service contracts may prevent us from meeting our contractual obligations, and we may be unable to bid on new contracts or retain existing contracts resulting in reduced operating revenue and earnings.

 

Municipal solid waste services contracts and permits to operate transfer stations, landfills and recycling facilities typically require us to obtain performance bonds, letters of credit or other means of financial assurance to secure our contractual performance. Such contracts and permits also typically require us to maintain adequate insurance coverage. We carry a broad range of insurance coverage and retain certain insurance exposure that we believe is customary for a company of our size. If our obligations were to exceed our estimates, there could be a material adverse effect on our results of operations. We satisfy these financial assurance requirements by providing performance bonds or letters of credit. Our ability to obtain performance bonds or letters of credit is generally dependent on our creditworthiness. Also, the issuance of letters of credit reduces the availability of our revolving credit facilities for other purposes. Our bonding arrangements are generally renewed annually. If we are unable to renew our bonding arrangements on favorable terms or at all or enter into arrangements with new surety providers, we would be unable to meet our existing contractual obligations that require the posting of performance bonds, and we would be unable to bid on new contracts. This would reduce our operating revenue and our earnings.

 

Our acquisition strategy may be unsuccessful if we are unable to identify and complete future acquisitions and integrate acquired assets or businesses and this subjects us to risks that may have a material adverse effect on our results of operations

 

Part of our strategy to expand our business and increase our revenue and profitability is to pursue the acquisition of disposal-based and collection assets and businesses. We have identified a number of acquisition candidates, both in the United States and Canada. However, we may not be able to acquire these candidates at prices or on terms and conditions that are favorable to us. We expect to finance future acquisitions through a combination of seller financing, cash from operations, borrowings under our financing facilities or issuing additional equity or debt securities. Furthermore, prior to the time the merger with IESI-BFC is consummated, we are required to obtain approval from IESI-BFC for certain acquisitions. Our ability to execute our acquisition strategy also depends upon other factors, including our ability to obtain financing on favorable terms, the successful integration of acquired businesses and our ability to effectively compete in the new markets we enter.

 

If we are unable to identify suitable acquisition candidates or successfully complete and integrate acquisitions, we may not realize the expected benefits from our acquisition growth strategy, including any expected benefits from the proposed vertical integration of acquired operations and our existing disposal facilities.

 

Our business strategy depends in part upon vertically integrating our operations. If we are unable to permit, expand or renew permits for our existing landfill sites or enter into agreements that provide us with access to landfill sites and acquire, lease or otherwise secure access to transfer stations, this may reduce our profitability and cash flow

 

Our ability to execute our business strategy depends in part on our ability to permit, expand or renew permits for our existing landfills, develop new landfill sites in proximity to our operations, enter into agreements that will give us long-term access to landfill sites in our markets and to acquire, lease or otherwise secure more favorable disposal arrangements. Permits to expand landfills are often not approved until the remaining permitted disposal capacity of a landfill is very low. We may not be able to purchase additional landfill sites, renew the permits for or expand existing landfill sites, negotiate or renegotiate agreements to obtain a long-term advantage for landfill costs or permit or renew permits for transfer stations that allow us to internalize the waste we collect. If we were to exhaust our permitted capacity at our landfills, our ability to expand internally could be limited, and we could be required to cap and close our landfills and dispose of collected waste at more distant landfills or at landfills operated by our competitors or other third parties. Our inability to secure favorable arrangements (through ownership of

landfills or otherwise) for the disposal of collected waste would increase our disposal costs and could result in the loss of business to competitors with more favorable disposal options thereby reducing our profitability and cash flow.

 

Changes in legislative or regulatory requirements may cause changes in the landfill site permitting process. These changes could make it more difficult or costly for us to obtain or renew landfill permits. Technical design requirements, as approved, may need modification at some future point in time, which could result in higher development and construction costs than projected. Our current estimates of future disposal capacity may change as a result of changes in design requirements prescribed by legislation, construction requirements and changes in the expected waste density over the life of a landfill site. The density of waste used to convert the available airspace at a landfill into tons may be different than estimated because of variations in operating conditions, including waste compaction practices, site design, climate and the nature of the waste.

 

Any exposure to environmental liabilities, to the extent not adequately covered by insurance, could result in significant expenses, which would reduce the funds we have available for other purposes, including debt service, debt reduction and acquisitions

 

We could be held liable for environmental damage at solid waste facilities that we own or operate, including damage to neighboring landowners and residents for contamination of the air, soil, groundwater, surface water and drinking water. Our liability could extend to damage resulting from pre-existing conditions and off-site contamination caused by pollutants or hazardous substances that we or our predecessors arranged to transport, treat or dispose of at other locations. We are also exposed to liability risks from businesses that we acquire because these businesses may have liabilities that we fail or are unable to discover, including noncompliance with environmental laws. Our insurance program may not cover all liabilities associated with environmental cleanup or remediation or compensatory damages, punitive damages, fines, or penalties imposed on us as a result of environmental damage caused by our operations or those of any predecessor. The incurring of liabilities for environmental damages that are not fully covered by insurance could adversely affect our liquidity and could result in significant expenses, which would reduce the funds we have available for other purposes, including debt service, debt reduction and acquisitions.

 

Although we operate landfills for non-hazardous commercial, industrial and municipal solid waste, it is possible that third parties may dispose of hazardous waste at our landfills or that we may unknowingly dispose of hazardous waste at our landfills. If this were to happen, we could become liable for remediation costs under applicable regulations and, although we would have a cause of action against any third party responsible for disposing of the hazardous waste, we may be unable to identify or recover against that person. The presence of hazardous waste at our landfills could also negatively affect future permitting processes with governmental authorities. If we become responsible for remediation costs for hazardous waste or if governmental authorities deny or restrict the scope of our future permits, our profitability and operations may be adversely impacted.

 

We face competition from large and small solid waste services companies and may be unable to successfully compete with them, reducing our operating margins

 

The markets in which we operate are highly competitive and require substantial labor and capital resources. We compete with large, national solid waste services companies as well as smaller, regional solid waste services companies. Some of our competitors are better capitalized, have greater name recognition and greater financial, operational and marketing resources than us, or may otherwise be able to provide services at a lower price.

 

We also compete with operators of alternative disposal facilities and municipalities that maintain their own waste collection and disposal operations. Public sector operators may have financial advantages over us because of their access to user fees and similar charges as well as to tax revenue. Responding to this competition may result in reduced operating margins. Further, competitive pressures may make our internal growth strategy of improving service and increasing sales penetration difficult or impossible to execute.

The termination or non-renewal of existing customer contracts, or the failure to obtain new customer contracts, could result in declining revenue

 

We derive a portion of our revenue from municipal contracts that require competitive bidding by potential service providers. Although we intend to continue to bid on municipal contracts and to re-bid some of our existing municipal contracts, such contracts may not be maintained or won in the future. We may be unable to meet bonding requirements for municipal contracts at a reasonable cost to us or at all. These requirements may limit our ability to bid for some municipal contracts and may favor some of our competitors. If we are unable to compete successfully for municipal contracts because of bonding or other requirements, we may lose important sources of revenue.

 

We also derive a portion of our revenue from non-municipal contracts, which generally have a term of one to five years. Some of these contracts permit our customers to terminate them before the end of the contractual term. Any failure by us to replace revenue from contracts lost through competitive bidding, termination or non-renewal within a reasonable time period could result in a decrease in our operating revenue and our earnings.

 

We depend on third parties for disposal of solid waste and if we cannot maintain disposal arrangements with them we could incur significant costs that would result in reduced operating margins and revenue.

 

We currently deliver a portion of the solid waste we collect to municipally owned disposal facilities and to privately owned or operated disposal facilities. If municipalities increase their disposal rates or if we cannot obtain and maintain disposal arrangements with private owners or operators, we could incur significant additional costs and, if we are not able to pass these cost increases on to our customers because of competitive pressures, or contractual limitations, this could result in reduced operating margins and revenue.

 

Labor unions may attempt to organize our non-unionized employees, which may result in increased operating expenses

 

Some of our employees in Canada have chosen to be represented by unions, and we have negotiated collective bargaining agreements with them. Labor unions may make attempts to organize our non-unionized employees. The negotiation of any collective bargaining agreement could divert management’s attention away from other business matters. If we are unable to negotiate acceptable collective bargaining agreements, we may have to wait through “cooling-off” periods, which are often followed by union-initiated work stoppages, including strikes. Unfavorable collective bargaining agreements, work stoppages or other labor disputes may result in increased operating expenses and reduced operating revenue.

 

Our operating margins and profitability may be negatively impacted by increased fuel and energy costs and changes in prices for recycled commodities

 

Although fuel and energy costs account for a relatively small portion of our total operating costs, sustained increases in such costs, which we are unable to pass on to our customers because of competitive pressures or contractual limitations, could lower our operating margins and negatively impact our profitability.

 

Our material recovery facilities generate revenue from the sale of recyclable commodities. In an effort to reduce our exposure to commodity price fluctuations on recycled materials, where competitive pressures permit, we charge collection or processing fees for recycling volume collected from our customers. However, sustained declines in the price of recycled commodities, including but not limited to, aluminum, used corrugated cardboard or news print would lower our revenue from such commodities and adversely affect our margins and profitability.

 

Our domestic operations are concentrated in Florida, which may be subject to specific economic conditions that vary from those nationally as well as weather related events that may impact our operations

 

Our domestic operations are concentrated in Florida, which may be subject to specific economic conditions that vary from those nationally and may adversely affect our operating margins and negatively impact our profitability. Additionally, we may be subject to weather related events or conditions that may result in temporary slowdowns or suspension of services or operations, higher labor and operating costs, and/or additional waste streams that could impact or cause our results to differ from those normally expected.

The industry in which we operate is seasonal and decreases in revenue during winter months may have an adverse effect on our results of operations, particularly for our Canadian operations

 

Our operating revenue tends to be somewhat lower in the fall and winter months for our Canadian operations, reflecting the lower volume of solid waste generated during those periods. Our first and fourth quarter results typically reflect this seasonality. In addition, particularly harsh weather conditions may result in temporary slowdowns or suspension of certain of our operations or higher labor and operational costs, any of which could have a material adverse effect on our results of operations.

 

Our Canadian operations subject us to currency translation risk, which could cause our results to fluctuate significantly from period to period

 

A portion of our operations is domiciled in Canada. For each reporting period we translate the results of operations and financial condition of our Canadian operations into U.S. dollars. Therefore, the reported results of our operations and financial condition are subject to changes in the exchange relationship between the two currencies. For example, as the Canadian dollar strengthens against the U.S. dollar, revenue is favorably affected and conversely expenses are unfavorably affected. Assets and liabilities of our Canadian operations are translated from Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet dates, and revenue and expenses of our Canadian operations are translated from Canadian dollars into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and losses on translation of our Canadian operations into U.S. dollars are reported as a separate component of shareholders’ equity and are included in comprehensive income or loss. Monetary assets and liabilities are re- measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported currently as a component of net income. Currently, we do not hedge our exposure to changes in foreign exchange rates.

 

Changes to patterns regarding disposal of waste could adversely affect our results of operations by reducing the volume of waste available for collection and disposal and thus reducing our earnings

 

Waste reduction programs may reduce the volume of waste available for collection and disposal in some areas where we operate. Some areas in which we operate offer alternatives to landfill disposal, such as recycling and composting. In addition, state, local and provincial authorities increasingly mandate recycling and waste reduction at the source and prohibit the disposal of certain types of waste, such as yard waste, at landfills. Any significant change in regulation or patterns regarding disposal of waste could have a material adverse effect on our earnings by reducing the level of demand for our services, resulting in decreased revenue and the earnings we are able to generate.

 

Limits on export of waste and any disruptions to the cross-border flow of waste may adversely affect our results of operations by increasing our costs of disposal

 

There is limited disposal capacity available in Ontario, Canada, a market in which we have significant operations. As a result, a significant portion of the solid waste collected in Ontario is transported to sites in the United States for disposal or incineration. Disruptions in the cross-border flow of waste, or periodic closures of the border to solid waste would cause us to incur more costs due to the increased time trucks hauling our waste may be required to spend at border check-points or increased processing or sorting requirements. Additionally, trucks hauling our waste might be required to travel further to dispose of the waste in other areas of Ontario. Disruptions in the cross-border flow of waste could also result in a lack of disposal capacity available to our Ontario market at a reasonable price or at all. These disruptions could have a material adverse effect on our operating results by increasing our costs of disposal in the Ontario market and thereby decreasing our operating margins and could result in the loss of business to competitors with more favorable disposal options.

 

 

None

 

Our principal executive offices are in leased premises in Burlington, Ontario. Our principal property and equipment consist of landfills, land, buildings, vehicles and equipment, substantially all of which are encumbered by liens in favor of our lenders under our Senior Secured Credit Facilities.

 

The following table summarizes the real properties used in our operations as of December 31, 2009:

 

 

We use approximately 1,230 front-line waste collection vehicles in our operations. We believe that our vehicles, equipment and operating properties are adequate for our current operations. However, we expect to continue to make investments in additional equipment and property for expansion, replacement of assets and in connection with future acquisitions.

 

 

In the normal course of our business and as a result of the extensive governmental regulation of the solid waste industry, we may periodically become subject to various judicial and administrative proceedings involving federal, state, provincial or local agencies. In these proceedings, an agency may seek to impose fines on us or revoke or deny renewal of an operating permit or license that is required for our operations. From time to time, we may also be subject to actions brought by citizens’ groups, adjacent landowners or residents in connection with the permitting and licensing of transfer stations and landfills or allegations related to environmental damage or violations of the permits and licenses pursuant to which we operate. In addition, we may become party to various claims and suits for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of a waste management business.

 

 

 

Market Information

 

On June 30, 2006, we effected a reverse one for three split of our common stock. As a result of the reverse split, each holder of three outstanding shares of common stock received one share of common stock. No fractional shares of common stock were issuable in connection with the reverse stock split. In lieu of such fractional shares, stockholders received a cash payment equal to the product obtained by multiplying the fraction of common stock by $9.15.

Our common shares are listed on the NASDAQ Stock Market LLC, as traded under the symbol “WSII”. The following table provides high and low common share price information for each quarter within our last two fiscal years:

 

 

Holders

 

As of February 22, 2010, there were 91 holders of record of our common shares.

 

Dividends

 

We have not paid cash dividends on our common shares to date. The terms of our Senior Secured Credit Facilities and Senior Subordinated Notes prohibit us from paying cash dividends without the consent of our lenders. See Item 7 — “Management Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Senior Secured Credit Facilities and Senior Subordinated Notes.”

 

We currently intend to retain our future earnings, if any, to finance the growth, development and expansion of our business and repayment of indebtedness. Accordingly, we do not intend to declare or pay any cash dividends on our common shares in the immediate future. The declaration, payment and amount of future cash dividends, if any, will be at the discretion of our board of directors after taking into account various factors. These factors include our financial condition, results of operations, cash flows from operations, current and anticipated capital requirements and expansion plans, provisions of our Senior Secured Credit Facilities, the income tax laws then in effect and the requirements of applicable laws.

 

Repurchases of Securities

 

None.

Performance graph

 

The following graph compares the cumulative total stockholder return from December 31, 2004 through December 31, 2009 for our common stock, the NASDAQ Composite Index and a peer group of companies we have selected for purposes of this comparison. We have assumed that dividends have been reinvested and the returns of each company in the NASDAQ Composite Index and the peer group have been weighted to reflect relative stock market capitalization. The graph assumes that $100 was invested on December 31, 2004, in each of Waste Services’ common stock, the stocks comprising the NASDAQ Composite Index and the stocks comprising the peer group.

 

 

 

The following tables set forth our selected consolidated financial data for the periods indicated and are qualified by reference to, and should be read in conjunction with our Consolidated Financial Statements and the Notes thereto, which are included elsewhere in this annual report, especially Notes 4 and 5 as they relate to our business combinations and dispositions, and Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operation.” On June 30, 2006, we effected a reverse one for three split of our common stock. The reverse split has been retroactively applied to all applicable information to the earliest period presented. The financial data as of December 31, 2009, 2008, 2007, 2006 and 2005 and for each of the years then ended have been derived from our Consolidated Financial Statements and have been prepared in accordance with accounting principles generally accepted in the United States.

 

 

 

 

The following discussion is based on, and should be read in conjunction with Item 6. “Selected Financial Data” and our Consolidated Financial Statements and Notes thereto contained elsewhere in this annual report.

 

Overview

 

We are a multi-regional, integrated solid waste services company, providing collection, transfer, landfill disposal and recycling services for commercial, industrial and residential customers in the United States and Canada. Our U.S. operations are located in Florida and our Canadian operations are located in Eastern Canada (Ontario) and Western Canada (Alberta, Saskatchewan and British Columbia). We divested our Jacksonville, Florida operations in March 2008, our Texas operations in June 2007 and our Arizona operations in March 2007 and as a result, these operations are presented as discontinued for all periods presented.

 

Sources of Revenue

 

Our revenue consists primarily of fees charged to customers for solid waste collection, landfill disposal, transfer and recycling services.

 

We derive our collection revenue from services provided to commercial, industrial and residential customers. Collection services are generally performed under service agreements or pursuant to contracts with municipalities. We recognize revenue when services are rendered. Amounts billed to customers prior to providing the related services are reflected as deferred revenue and reported as revenue in the periods in which the services are rendered.

 

We provide collection services for commercial and industrial customers generally under one to five year service agreements. We determine the fees we charge our customers based on a variety of factors, including collection frequency, level of service, route density, the type, volume and weight of the waste collected, type of equipment and containers furnished, the distance to the disposal or processing facility, the cost of disposal or processing and prices charged by competitors for similar services. Our contracts with commercial and industrial customers typically allow us to pass on increased costs resulting from variable items such as disposal and fuel costs and surcharges. Our ability to pass on cost increases is however, sometimes limited by the terms of our contracts.

 

We provide residential waste collection services through a variety of contractual arrangements, including contracts with municipalities, owners and operators of large residential complexes, mobile home parks and homeowner associations or through subscription arrangements with individual homeowners. Our contracts with municipalities are typically for a term of three to ten years and contain a formula, generally based on a predetermined published price index, for adjustments to fees to cover increases in some, but not all, of our operating costs. Certain of our contracts with municipalities contain renewal provisions. The fees we charge for residential solid waste collection services provided on a subscription basis are based primarily on route density, the

frequency and level of service, the distance to the disposal or processing facility, the cost of disposal or processing and prices we charge in the market for similar services.

 

We charge our landfill and transfer station customers a tipping fee on a per ton or per cubic yard basis for disposing of their solid waste at our transfer stations and landfills. We generally base our landfill tipping fees on market factors and the type and weight of, or volume of the waste deposited. We generally base our transfer station tipping fees on market factors and the cost of processing the waste deposited at the transfer station, the cost of transporting the waste to a disposal facility and the cost of disposal.

 

Material recovery facilities generate revenue from the sale of recyclable commodities. In an effort to reduce our exposure to commodity price fluctuations on recycled materials, where competitive pressures permit, we charge collection or processing fees for recycling volume collected from our customers. However, sustained declines in the price of recycled commodities, including but not limited to, aluminum, used corrugated cardboard or newsprint would lower our revenue from such commodities and adversely affect our margins and profitability.

 

Expense Structure

 

Our cost of operations primarily includes tipping fees and related disposal costs, labor and related benefit costs, equipment maintenance, fuel, vehicle, liability and workers’ compensation insurance and landfill capping, closure and post-closure costs. Our strategy is to create vertically integrated operations where possible, using transfer stations to link collection operations with our landfills to increase internalization of our waste volume. Internalization lowers our disposal costs by allowing us to eliminate tipping fees otherwise paid to third party landfill or transfer station operators. We believe that internalization provides us with a competitive advantage by allowing us to be a low cost provider in our markets. We expect that our internalization will gradually increase over time as we develop our network of transfer stations and maximize delivery of collection volumes to our landfill sites.

 

In markets where we do not have our own landfills, we seek to secure disposal arrangements with municipalities or private owners of landfills or transfer stations. In these markets, our ability to maintain competitive prices for our collection services is generally dependent upon our ability to secure competitive disposal pricing. If owners of third party disposal sites discontinue our arrangements, we would have to seek alternative disposal sites which could impact our profitability and cash flow. In addition, if third party disposal sites increase their tipping fees and we are unable to pass these increases on to our collection customers, our profitability and cash flow would be negatively impacted.

 

We believe that the age and condition of our vehicle fleet has a significant impact on operating costs, including, but not limited to, repairs and maintenance, insurance and driver training and retention costs. Through capital investment, we seek to maintain an average fleet age of approximately six to seven years. We believe that this enables us to best control our repair and maintenance costs, safety and insurance costs and employee turnover related costs.

 

Selling, general and administrative expenses include managerial costs, information systems, sales force, administrative expenses and professional fees.

 

Depreciation, depletion and amortization includes depreciation of fixed assets over their estimated useful lives using the straight-line method, depletion of landfill costs, including capping, closure and post-closure obligations using the units-of-consumption method, and amortization of intangible assets including customer relationships and contracts and covenants not-to-compete, which are amortized over the expected life of the benefit to be received from such intangibles.

 

Recent Developments

 

Proposed Merger with IESI-BFC

 

On November 11, 2009, we entered into a merger agreement with IESI-BFC Ltd. (“IESI-BFC”), which provides for IESI-BFC to acquire us. IESI-BFC, through its subsidiaries, is one of North America’s largest full-service waste management companies, providing non-hazardous solid waste collection and landfill disposal

services to commercial, industrial, municipal and residential customers in ten states and the District of the Columbia in the U.S., and five Canadian provinces.

 

On January 19, 2010, IESI-BFC filed a registration statement with the SEC that included a preliminary proxy statement for such merger. Waste Services and IESI-BFC are working to complete the merger as quickly as practicable and we currently expect the merger to be completed during the second calendar quarter of 2010. However, neither Waste Services nor IESI-BFC can predict the effective time of the merger because it is subject to conditions beyond each company’s control, including approval of the merger by our stockholders and necessary regulatory approvals. If the merger is completed, each of our shareholders will receive 0.5833 IESI-BFC common shares (plus cash in lieu of any fractional share interests) for each share of our common stock held immediately prior to the completion of the merger, subject to adjustment to reflect certain changes in the number of common shares of IESI-BFC outstanding before the merger is completed.

 

If the merger agreement is terminated under certain circumstances, including circumstances involving the acceptance of a superior acquisition proposal by us or a change in recommendation by our board of directors or an intentional breach by us, we will be required to pay IESI-BFC a termination fee of $11.0 million, plus all out-of-pocket costs up to a maximum of $3.5 million for professional and advisory services and other expenses reasonably incurred by IESI-BFC in connection with the merger. Upon termination of the merger agreement by us resulting from IESI-BFC’s intentional breach of the merger agreement, IESI-BFC will be required to pay us $11.0 million plus an amount equal to all out-of-pocket costs up to $3.5 million for professional and advisory services and other expenses reasonably incurred by us in connection with the merger. Waste Services or IESI-BFC may be required to pay the other party an expense reimbursement amount of up to $3.5 million in certain other specified circumstances.

 

Acquisitions and Dispositions

 

In January 2010, we acquired a permitted construction and demolition transfer station in Miami-Dade County, Florida from County Recycling and Waste Transfer for approximately $4.4 million in cash. We intend to use this facility as a platform to build our roll-off business in Miami-Dade County, Florida and to internalize the waste volume into our existing landfill facilities.

 

In January 2010, we acquired three material recovery facilities located on Vancouver Island, British Columbia from Vancouver Island Recycling Services for C$3.5 million in cash. This acquisition allows us to have more control over the marketing, sales and disposal of recyclables collected in our Vancouver Island operations.

 

In October 2009, we acquired Republic Services’ operations in Miami-Dade County, Florida for $32.0 million in cash plus an adjustment for working capital. We are internalizing waste volumes from this acquisition into our existing transfer station and landfill facilities.

 

In September 2009, we acquired the Miami-Dade County, Florida hauling operations of DisposAll of South Florida, Inc. (“DisposAll”) for approximately $15.6 million, of which $1.3 million was paid by way of a disposal credit for future fees charged to DisposAll for waste disposed at certain of our transfer station and landfill facilities. We are internalizing the waste flow from this acquisition into our existing transfer station and landfill facilities.

 

During 2009, we also acquired five separate “tuck-in” hauling operations in Florida for an aggregate purchase price of $3.6 million. We are internalizing construction and demolition waste volumes associated with these acquisitions into certain of our existing transfer station and landfill facilities.

 

During July 2009, we entered into an agreement to acquire 875 acres of agricultural land in Hardee County, Florida, subject to the land being permitted for the operation of a Class I landfill. The purchase price, at the seller’s option, will be either (i) a lump sum payment of $10.0 million to $11.6 million depending on the timing of the closing of the transaction and payable on closing or (ii) a portion of the lump sum payment at closing, ranging from $1.0 million to $7.0 million, plus a future stream of annual payments calculated as the greater of a specified annual minimum, ranging from $0.2 million to $0.5 million, or a percentage of revenues from the operation of the landfill, until the property ceases to be used for landfill related operations, but not less than twenty years.

In December 2008, we acquired RIP, Inc., the owner of a construction and demolition waste landfill in Citrus Country, Florida, for an aggregate purchase price of $7.7 million. Should the site be permitted as a Class I landfill, Class III landfill or as a transfer station, the sellers are entitled to future royalties at varied rates per ton based on the volume and type of waste deposited at the site.

 

In December 2008, we acquired the assets of Commercial Clean-up Enterprises, Inc., a construction and demolition hauling operation in Fort Myers, Florida, for a total purchase price of $6.1 million, of which $1.6 million is deferred and payable as we collect waste volumes from our pre-existing waste streams within the counties of Charlotte, Lee and Collier, Florida. We are internalizing the waste volumes associated with this acquisition to our SLD Landfill in southwest Florida.

 

In March 2008, we sold our hauling and material recovery operations and a construction and demolition landfill site in the Jacksonville, Florida market to an independent third party. The proceeds from this sale approximated $56.7 million of cash, including working capital. At the time of close, we were actively pursuing an expansion at the landfill. If the construction and demolition landfill site did not obtain certain permits relating to an expansion, we would have been required to refund $10.0 million of the purchase price and receive title to the expansion property. Accordingly, at the time of closing we deferred this portion of the proceeds, net of our $3.0 million cost basis. During December 2008, the permits relating to the expansion were secured and the deferred gain was recognized. Simultaneously with the closing of the sale transaction we entered into an operating lease with the buyer for certain land and buildings used in the Jacksonville, Florida operations, for a term of five years at $0.5 million per year. Commencing in April 2009, the lessee had the option to purchase the leased assets for a purchase price of $6.0 million, which was exercised in 2009. Also at the time of close, we utilized $42.5 million of the proceeds to make a prepayment of the term loan under our Senior Secured Credit Facilities. Accordingly, we expensed approximately $0.5 million of unamortized debt issue costs relating to this retirement.

 

In June 2007, we completed transactions to acquire WCA Waste Corporation’s (“WCA”) hauling and transfer station operations near Fort Myers, Florida and to sell our Texas operations to WCA. The transfer station is permitted to accept construction and demolition waste volume, and we are internalizing this additional volume to our SLD Landfill in southwest Florida. The estimated fair value of the WCA assets approximated $18.4 million. Additionally, as part of the transaction with WCA we received $23.7 million in cash and issued a $10.5 million non-interest bearing promissory note with payments of $125,000 per month until June 2014. The net present value of the note at the time of closing was approximately $8.1 million.

 

Prior to the WCA transaction, we had significant operations in the construction and demolition market in Fort Myers. We believed that by acquiring WCA’s Southwest Florida operations, we could create greater long-term shareholder value by removing a market competitor, increasing our density and internalizing construction and demolition waste volume to our SLD Landfill in southwest Florida. Conversely, our Texas Class I landfill site required significant capital investment for cell construction and new equipment within the next two years. While both markets are extremely competitive, our lack of dedicated collection or hauling assets in Texas meant that in order to realize the full potential of the Texas marketplace earlier in the site life, we would need to acquire additional hauling company assets rather than building them organically over time. Hence we believed that the WCA assets, which were immediately integrated into existing operations, would yield higher future returns than those of the developing Texas market.

 

In April 2007, we completed the acquisition of a roll-off collection and transfer operation, a transfer station development project and a landfill development project in southwest Florida operated by USA Recycling Holdings, LLC, USA Recycling, LLC and Freedom Recycling Holdings, LLC for a total purchase price of $51.2 million. The existing transfer station is permitted to accept construction and demolition waste volume, and we are internalizing this additional volume to our SLD Landfill in southwest Florida. Under the terms of the purchase agreement, $7.5 million is contingent upon the receipt of certain landfill operating permits, $2.5 million is contingent on the receipt of certain operating permits for the transfer station and $18.5 million is due and payable at the earlier of the receipt of all operating permits for the landfill site, or January, 2009, and delivery of title to the property. Through the third quarter of 2008, we had advanced $9.5 million towards the purchase of the landfill development project and incurred design and other third party costs relative to this project totaling $0.8 million. In the fourth quarter of 2008 we determined that the landfill development project was no longer economically viable, and as such we ceased

pursuing any further investment in this project. Accordingly, we recognized a charge for the previous advances and capitalized costs of $10.3 million in December 2008. We will have no further obligation relative to the $18.5 million payment or the $7.5 million contingent fee associated with the obtaining of certain landfill operating permits.

 

In April 2007, we acquired a “tuck-in” hauling operation in Ontario, Canada for cash consideration of approximately C$1.5 million.

 

In March 2007, we completed transactions to acquire Allied Waste Industries, Inc’s. (“Allied Waste”) South Florida operations and to sell our Arizona operations to Allied Waste and paid $15.8 million including net working capital between the two operations and transaction costs.

 

We have presented the net assets and operations of our Jacksonville, Florida operations, Texas operations and Arizona operations as discontinued operations for all periods presented. Revenue from discontinued operations was $4.7 million and $37.1 million for the years ended December 31, 2008 and 2007, respectively. Pre-tax net income from discontinued operations was $0.7 million and $2.8 million for the years ended December 31, 2008 and 2007, respectively. The income tax provision for discontinued operations was $0.3 million and nil for the years ended December 31, 2008 and 2007, respectively. The decrease in pre-tax net income from discontinued operations for 2008 compared to 2007 relates primarily to the exclusion of our Jacksonville, Florida operations for all but the first two months of 2008. During 2008, we recognized a pre-tax gain on disposal of $18.4 million relative to the sale of the Jacksonville, Florida operations and an associated income tax provision of $7.3 million. During 2007, we recognized a loss on disposal of $12.4 million relative to the sale of our Texas operations and a gain on disposal of $0.8 million relative to the sale of our Arizona operations. No income tax provision or benefit has been attributed to the Texas or Arizona disposals. Included in the calculation of the gain on disposal for the Jacksonville, Florida operations and Arizona operations was $23.6 million and $21.0 million of goodwill, respectively. There was no goodwill allocable to our Texas operations.

 

Critical Accounting Estimates and Policies

 

General

 

Our discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of the Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosure of contingent assets and liabilities. On an ongoing basis we evaluate our estimates, including those related to areas that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. These areas include allowances for doubtful accounts, landfill airspace and depletion of landfill development costs, intangible and long-lived assets, closure and post-closure liabilities, insurance reserves, revenue recognition, income taxes, assumptions for share-based payments and commitments and contingencies. We base our estimates on historical experience, our observance of trends in particular areas and information or valuations and various other assumptions that we believe to be reasonable under the circumstances and which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent from other sources. Actual amounts could differ significantly from amounts previously estimated.

 

We believe that of our significant accounting policies (refer to the Notes to Consolidated Financial Statements contained elsewhere in this annual report), the following may involve a higher degree of judgment and complexity:

 

Revenue Recognition

 

We recognize revenue when services, such as providing collection services or accepting waste at our disposal facilities, are rendered. Amounts billed to customers prior to providing the related services are reflected as deferred revenue and reported as revenue in the period in which the services are rendered. Our customers are diversified as to both geographic and industry concentrations, however, our domestic operations are concentrated in Florida, which may be subject to specific economic conditions that vary from those nationally as well as weather related events that may impact our operations.

Accounts Receivable and Allowance for Doubtful Accounts

 

We maintain an allowance for doubtful accounts based on expected collectability. We perform credit evaluations of our significant customers and establish an allowance for doubtful accounts based on the aging of our receivables, payment performance factors, historical trends and other information. In general, we reserve a portion of those receivables outstanding more than 90 days and 100% of those outstanding more than 120 days. We evaluate and revise our reserve on a monthly basis based on a review of specific accounts outstanding and our history of uncollectible accounts.

 

Business Acquisitions and Goodwill

 

We account for business acquisitions using the purchase method of accounting. In December 2007, the FASB issued revised guidance for accounting for business combinations. As of January 1, 2009 we adopted this revised guidance, which is described more fully elsewhere in this annual report, and have accounted for acquisitions completed after December 31, 2008 in accordance with this revised guidance. The total purchase price of an acquisition is allocated to the underlying net assets based on their respective estimated fair values at the date of acquisition, with any residual amount allocated to goodwill. As part of this allocation process, management must identify and attribute values and estimated lives to intangible assets acquired. Such determinations involve considerable judgment, and often involve the use of significant estimates and assumptions, including those with respect to future cash inflows and outflows, discount rates and asset lives. These determinations will affect the amount of amortization expense recognized in future periods. Assets acquired in a business combination that will be re-sold are valued at fair value less cost to sell. Results of operating these assets are recognized currently in the period in which those operations occur.

 

We test goodwill annually at December 31 for impairment using the two-step process. The first step is a screen for potential impairment, while the second step measures the amount of the impairment, if any. The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired. If the carrying value of the reporting unit’s net assets, including goodwill, exceeds the fair value of the reporting unit, then we determine the implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, then an impairment of goodwill has occurred and an impairment is recognized for the difference between the carrying amount and the implied fair value of goodwill as a component of operating income. The implied fair value of goodwill is calculated by subtracting the fair value of tangible and intangible assets associated with the reporting unit from the fair value of the unit.

 

We have defined our reporting units to be consistent with our operating segments: Eastern Canada, Western Canada and Florida. In determining fair value, we have utilized discounted future cash flows. We may compare the results of fair value calculated using discounted cash flows to other fair value techniques including: (i) operating results based on a comparative multiple of earnings or revenues; (ii) offers from interested investors, if any; or (iii) appraisals. There may be instances where these alternative methods provide a more accurate measure or indication of fair value. We passed the step one test for all reporting units for our annual impairment tests as of December 31, 2009, 2008 and 2007 and accordingly, did not proceed to the second step and concluded that goodwill was not impaired.

 

In addition, we evaluate a reporting unit for impairment if events or circumstances change between annual tests, indicating a possible impairment. Examples of such events or circumstances include: (i) a significant adverse change in legal factors or in the business climate; (ii) an adverse action or assessment by a regulator; (iii) a more likely than not expectation that a reporting unit or a significant portion thereof will be sold; (iv) continued or sustained losses at a reporting unit; (v) a significant decline in our market capitalization as compared to our book value; or (vi) the testing for recoverability of a significant asset group within the reporting unit.

 

During the first three quarters of 2009, our market capitalization declined from that of the fourth quarter of 2008 and was below our book value of equity. We considered these declines to be indicators of possible impairment of goodwill. As of March 31, 2009, June 30, 2009 and September 30, 2009, we performed interim step one screens for impairment, which we passed and accordingly, did not proceed to the second step and concluded that goodwill was not impaired.

Significant estimates used in the fair value calculation utilizing discounted future cash flows include, but are not limited to: (i) estimates of future revenue and expense growth by reporting unit (revenue has been projected to grow by approximately 3% to 8% with corresponding operating margins ranging from approximately 20% to 35% over the forecast period for the December 2009 impairment test); (ii) future estimated effective tax rates, which we estimated to range between 32% and 40%; (iii) future estimated capital expenditures as well as future required investments in working capital; (iv) estimated discount rate, which we estimated to range between 10% and 12%; (v) the ability to utilize certain domestic tax attributes; and (vi) the future terminal value of the reporting unit, which is based on its ability to exist into perpetuity and in part on the estimated rate of inflation, which was approximately 2.5%. There were no substantial changes in the methodologies employed, significant assumptions used, or calculations applied in the first step of the impairment tests conducted during 2009, 2008 or 2007.

 

In preparing our recent interim tests during 2009 and the December 31, 2008 annual test for impairment, we determined that the sum of our reporting unit fair values exceeded our enterprise value. We determined enterprise value by utilizing the fair value of our common shares outstanding using a twenty day weighted average share price to the end of each applicable period. We believe one of the primary reconciling differences between the total fair value of our reporting units and our enterprise value related to control premium. Control premium is the savings and/or synergies a market participant could realize by obtaining control and eliminating duplicative overhead costs and realizing operating efficiencies from the consolidation of routes and internalization of waste streams. Additionally, we believe there were qualitative factors that externally influenced our calculated enterprise value including, but not limited to:

 

 

During the fourth quarter of 2009, our market capitalization and corresponding enterprise value increased, and was greater than our book value as of December 31, 2009. We believe this increase was in part attributable to (i) positive operating results in the third quarter of 2009; (ii) elimination of the market perception that one of our larger stockholders wished to liquidate their position; and (iii) the announcement of the proposed merger with IESI-BFC, which is described more fully elsewhere in this annual report. In preparing our annual impairment test as of December 31, 2009, we also compared the sum of our reporting unit fair values to the consideration contemplated by the proposed merger with IESI-BFC. We noted that the merger consideration currently contemplated did not result in impairment indicators, which is consistent with the results of our testing using discounted cash flows. We will continue to monitor market trends in our business, the related expected cash flows and our calculation of enterprise value for purposes of identifying possible indicators of impairment. Should our market price per share decline below our book value per share in the future, or we have other indicators of impairment, as previously discussed, we will be required to perform future interim step one impairment analysis, which may lead to a step two analysis resulting in a goodwill impairment. Additionally, we would then be required to review our remaining long-lived assets for impairment.

 

For the December 31, 2009 annual impairment test, we performed a sensitivity analysis on key assumptions used. For the December 31, 2009 test, we noted that a 10% decrease in projected operating margins over the forecast period would result in the requirement to perform a step two analysis for the Florida reporting unit, but would not require a step two analysis for the Eastern Canada or Western Canada reporting units. We also performed a sensitivity analysis on the market weighted average cost of capital and noted that for the December 31, 2009 test, a 10% increase in the market weighted average cost of capital would result in the requirement to perform a step two analysis for the Florida reporting unit, but would not require a step two analysis for the Eastern Canada or Western Canada reporting units.

The estimated fair values of our reporting units, as calculated for the December 31, 2009 impairment test, exceeded the carrying values of the reporting units by approximately 10% to 75%. The Florida reporting unit represented the low end of this range due in part to the severity of the recent economic downturn experienced in the Florida market.

 

Judgments regarding the existence of impairment indicators are based on legal factors, market conditions and operational performance of the acquired businesses. Future events, including but not limited to continued declines in economic activity, loss of contracts or a significant number of customers or a rapid increase in costs or capital expenditures, could cause us to conclude that impairment indicators exist and that goodwill associated with the affected reporting units is impaired. Additionally, as the valuation of identifiable goodwill requires significant estimates and judgment about future performance, cash flows and fair value, our future results could be affected if these current estimates of future performance and fair value change. Any resulting goodwill impairment loss could have a material adverse impact on our financial condition and results of operations.

 

Long-Lived Assets

 

We periodically evaluate whether events and circumstances have occurred that may warrant revision of the estimated useful life of property and equipment or whether the remaining balance of property and equipment, or other long-lived assets including amortizing intangible assets, should be evaluated for possible impairment. Instances that may lead to an impairment include: (i) a significant decrease in the market price of a long-lived asset group; (ii) a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition; (iii) a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or asset group, including an adverse action or assessment by a regulator; (iv) an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset or asset group; (v) a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; or (vi) a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

 

Upon recognition of an event, as previously described, we use an estimate of the related undiscounted cash flows, excluding interest, over the remaining life of the property and equipment and long-lived assets in assessing their recoverability. We measure impairment loss as the amount by which the carrying amount of the asset(s) exceeds the fair value of the asset(s). We primarily employ two methodologies for determining the fair value of a long-lived asset: (i) the amount at which the asset could be bought or sold in a current transaction between willing parties; or (ii) the present value of expected future cash flows grouped at the lowest level for which there are identifiable independent cash flows.

 

Costs associated with arranging financing are deferred and expensed over the related financing arrangement using the effective interest method. Should we repay an obligation earlier than its contractual maturity, any remaining deferred financing costs are charged to earnings. Fees paid to lenders for amendments that are not accounted for as extinguishments are deferred and expensed over the remaining life of the facility; ancillary professional fees relating to an amendment are expensed as incurred.

 

Landfill Sites

 

Landfill sites are recorded at cost. Capitalized landfill costs include expenditures for land, permitting costs, cell construction costs and environmental structures. Capitalized permitting and cell construction costs are limited to direct costs relating to these activities, including legal, engineering and construction costs associated with excavation, liners and site berms, leachate management facilities and other costs associated with environmental management equipment and structures.

 

Costs related to acquiring land, excluding the estimated residual value of un-permitted, non-buffer land, and costs related to permitting and cell construction are depleted as airspace is consumed using the units-of-consumption method over the total available airspace, including probable expansion airspace, where appropriate.

Environmental structures, which include leachate collection systems, methane collection systems and groundwater monitoring wells, are charged to expense over the shorter of their useful life or the life of the landfill.

 

Capitalized landfill costs may also include an allocation of the purchase price paid for the landfills. For landfills purchased as part of a group of several assets, the purchase price assigned to the landfill is determined based on the discounted expected future cash flows of the landfill. If the landfill meets our expansion criteria, the purchase price is further allocated between permitted airspace and expansion airspace based on the ratio of permitted versus probable expansion airspace to total available airspace.

 

We assess the carrying value of our landfill sites using the same criteria outlined in the Long-Lived Assets section above. There are certain indicators previously discussed that require significant judgment and understanding of the waste industry when applied to landfill development or expansion.

 

We identified three sequential steps that landfills generally follow to obtain expansion permits. These steps are as follows: (i) obtaining approval from local authorities; (ii) submitting a permit application to state or provincial authorities; and (iii) obtaining permit approval from state or provincial authorities.

 

Before expansion airspace is included in our calculation of total available disposal capacity, the following criteria must be met: (i) the land associated with the expansion airspace is either owned by us or is controlled by us pursuant to an option agreement; (ii) we are committed to supporting the expansion project financially and with appropriate resources; (iii) there are no identified fatal flaws or impediments associated with the project, including political impediments; (iv) progress is being made on the project; (v) the expansion is attainable within a reasonable time frame; and (vi) based on senior management’s review of the status of the permit process to date, we believe it is more likely than not the expansion permit will be received within the next five years. Upon meeting our expansion criteria, the rates used at each applicable landfill to expense costs to acquire, construct, close and maintain a site during the post-closure period are adjusted to include probable expansion airspace and all additional costs to be capitalized or accrued associated with the expansion airspace.

 

Once expansion airspace meets the criteria for inclusion in our calculation of total available disposal capacity, management continuously monitors each site’s progress in obtaining the expansion permit. If at any point it is determined that an expansion area no longer meets the required criteria, the probable expansion airspace is removed from the landfill’s total available capacity and the rates used at the landfill to expense costs to acquire, construct, close and maintain a site during the post-closure period are adjusted accordingly. Depletion rates are affected by changes in engineering estimates, including changes in landfill design, and waste compaction and density.

The following tables reflect landfill capacity activity for permitted landfills owned by us, which are part of our continuing operations. Corrections for actual waste compaction and density realized for each year are made at the end of each year. These tables are exclusive of our landfill sites that were divested as part of the sales of our Jacksonville, Florida operations in March 2008, Texas operations in June 2007 and Arizona operations in March 2007 and are for each of the three years ended December 31, 2009, 2008 and 2007 (in thousands of cubic yards):

 

 

As of January 1, 2009, we had deemed 4.9 million cubic yards of expansion capacity at one of our Canadian landfills. During the year ended December 31, 2009, 4.7 million cubic yards of expansion capacity was formally permitted and as such, it was reclassified to permitted capacity during 2009.

 

 

As of January 1, 2008, we had deemed 29.6 million cubic yards of domestic expansion capacity. During April 2008, that capacity was formally permitted and as such it was reclassified to permitted capacity during 2008.

 

 

Accrued Closure and Post-Closure Obligations

 

We recognize as an asset, an amount equal to the fair value of the liability for an asset retirement obligation. The asset is then depleted consistent with other capitalized landfill costs, over the remaining useful life of the site

based on units-of-consumption as airspace in the landfill is consumed. Additionally, we recognize a liability for the present value of the estimated future asset retirement obligation. The liability will be adjusted for: (i) additional liabilities incurred or settled; (ii) accretion of the liability to its future value; and (iii) revisions in the estimated cash flows relative to closure and post-closure costs.

 

Accrued closure and post-closure obligations represent an estimate of the future obligation associated with closure and post-closure monitoring of the solid waste landfills owned by us. Site-specific closure and post-closure engineering cost estimates are prepared for the landfills we own. The impact of changes in estimates, based on an annual update, is accounted for on a prospective basis. We calculate closure and post-closure liabilities by estimating the total future obligation in current dollars, increasing the obligations based on the expected date of the expenditure using an inflation rate of approximately 2.5% and discounting the resultant total to its present value using a credit-adjusted risk-free discount rate of approximately 6.5%. Our 2010 inflation and discount rates are expected to approximate these rates. The anticipated timeframe for paying these costs varies based on the remaining useful life of each landfill as well as the duration of the post-closure monitoring period. Accretion of discounted cash flows associated with the closure and post-closure obligations is accrued over the estimated life of the landfill and charged to cost of operations as it is accrued.

 

Accounting for Income Taxes

 

We use the asset and liability method to account for income taxes. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. In preparing the Consolidated Financial Statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating the actual current tax liability together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, depreciation on property, plant and equipment, intangible assets, goodwill and losses for tax and accounting purposes. These differences result in deferred tax assets, which include tax loss carry-forwards, and liabilities, which are included within the Consolidated Balance Sheet. We then assess the likelihood that deferred tax assets will be recovered from future taxable income, and to the extent that recovery is not likely or there is insufficient operating history, a valuation allowance is established. To the extent a valuation allowance is established or increased in a period, we include an expense within the tax provision of the Consolidated Statements of Operations. Our provision for deferred income taxes is complex; as such you should read our discussion of “Income Tax Provision” contained elsewhere in this Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.

 

In July 2006, the FASB issued guidance relative to accounting for uncertainty in income taxes. This guidance applies to all “tax positions” and refers to “tax positions” as positions taken in a previously filed tax return or positions expected to be taken in a future tax return that are reflected in measuring current or deferred income tax assets and liabilities reported in the financial statements. This guidance further clarifies a tax position to include, but not be limited to, the following:

 

 

This guidance clarifies that a tax benefit may be reflected in the financial statements only if it is “more likely than not” that a company will be able to sustain the tax return position, based on its technical merits. If a tax benefit meets this criterion, it should be measured and recognized based on the largest amount of benefit that is cumulatively greater than 50% likely to be realized. This is a change from previous practice, whereby companies recognized a tax benefit only if it was probable a tax position would be sustained. This guidance also requires that we make qualitative and quantitative disclosures, including a discussion of reasonably possible changes that might occur in unrecognized tax benefits over the next 12 months, a description of open tax years by major jurisdictions, and a roll-forward of all unrecognized tax benefits, presented as a reconciliation of the beginning and ending balances of the unrecognized tax benefits on an aggregated basis.

As of December 31, 2009 and 2008 we did not recognize any assets or liabilities for unrecognized tax benefits relative to uncertain tax positions nor do we anticipate any significant unrecognized tax benefits will be recorded during the next 12 months. Any interest or penalties resulting from examinations will be recognized as a component of the income tax provision. However, since there are no unrecognized tax benefits as a result of tax positions taken, there are no accrued penalties or interest.

 

Risk Management

 

Our U.S.-based workers’ compensation, automobile and general liability insurance coverage is subject to certain deductible limits. We retain up to $0.5 million and $0.25 million of risk per claim, plus claims handling expense under our workers’ compensation and our auto and general liability insurance programs, respectively. Claims in excess of such deductible levels are fully insured subject to our policy limits. However, we have a limited claims history for our U.S. operations and it is reasonably possible that recorded reserves may not be adequate to cover future payments of claims. We have collateral requirements that are set by the insurance companies that underwrite our insurance programs. Collateral requirements may change from time to time, based on, among other factors, the size of our business, our claims experience, financial performance or credit quality and retention levels. As of December 31, 2009 we had posted letters of credit with our U.S. insurer of $10.9 million to cover the liability for losses within the deductible limit. Provisions for retained claims are made by charges to expense based on periodic evaluations by management of the estimated ultimate liabilities on reported and incurred but not reported claims. Adjustments, if any, to the estimated reserves resulting from ultimate claim payments will be reflected in operations in the periods in which such adjustments become known.

 

Share-Based Payments

 

Stock-based employee compensation cost is recognized as a component of selling, general and administrative expense in the Consolidated Statements of Operations. For the years ended December 31, 2009, 2008 and 2007, stock-based employee compensation expense was $2.9 million, $2.6 million and $2.8 million, respectively.

 

We estimate the fair value of option grants made to employees using a Black-Scholes pricing model. We make the following assumptions relative to this model: (i) the annual dividend yield is zero as we do not pay dividends, (ii) the weighted-average expected life is based on share option exercises, pre and post vesting terminations and share option term expiration, (iii) the risk free interest rate is based on the U.S. Treasury security rate for the expected life, and (iv) the volatility is based on the level of fluctuations in our historical share price for a period equal to the weighted-average expected life.

 

Restricted stock units with performance based vesting provisions are expensed based on our estimate of achieving the specific performance criteria on a straight-line basis over the requisite service period. We perform periodic reviews of the progress of actual achievement against the performance criteria in order to reassess the likely vesting scenario and, when applicable, realign the expense associated with that outcome.

 

Registration Payment Arrangements

 

Contingent obligations to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, are separately recognized and measured when they are probable and estimable.

 

Translation and Re-Measurement of Foreign Currency

 

A portion of our operations is domiciled in Canada. For each reporting period we translate the results of operations and financial condition of our Canadian operations into U.S. dollars. Therefore, the reported results of our operations and financial condition are subject to changes in the exchange relationship between the two currencies. For example, as the Canadian dollar strengthens against the U.S. dollar, revenue is favorably affected and conversely expenses are unfavorably affected. Assets and liabilities of our Canadian operations are translated from Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet dates, and revenue and expenses of our Canadian operations are translated from Canadian dollars into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and losses on translation of our Canadian operations into U.S. dollars are reported as a separate component of shareholders’ equity and are included in

comprehensive income or loss. Monetary assets and liabilities are re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported currently as a component of net income. Currently, we do not hedge our exposure to changes in foreign exchange rates.

 

Exchange rates for the Canadian dollar to U.S. dollar that are applicable for the periods covered by the accompanying Consolidated Financial Statements are summarized as follows:

 

 

Operating Results

 

Results of Operations for each of the Three Years Ended December 31, 2009, 2008 and 2007

 

The following tables set forth our consolidated results of operations for each of the three years ended December 31, 2009, 2008 and 2007 (in thousands):

 

 

 

 

Revenue

 

A summary of our revenue, by service line, for each of the three years ended December 31, 2009, 2008 and 2007 is as follows (in thousands):

 

 

Revenue was $434.5 million and $473.0 million for the years ended December 31, 2009 and 2008, respectively, a decrease of $38.5 million or 8.1%. The decrease in revenue from our Florida operations for the year ended December 31, 2009 of $22.1 million or 9.6% was driven by decreased collection volumes, primarily in our industrial and commercial lines of business, of $11.1 million, coupled with lower third-party transfer station, recycling and landfill volumes of $5.2 million. Declining fuel costs resulted in lower surcharges of $9.9 million and other net decreases of $11.0 million, primarily related to the expiration or divestiture of certain residential collection contracts. Offsetting these decreases were net price increases of $8.0 million, which were adversely affected by commodity pricing declines of $1.8 million, and net increases from acquisitions of $7.1 million.

 

The decrease in revenue from our Canadian operations for the year ended December 31, 2009 of $16.4 million or 6.8% was primarily due to the unfavorable effect of foreign exchange movements of $16.1 million. After considering foreign exchange rate changes, revenue from our Canadian operations declined $0.3 million or 0.1% as a result of decreases in fuel surcharges of $6.2 million, decreased collection volumes, primarily in our industrial and commercial lines of business, of $8.5 million and other decreases of $0.3 million, primarily related to the loss of certain contracts. Offsetting these decreases were net price increases of $10.5 million, which were favorably affected by net commodity pricing increases of $0.4 million, and higher third-party landfill and transfer station volumes of $4.2 million.

 

Revenue was $473.0 million and $461.4 million for the years ended December 31, 2008 and 2007, respectively, an increase of $11.6 million or 2.5%. The decrease in revenue from our Florida operations for 2008 of $8.0 million or 3.4% was driven by decreased collection, primarily in our industrial and commercial lines of business, third-party transfer station and landfill volumes of $25.7 million and other net decreases of $12.8 million, primarily related to the expiration of certain residential and recycling collection contracts. Offsetting these net

decreases were acquisitions net of dispositions of $18.6 million and price increases of $11.9 million, of which $4.2 million related to fuel and environmental surcharges.

 

The increase in revenue from our Canadian operations for 2008 of $19.6 million or 8.8% was due to price increases of $16.8 million, of which $6.8 million related to fuel and environmental surcharges. Organic volume growth was $6.0 million. Offsetting these increases were decreases of $5.2 million, primarily related to the loss of residential contracts. The favorable effect of foreign exchange movements increased revenue by $2.0 million.

 

Cost of Operations

 

Cost of operations was $277.5 million and $309.1 million for the years ended December 31, 2009 and 2008, respectively, a decrease of $31.6 million or 10.2%. As a percentage of revenue, cost of operations was 63.9% and 65.3% for the years ended December 31, 2009 and 2008, respectively.

 

The decrease in cost of operations from our Florida operations for the year ended December 31, 2009 of $20.0 million or 13.5% was due to lower labor costs of $6.2 million resulting from route reductions and consolidations, decreased fuel costs of $5.9 million, lower costs for third-party disposal due to overall lower collection volumes of $5.0 million and decreases in other operating costs of $2.9 million. As a percentage of revenue, cost of operations for our Florida operations was 61.4% and 64.2% for the years ended December 31, 2009 and 2008, respectively. The improvement in our domestic gross margin is primarily due to cost controls implemented in the fourth quarter of 2008, which continued into 2009.

 

The decrease in cost of operations from our Canadian operations for the year ended December 31, 2009 of $11.6 million or 7.3% was primarily due to the favorable effect of foreign exchange movements of $10.6 million. After considering foreign exchange rate changes, cost of operations from our Canadian operations decreased $1.0 million as decreased fuel costs of $4.7 million were offset by increased labor costs of $2.7 million and repair, maintenance and other net cost increases of $1.0 million. As a percentage of revenue, cost of operations for our Canadian operations was 66.1% and 66.5% for the years ended December 31, 2009 and 2008, respectively.

 

Cost of operations was $309.1 million and $301.6 million for the years ended December 31, 2008 and 2007, respectively, an increase of $7.5 million or 2.5%. As a percentage of revenue, cost of operations was 65.3% for the years ended December 31, 2008 and 2007.

 

The decrease in cost of operations from our Florida operations for 2008 of $5.8 million or 3.7% was due to lower costs for disposal and transportation sub-contractor costs, primarily due to overall lower collection volumes of $9.4 million, lower variable labor costs of $5.1 million due to decreased labor hours and labor reduction initiatives. Decreases in other operating costs of $3.5 million were due to lower equipment operating costs of $1.5 million, lower insurance and support costs of $1.5 million and lower landfill operating costs of $0.5 million resulting from lower landfill volumes and community host fees. Offsetting these decreases were acquisitions of $10.7 million and increased fuel costs of $1.5 million. As a percentage of revenue, cost of operations remained consistent at 64.2% and 64.4% for the years ended December 31, 2008 and 2007, respectively, as declines in waste volumes and internalization eroded margins, which were offset by net declines in our operating costs.

 

The increase in cost of operations from our Canadian operations for 2008 of $13.3 million or 9.0% was due to increased disposal volumes and costs of $6.8 million, increased fuel costs of $3.5 million and increased labor costs of $2.6 million, of which $0.2 million related to severance in connection with labor reduction initiatives. These increases were offset by decreases in vehicle repair and maintenance costs of $0.4 million and landfill operating costs of $0.5 million resulting from lower landfill volumes. The unfavorable effect of foreign exchange movements was $1.3 million. Cost of operations as a percentage of revenue increased to 66.5% from 66.3% for the years ended December 31, 2008 and 2007, respectively, primarily due to lower landfill and special waste volumes received directly at our landfill sites, which generally have higher operating margins than our hauling operations, coupled with the higher operating costs previously discussed.

 

Selling, General and Administrative Expense

 

Selling, general and administrative expense, excluding restructuring, severance and related costs, was $58.3 million and $59.6 million for the years ended December 31, 2009 and 2008, respectively, a decrease of

$1.3 million or 2.1%. As a percentage of revenue, selling, general and administrative expense was 13.4% and 12.6% for the years ended December 31, 2009 and 2008, respectively. The overall decrease in selling, general and administrative expense was affected by the restructuring of corporate overhead and other administrative and operational functions during the fourth quarter of 2008, which is discussed and more fully described below. These restructuring efforts are the primary driver of the overall decrease in selling, general and administrative costs. Salaries and related benefits and consulting fees declined $3.2 million, primarily as a result of these restructuring efforts. Offsetting these reductions were $2.2 million of costs incurred in the fourth quarter of 2009 relative to our proposed merger with IESI-BFC, which is discussed more fully above, $0.8 million for acquisition related costs and higher stock-based compensation costs of $0.5 million. The favorable effect of foreign exchange movements was $2.0 million.

 

Selling, general and administrative expense, excluding restructuring, severance and related costs, was $59.6 million and $60.2 million for the years ended December 31, 2008 and 2007, respectively, a decrease of $0.6 million or 1.0%. As a percentage of revenue, selling, general and administrative expense, excluding restructuring, severance and related costs, was 12.6% and 13.1% for years ended December 31, 2008 and 2007, respectively. The overall decrease in selling, general and administrative expense was primarily due to reductions in legal fees of $1.8 million, which primarily related to fees for our litigation with Waste Management expensed in the first quarter of 2007 that did not recur in 2008. In the third quarter of 2008, we incurred legal and professional fees related to the consent solicitation that provided for certain amendments to the Indenture governing our Senior Subordinated Notes, which in part offset the overall decrease in legal fees. Also contributing to the decrease in selling, general and administrative expense were lower wages, salaries and bonus of $0.4 million, of which $1.2 million was a release of bonus accrual in the fourth quarter of 2008, and other decreases of $0.5 million. Offsetting these decreases were cost increases associated with acquisitions net of dispositions of $1.3 million and increased stock-based compensation of $0.5 million. The unfavorable effect of foreign exchange movements was $0.3 million.

 

Restructuring, Severance and Related Costs

 

During the fourth quarter of 2008, we completed a restructuring of corporate overhead and other administrative and operational functions. The plan included the closing of our U.S. corporate office and the consolidation of corporate administrative functions to our headquarters in Burlington, Ontario, reductions in staffing levels in both overhead and operational positions and the termination of certain consulting arrangements. In connection with the execution of the plan, in the fourth quarter of 2008 we recognized a charge of $6.9 million for selling, general and administrative expense, which consisted of (i) $3.6 million for severance and related costs, (ii) $0.9 million for rent, net of estimated sub-let income of $0.7 million, due to the closure of our U.S. corporate office; and (iii) $2.4 million for the termination of certain consulting arrangements, the majority of which related to agreements we had entered into with previous owners of businesses that were acquired. As of December 31, 2009, $2.6 million remains accrued relative to the plan. During October 2009 we entered into a sublease of our former U.S. corporate office. This sublease is for an initial term of three years commencing November 1, 2009 and includes a three year extension term at the discretion of the tenant, which we have assumed will occur. Our original estimates have been revised to reflect these circumstances and other changes based on revised information. Should our assumptions require future revision as additional information becomes available, we may have additional charges in future periods.

 

Effective August 23, 2007, we entered into a separation agreement with Mr. Charles Wilcox our former President and Chief Operating Officer. The agreement provides for salary continuation and benefits until December 31, 2010. In addition, we agreed that his outstanding stock options would remain outstanding until their original expiry date. Accordingly, we recorded a charge for severance costs of $3.3 million and additional stock-based compensation of $0.7 million during 2007. As of December 31, 2009, $1.0 million remains accrued relative to Mr. Wilcox’s separation agreement.

 

Please see the section titled “Tabular Disclosure of Contractual Obligations” below for the timing of payment for the remaining accrued restructuring, severance and related expenditures discussed above.

Landfill Development Project

 

Through the third quarter of 2008, we had advanced $9.5 million towards the purchase of a landfill development project and incurred design and other third party costs relative to this project totaling $0.8 million. In the fourth quarter of 2008 we determined that the landfill development project was no longer economically viable, and as such we ceased pursuing any further investment in this project. Accordingly, we recognized a charge for the previous advances and capitalized costs of $10.3 million in December 2008.

 

Depreciation, Depletion and Amortization

 

Depreciation, depletion and amortization was $44.6 million and $45.3 million for the years ended December 31, 2009 and 2008, respectively, a decrease of $0.7 million or 1.7%. As a percentage of revenue, depreciation, depletion and amortization was 10.3% and 9.6% for the years ended December 31, 2009 and 2008, respectively. Foreign exchange rate movements had a favorable effect of $1.2 million. Amortization of intangible assets decreased $0.6 million primarily due to lower amortization associated with our customer relationship intangible assets. Offsetting these decreases was a $1.0 million increase in depreciation expense, which primarily relates to depreciation of assets acquired in recent business acquisitions. Landfill depletion rates for our U.S. landfills ranged from $5.66 to $6.09 per ton and $4.02 to $6.16 per ton during the years ended December 31, 2009 and 2008, respectively. Landfill depletion rates for our Canadian landfills ranged from C$0.66 to C$8.01 per tonne and C$2.99 to C$7.28 per tonne during the years ended December 31, 2009 and 2008, respectively.

 

Depreciation, depletion and amortization was $45.3 million and $54.9 million for the years ended December 31, 2008 and 2007, respectively, a decrease of $9.6 million or 17.5%. As a percentage of revenue, depreciation, depletion and amortization was 9.6% and 11.9% for the years ended December 31, 2008 and 2007, respectively. Acquisitions net of dispositions accounted for an increase in depreciation of $0.9 million. This increase was offset by an overall decrease in landfill depletion of $6.9 million, which was primarily due to decreased third-party and internal disposal volumes at our landfills of $4.3 million, as well as lower depletion rates of $2.6 million. A permitted expansion at one of our disposal sites increased landfill airspace and thereby decreased our domestic depletion rate. Amortization of intangible assets decreased $3.7 million primarily due to the expiration of a residential recycling agreement in Miami-Dade County that was acquired as part of our acquisition of the Allied Waste South Florida operations. Foreign exchange rate movements had an unfavorable effect of $0.1 million. Landfill depletion rates for our U.S. landfills ranged from $4.02 to $6.16 per ton and $3.55 to $7.81 per ton during the years ended December 31, 2008 and 2007, respectively. Landfill depletion rates for our Canadian landfills ranged from C$2.99 to C$7.28 per tonne and C$3.12 to C$9.25 per tonne during the years ended December 31, 2008 and 2007, respectively.

 

Loss (Gain) on Sale of Property and Equipment, Foreign Exchange and Other

 

Loss (gain) on sale of property and equipment, foreign exchange and other was $(2.6) million, $0.2 million and $(0.1) million for the years ended December 31, 2009, 2008 and 2007, respectively. Foreign exchange gains and losses relate to the re-measuring of U.S. dollar denominated monetary accounts into Canadian dollars.

 

During the first quarter of 2009, we sold certain land and buildings under the terms of a lease purchase option entered into with the purchaser of our Jacksonville, Florida operations. The purchase price for the land and buildings was $6.0 million with an associated gain on sale of $3.3 million, which is the primary driver of the increase in gain on sale of property and equipment, foreign exchange and other for the year ended December 31, 2009 compared to the same periods in the previous years.

Interest Expense

 

The components of interest expense, including amortization of issue costs and discounts, and accretion for non-interest bearing notes for the years ended December 31, 2009, 2008 and 2007 are as follows:

 

 

Interest expense was $31.0 million and $37.4 million for the years ended December 31, 2009 and 2008, respectively, a decrease of $6.4 million or 17.3%. Interest expense on the Senior Secured Credit Facilities decreased $5.9 million for the year ended December 31, 2009 due primarily to lower average interest rates. The weighted average interest rate on borrowings under the U.S. dollar denominated Senior Secured Credit Facilities was 4.0% and 6.2% for the years ended December 31, 2009 and 2008, respectively. The weighted average interest rate on borrowings under our Canadian dollar denominated Senior Secured Credit Facilities was 4.2% for the year ended December 31, 2009 and 6.5% for the period the borrowings were outstanding during 2008.

 

Interest expense on the Senior Subordinated Notes increased $0.9 million for the year ended December 31, 2009 due to interest on an additional $50.0 million aggregate principal of Senior Subordinated Notes that were issued on September 21, 2009, which is described in further detail elsewhere in this annual report. We expect to incur additional annual interest expense of $4.8 million relative to these additional notes through their maturity.

 

Interest expense was $37.4 million and $40.7 million for the years ended December 31, 2008 and 2007, respectively, a decrease of $3.3 million or 8.0%. Interest expense on the Senior Secured Credit Facilities and the Senior Subordinated Notes decreased $6.6 million for the year ended December 31, 2008 due primarily to lower average rates and lower overall balances outstanding on our Senior Secured Credit Facilities during 2008. The weighted average interest rate on borrowings under the U.S. dollar denominated Senior Secured Credit Facilities was 6.2% and 7.9% for the years ended December 31, 2008 and 2007, respectively and 6.5% for our Canadian dollar denominated Senior Secured Credit Facilities for the period the borrowings were outstanding during 2008.

 

In March 2008, we used $42.5 million of proceeds from the sale of our Jacksonville, Florida operations to make a prepayment on the term loan under our Senior Secured Credit Facilities. As such, we expensed $0.5 million of unamortized debt issue cost related to the retirement. In October 2008, we refinanced our Senior Secured Credit Facilities with a consortium of new lenders and recognized a non-cash interest charge of approximately $2.5 million for the unamortized debt issue costs related to the Senior Secured Credit Facilities at the time of the refinancing. In order to lower our borrowing costs, in December 2008, we converted the Senior Secured Credit Facility from base rate loans to Eurodollar loans in the U.S., and to Bankers Acceptance loans in Canada. As long as rates are favorable, we expect to continue with these loan types in the future.

 

Change in Fair Value of Warrants

 

Effective January 1, 2009 we adopted guidance related to determining whether an instrument or embedded feature is indexed to an entity’s own stock. This guidance applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. As a result of adopting this accounting guidance, outstanding common stock purchase warrants to purchase 2,383,333 common shares that were previously treated as equity pursuant to the derivative treatment exemption, were no longer afforded equity treatment. These warrants have a strike price of $8.96 per share and expire in May 2010. As such, effective January 1, 2009 we reclassified the fair value of these common stock purchase warrants, which have exercise price reset features, from equity to liability status as if these warrants were treated as a derivative liability since their date of issue in May 2003. On January 1, 2009, we reclassified from additional paid-in capital, as a cumulative effect adjustment, $11.4 million to accumulated deficit and $2.4 million to a long-term warrant liability to recognize the fair value of these warrants

on such date. The fair value of these common stock purchase warrants increased to $2.8 million as of December 31, 2009. We recognized a loss of $0.4 million for the change in fair value of these warrants for the year ended December 31, 2009.

 

Income Tax Provision

 

The provision for income taxes from continuing operations for the years ended December 31, 2009, 2008 and 2007 was $11.2 million, $6.2 million and $14.4 million, respectively. For 2009, the provision for income taxes was comprised of $7.2 million for our U.S. operations and parent company and $4.0 million for our Canadian operations. We provide a 100% valuation allowance for our net operating loss carry-forwards generated in the United States. In recording the valuation allowance, we considered the requirements of the prevailing accounting guidance. The available evidence considered includes the historical operating results (2003 to 2009) as well as a five year forecast of future operations. From 2003 to 2007, we generated operating losses in the U.S. In 2008, we generated an operating profit in the U.S. primarily because of the gain arising from the sale of our Jacksonville operations. In 2009, we generated an operating profit in the U.S. primarily because of the gains arising from the reorganization of our Canadian subsidiaries and the introduction of intercompany debt. Without these and other non-recurring items, we would have generated operating losses in the U.S. in 2009 and 2008.

 

We also considered the future reversals of our existing temporary differences, exclusive of goodwill for which we provide a separate deferred tax liability, in determining the need for a valuation allowance. Additionally, as of December 31, 2009, there were no material tax planning strategies being considered that would trigger realization of the U.S. net operating losses.

 

Given the history of operating losses in the U.S., the future reversals of temporary differences and the magnitude of the net operating loss carry-forward, we concluded as of December 31, 2009 that it was more likely than not that the U.S. deferred tax assets would not be recovered from future U.S. taxable income, therefore we believed a full valuation allowance against these deferred tax assets was necessary and justifiable. As of December 31, 2009, our valuation allowance totaled $53.2 million, of which $46.6 million relates to our U.S. operations.

 

In addition to the valuation allowance recorded for our net operating loss carry-forwards generated in the U.S., we also provide deferred tax liabilities generated by our tax deductible goodwill. The effect of not benefiting our domestic net operating loss carry-forwards and separately providing deferred tax liabilities for our tax deductible goodwill is to increase our domestic effective tax rate above the statutory amount that would otherwise be expected. For each of the years ended December 31, 2009, 2008 and 2007, the portion of our domestic deferred provision related to goodwill approximated $7.2 million, $7.1 million and $7.0 million respectively. We expect that our quarterly 2010 domestic provision for deferred tax liabilities for goodwill will approximate $1.9 million. Should we generate taxable income domestically, we expect our deferred tax liabilities generated from goodwill will offset other deferred tax assets and we will not provide for them separately. However, we currently do not foresee a decrease in our domestic effective rate for 2010. We have not historically paid domestic cash income taxes or alternative minimum tax, nor do we expect to pay any during 2010.

 

We recognize a provision for foreign taxes on our Canadian income including taxes for stock-based compensation, which is a non-deductible item for income tax reporting in Canada. Since stock-based compensation is a non-deductible expense and a permanent difference, our future effective rate in Canada is affected by the level of stock-based compensation incurred in a particular period. We expect that during 2010, our Canadian statutory rate will approximate 30.0%. However, as a result of stock-based compensation and other permanent items, our effective rate is expected to approximate 32.0% to 34.0%. For the year ended December 31, 2009, we paid C$6.5 million in cash relative to our actual 2008 and estimated 2009 tax liabilities in Canada. We expect our 2010 estimated tax payments to approximate C$1.6 million in the first quarter and C$0.6 million for the second, third and fourth quarters. Included in our provision for income taxes for our Canadian operations for 2009 is a C$1.2 million benefit, which relates to the release of the valuation allowance on the non-capital loss carryforwards of our subsidiary, Capital Environmental Holdings Company (“Holdings”), that were fully utilized by December 31, 2009 as a result of the amalgamation of Holdings and its wholly-owned subsidiary, Waste Services (CA) Inc. The amalgamation transaction was completed during the third quarter of 2009.

For 2008, the provision for income taxes from continuing operations was comprised of a $3.0 million benefit for our U.S. operations and parent company and a $9.2 million provision for our Canadian operations. However, as a result of the gain of $18.4 million on the sale of our Jacksonville, Florida operations in 2008, we have benefited $7.5 million of our previously fully reserved deferred tax assets for net operating loss carryforwards and reversed $2.6 million of excess deferred tax liabilities related to goodwill.

 

For 2007, the provision for income taxes was comprised of a $5.2 million provision for our U.S. operations and parent company and a $9.2 million provision for our Canadian operations. The domestic provision was lower than would be expected as the sale of our Arizona operations during the first quarter of 2007 generated a reversal of excess deferred tax liabilities of approximately $1.8 million.

 

The income tax provision from discontinued operations for the year ended December 31, 2008 was $0.3 million. The income tax provision for the gain on sale of the Jacksonville, Florida operations was $7.3 million for the year ended December 31, 2008. Due to losses in 2007, no tax benefit was attributable to discontinued operations for the year ended December 31, 2007. The income tax provision for discontinued operations is based on our statutory tax rate for those operations.

 

As of December 31, 2009, we have approximately $59.1 million of gross domestic net operating loss carry-forwards that expire from 2023 to 2029. As of December 31, 2009, we have foreign tax credit carry-forwards of approximately $14.6 million that expire in 2018 and 2019. As of December 31, 2009, we also have a C$27.0 million capital loss carry-forward at Waste Services (CA) Inc. (“WSI (CA)”) that has no expiration, but would no longer be available following a change of control. Due to the fact that we do not expect to generate capital gains at WSI (CA), we have provided a full valuation allowance against the capital loss carry-forward. Changes in our ownership structure in the future could result in limitations on the utilization of our loss carry-forwards, as imposed by Section 382 of the U.S. Internal Revenue Code.

 

Liquidity and Capital Resources

 

Our principal capital requirements are to fund capital expenditures, and to fund debt service and asset acquisitions. Significant sources of liquidity are cash on hand and from operations, working capital, borrowings from our Senior Secured Credit Facilities and proceeds from debt and/or equity issuances. We believe that our sources of liquidity will be sufficient to meet our requirements for the next 12 months. The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere herein.

 

The change in control contemplated by the merger with IESI-BFC would result in a default under the terms of our Senior Secured Credit Facilities and accordingly, IESI-BFC would be required to refinance these facilities in connection with the merger. Additionally, we would be required to offer to redeem the Senior Subordinated Notes for a price of 101% of the principal amount outstanding. There is however no assurance that IESI-BFC will be able refinance this indebtedness.

 

Senior Secured Credit Facilities

 

On October 8, 2008 we refinanced our Senior Secured Credit Facilities with new Senior Secured Credit Facilities (the “Credit Facilities”) with a consortium of new lenders. The Credit Facilities provide for a revolving credit facility of $124.8 million, which is available to our U.S. operations or our Canadian operations, in U.S. or Canadian dollars, and C$16.3 million, which is available to our Canadian operations. The new Credit Facilities also provide for term loans with initial principal balances of $39.9 million to our U.S. operations and C$132.2 million to our Canadian operations. The revolver commitments terminate on October 8, 2013 and the term loans mature in specified quarterly installments through October 8, 2013. The Credit Facilities are available to us as base rate loans, Eurodollar loans or Bankers Acceptance loans, plus an applicable margin, as defined, at our option in the respective lending jurisdiction. The Credit Facilities are secured by all of our assets, including those of our domestic and foreign subsidiaries, and are guaranteed by all of our domestic and foreign subsidiaries. As of December 31, 2009, there was $30.0 million and C$6.0 million outstanding on the U.S. dollar denominated revolving credit facility and Canadian dollar denominated revolving credit facility, respectively, and $11.6 million and C$9.9 million of revolver capacity was used to support outstanding letters of credit in the U.S. and Canada, respectively. As of December 31,

2009, we had unused availability of $83.7 million under our revolving credit facilities, subject to certain conditions. As of February 22, 2010, there was $30.0 million and C$12.0 million drawn on the revolving credit facility and $11.6 million and C$10.7 million of revolver capacity was used to support outstanding letters of credit in the U.S. and Canada, respectively. As of February 22, 2010, we had unused availability of $77.1 million under our revolving credit facilities, subject to certain conditions.

 

Our Credit Facilities contain certain financial and other covenants that restrict our ability to, among other things, make capital expenditures, incur indebtedness, incur liens, dispose of property, repay debt, pay dividends, repurchase shares and make certain acquisitions. Our financial covenants include: (i) maximum total leverage; (ii) maximum senior secured leverage; and (iii) minimum interest coverage. The covenants and restrictions limit the manner in which we conduct our operations and could adversely affect our ability to raise additional capital. The following table sets forth our financial covenant levels for the current and each of the following four quarters:

 

 

As of December 31, 2009, the actual ratios achieved for the financial covenants in the above table are as follows: Maximum Consolidated Leverage Ratio — 3.62 to 1.00; Maximum Consolidated Senior Secured Leverage Ratio — 1.73 to 1.00; and Minimum Consolidated Interest Coverage Ratio — 3.96 to 1.00. As of December 31, 2009, we are in compliance with the financial covenants of our Credit Facilities and we expect to be in compliance with the financial covenants of our Credit Facilities in future periods.

 

Our Senior Secured Credit Facilities outstanding prior to the October 2008 refinancing (the “Prior Credit Facilities”) were governed by our Second Amended and Restated Credit Agreement, entered into on December 28, 2006, as amended, with Lehman Brothers Inc. as Arranger and the other lenders named in the Prior Credit Facilities. The Prior Credit Facilities consisted of a revolving credit facility in the amount of $65.0 million, of which $45.0 million was available to our U.S. operations and $20.0 million to our Canadian operations, and a term loan facility in the amount of $231.4 million. The revolver commitments were scheduled to terminate on April 30, 2009 and the term loans matured in specified quarterly installments through March 31, 2011. In March 2008, we used $42.5 million of proceeds from the sale of our Jacksonville, Florida operations to reduce principal amounts outstanding under the term loan facility.

 

Direct Financing Lease Facility

 

In November 2009, we entered into a direct financing lease facility to finance our fleet purchases in Florida. We have availability under this lease facility through June 2010 of up to $6.2 million, and leases can extend for five or six years. Vehicles purchased under the facility would be ineligible for tax deprecation deductions. Leases under the facility will be treated as a capital lease and considered as secured debt for purposes of our Credit Facilities. As of February 22, 2010 the facility remains undrawn.

 

Senior Subordinated Notes

 

On April 30, 2004, we completed a private offering of 91/2% Senior Subordinated Notes (“Senior Subordinated Notes”) due 2014 for gross proceeds of $160.0 million. On September 21, 2009 we completed an additional private placement of $50.0 million aggregate principal of our Senior Subordinated Notes, with terms identical to the initial offering. This additional private placement resulted in gross proceeds of $49.5 million with an additional $2.1 million received from the purchasers for accrued interest. The Senior Subordinated Notes mature on April 15, 2014. Interest on the Senior Subordinated Notes is payable semiannually on October 15 and April 15. The Senior Subordinated Notes are redeemable, in whole or in part, at our option, on or after April 15, 2009, at a redemption

price of 104.75% of the principal amount, declining ratably in annual increments to par on or after April 15, 2012, together with accrued interest to the redemption date. Upon a change of control, as such term is defined in the Indenture, we are required to offer to repurchase all the Senior Subordinated Notes at 101.0% of the principal amount, together with accrued interest and liquidated damages, if any, and obtain the consent of our senior lenders to such payment or repay indebtedness under our Credit Facilities.

 

The Senior Subordinated Notes are unsecured and are subordinate to our existing and future senior secured indebtedness, including our Senior Secured Credit Facilities, rank equally with any unsecured senior subordinated indebtedness and senior to our existing and future subordinated indebtedness. Our obligations with respect to the Senior Subordinated Notes, including principal, interest, premium, if any, and liquidated damages, if any, are fully and unconditionally guaranteed on an unsecured, senior subordinated basis by all of our existing and future domestic and foreign restricted subsidiaries.

 

Prior to the October 2008 restructuring of our Senior Secured Credit Facilities, our Canadian operations were not guarantors under the Senior Subordinated Notes. Simultaneously with entering into our new Credit Facilities in October 2008, certain amendments to the governing Indenture to the Senior Subordinated Notes became operative. These amendments enabled our Canadian subsidiaries, upon becoming guarantors of the Senior Subordinated Notes, to incur indebtedness to the same extent as other guarantors of the notes and allowed for the refinancing of our Senior Secured Credit Facilities. Following the amendments to the Indenture, our obligations with respect to the Senior Subordinated Notes, including principal, interest, premium, if any, and liquidated damages, if any, are fully and unconditionally guaranteed on an unsecured, senior subordinated basis by all of our existing and future domestic and foreign restricted subsidiaries.

 

The Senior Subordinated Notes contain certain covenants that, in certain circumstances and subject to certain limitations and qualifications, restrict, among other things: (i) the incurrence of additional debt; (ii) the payment of dividends and repurchases of stock; (iii) the issuance of preferred stock and the issuance of stock of our subsidiaries; (iv) certain investments; (v) transactions with affiliates; and (vi) certain sales of assets. The indenture relating to our Senior Subordinated Notes contains cross default provisions (i) should we fail to pay the principal amount of other indebtedness when due (after applicable grace periods) or the maturity date of that indebtedness is accelerated and the amount in question is $10.0 million or more or (ii) should we fail to pay judgments in excess of $10.0 million in the aggregate for more than 60 days.

 

Migration Transaction

 

Effective July 31, 2004, we entered into a migration transaction by which our corporate structure was reorganized so that Waste Services, Inc. became the ultimate parent company of our corporate group. Prior to the migration transaction, we were a subsidiary of Waste Services (CA) Inc. After the migration transaction, Waste Services (CA) Inc. became our subsidiary.

 

The migration transaction occurred by way of a plan of arrangement under the Business Corporations Act (Ontario) and consisted primarily of: (i) the exchange of 29,219,011 common shares of Waste Services (CA) Inc. for 29,219,011 shares of our common stock; and (ii) the conversion of the remaining 3,076,558 common shares of Waste Services (CA) Inc. held by non-U.S. residents and who elected to receive exchangeable shares, into 9,229,676 exchangeable shares of Waste Services (CA) Inc., exchangeable into 3,076,558 shares of our common stock. The transaction was approved by the Ontario Superior Court of Justice on July 30, 2004 and by our shareholders at a special meeting held on July 27, 2004.

 

The terms of the exchangeable shares of Waste Services (CA) Inc. were the economic and functional equivalent of our common stock. Holders of exchangeable shares (i) were entitled to receive the same dividends as holders of shares of our common stock and (ii) were entitled to vote on the same matters as holders of shares of our common stock. Such voting was accomplished through the one share of Special Voting Preferred Stock held by Computershare Trust Company of Canada as trustee, who voted on the instructions of the holders of the exchangeable shares (one-third of one vote for each exchangeable share). Holders of exchangeable shares also had the right to exchange their exchangeable shares for shares of our common stock on the basis of one-third of a share of our common stock for each one exchangeable share. Upon the occurrence of certain events, such as the liquidation of Waste Services (CA) Inc., or after the redemption date, our Canadian holding company, Capital

Environmental Holdings Company had the right to purchase each exchangeable share for one-third of one share of our common stock, plus all declared and unpaid dividends on the exchangeable share and payment for any fractional shares.

 

During the second quarter of 2009, all remaining exchangeable shares of Waste Services (CA) Inc. not owned by affiliates were exchanged for shares of our common stock.

 

Surety Bonds, Letters of Credit and Insurance

 

Municipal solid waste services contracts and permits and licenses to operate transfer stations, landfills and recycling facilities may require performance or surety bonds, letters of credit or other means of financial assurance to secure contractual performance. As of December 31, 2009, we provided customers, various regulatory authorities and our insurer with such bonds and letters of credit amounting to approximately $80.9 million to collateralize our obligations, which is comprised of $47.2 million and C$13.3 million of performance and surety bonds or other means of financial assurance and $11.6 million and C$9.9 million of letters of credit. The majority of these obligations are renewed on an annual basis. We expect future increases in these levels of financial assurance relative to our closure and post closure obligations as we utilize capacity at our landfills.

 

Our domestic based workers’ compensation, automobile and general liability insurance coverage is subject to certain deductible limits. We retain up to $0.5 million and $0.25 million of risk per claim, plus claims handling expense under our workers’ compensation and our auto and general liability insurance programs, respectively. Claims in excess of such deductible levels are fully insured subject to our policy limits. However, we have a limited claims history for our U.S. operations and it is reasonably possible that recorded reserves may not be adequate to cover future payments of claims. Adjustments, if any, to our reserves will be reflected in the period in which the adjustments are known. As of December 31, 2009 and included in the $80.9 million of bonds and letters of credit discussed previously, we have posted a letter of credit with our U.S. insurer of approximately $10.9 million to secure the liability for losses within the deductible limit. Provisions for retained claims are made by charges to expense based on periodic evaluations by management of the estimated ultimate liabilities on both reported and incurred but not reported claims. Adjustments, if any, to the estimated reserves resulting from ultimate claim payments will be reflected in operations in the periods in which such adjustments become known.

 

Registration Payment Arrangement

 

In connection with the additional private placement of Senior Subordinated Notes completed on September 21, 2009, we entered into a Registration Rights Agreement with the initial purchasers of these notes in which we agreed to (i) file a registration statement with respect to the Senior Subordinated Notes within 120 days of the closing date of the issuance of the notes, or the issuance date, pursuant to which we will exchange the Senior Subordinated Notes for registered notes with terms identical to the Senior Subordinated Notes; (ii) have such registration statement declared effective within 210 days of the closing date; (iii) maintain the effectiveness of such registration statement for minimum periods specified in the agreement; and (iv) file a shelf registration statement in the circumstances and within the time periods specified in the agreement. If we do not comply with these obligations, we will be required to pay liquidated damages, in cash, in an amount equal to $0.05 per week per $1,000 in principal amount of the unregistered Senior Subordinated Notes for each week that the default continues, for the first 90-days following default. Thereafter, the amount of liquidated damages will increase by an additional $0.05 per week per $1,000 in principal amount of unregistered Senior Subordinated Notes for each subsequent 90-day period until all defaults have been cured, to a maximum of $0.50 per week per $1,000 in principal amount of unregistered Senior Subordinated Notes outstanding. Liquidated damages, if any, are payable at the same time as interest payments due under the Senior Subordinated Notes. As of the date of this annual report, we expect to be subject to penalty payments under this Registration Rights Agreement, and have accrued $0.1 million for such penalties as of December 31, 2009.

 

Cash Flows

 

The following discussion relates to the major components of the changes in cash flows for the years ended December 31, 2009, 2008 and 2007.

Cash Flows from Operating Activities

 

Cash provided by operating activities of our continuing operations was $64.4 million and $56.1 million for the year ended December 31, 2009 and 2008, respectively. The increase in cash provided by operating activities is primarily due to lower borrowing costs, which relate to lower variable interest rates on our Senior Secured Credit Facilities during 2009 compared to 2008, lower overall overhead costs, decreased taxes relative to our Canadian operations and improved operating margins. Cash used for working capital decreased to $4.9 million for 2009 compared to $8.4 million for 2008. For 2009, cash for working capital changes primarily relates to payments made relative to certain accrued expenses, including closure and post closure accruals, restructuring and severance accruals and disposal accruals. For 2008, cash for working capital changes primarily relates to taxes paid for our Canadian operations.

 

Cash provided by operating activities of our continuing operations was $56.1 million and $54.7 million for the years ended December 31, 2008 and 2007, respectively. The increase in cash provided by operating activities was primarily due to increased cash from operations before working capital changes of $64.4 million for 2008 compared to $55.5 million for 2007, which primarily related to increased profitability of our operations. This increase was offset by investments in working capital of $8.4 million for 2008 compared to $0.9 million for 2007. The primary component of the decline in accrued expenses and payables during 2008 related to cash taxes paid for our Canadian operations.

 

Cash flows from our discontinued operations are disclosed separately on the Consolidated Statements of Cash Flows included elsewhere in this annual report. Following the conclusion of the sales of our Jacksonville, Florida operations, Texas operations and Arizona operations, we are no longer impacted by these cash flows and do not anticipate any subsequent adverse affect on our future liquidity or financial covenants.

 

Cash Flows from Investing Activities

 

Cash used in investing activities of our continuing operations was $74.9 million and $3.1 million for the years ended December 31, 2009 and 2008, respectively. For the year ended December 31, 2009, cash used in investing activities relates to business combinations of $50.5 million and capital expenditures of $32.2 million, offset by proceeds from the sale of property and equipment, primarily from the sale of the Jacksonville real property, of $8.4 million. For the year ended December 31, 2008, cash used in investing activities relates to capital expenditures of $48.1 million and cash paid for business combinations of $11.7 million, offset by proceeds from asset sales and business divestitures, primarily related to the disposal of our Jacksonville, Florida operations, of $58.2 million.

 

Cash used in investing activities of our continuing operations was $3.1 million and $79.6 million for the years ended December 31, 2008 and 2007, respectively. For the year ended December 31, 2008, cash used in investing activities related to capital expenditures of $48.1 million, cash used for the acquisitions of the RIP Landfill and Commercial Clean-up of $11.7 million and deposits for business acquisitions and other investing activities of $1.6 million. Offsetting these cash outflows was $58.2 million of proceeds from asset sales and business divestitures, which primarily related to the disposal of our Jacksonville, Florida operations. For the year ended December 31, 2007, cash used in investing activities related to capital expenditures of $57.6 million, cash used for acquisitions of $32.1 million and deposits for business acquisitions and other investing activities of $9.8 million. Offsetting these cash outflows was $19.9 million of proceeds from asset sales and business divestitures, which primarily related to the disposal of our Texas operations.

 

Cash Flows from Financing Activities

 

Cash provided by (used in) financing activities of our continuing operations was $5.0 million and $(67.5) million for the years ended December 31, 2009 and 2008, respectively. Cash used in financing activities for the year ended December 31, 2009 primarily relates to principal repayments of our Credit Facilities, offset by an additional private placement of $50.0 million aggregate principal of our Senior Subordinated Notes, which we completed on September 21, 2009 and resulted in gross proceeds of $49.5 million. Cash used in financing activities for 2008 primarily related to a $42.5 million prepayment of our Prior Credit Facilities from a portion of the proceeds from the sale of our Jacksonville, Florida operations.

Cash provided by (used in) financing activities of our continuing operations was $(67.5) million and $33.6 million for the years ended December 31, 2008 and 2007, respectively. Cash used in financing activities for the year ended December 31, 2008 primarily related to the October 2008 refinancing of our Senior Secured Credit Facilities and a prepayment of our Prior Credit Facilities with a portion of the proceeds from the sale of our Jacksonville, Florida operations. For 2008, our new Credit Facilities provided proceeds, net of discounts, of $217.2 million. Cash provided by financing activities for the year ended December 31, 2007 primarily relates to draws on our Prior Credit Facilities to finance the acquisition of Allied Waste’s South Florida operations and other acquisition related deposits.

 

New Accounting Pronouncements

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures” (“ASU 2010-06”). ASU 2010-06 requires new disclosures for (i) transfers of assets and liabilities in and out of levels one and two fair value measurements, including a description of the reasons for such transfers and (ii) additional information in the reconciliation for fair value measurements using significant unobservable inputs (level three). This guidance also clarifies existing disclosure requirements including (i) the level of disaggregation used when providing fair value measurement disclosures for each class of assets and liabilities and (ii) the requirement to provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for level two and three assets and liabilities. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about activity in the roll forward for level three fair value measurements, which is effective for fiscal years beginning after December 15, 2010. We do not anticipate that the adoption of this guidance will have a material impact on our financial position and results of operations.

 

In June 2009, the FASB issued guidance for determining the primary beneficiary of a variable interest entity (“VIE”). In December 2009, the FASB issued ASU 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities” (“ASU 2009-17”). ASU 2009-17 provides amendments to ASC 810 to reflect the revised guidance. The amendments in ASU 2009-17 replace the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a VIE with an approach focused on identifying which reporting entity has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (i) the obligation to absorb losses of the entity or (ii) the right to receive benefits from the entity. The amendments in ASU 2009-17 also require additional disclosures about a reporting entity’s involvement with VIEs. ASU 2009-17 is effective for annual reporting periods beginning after November 15, 2009. We do not anticipate that the adoption of this guidance will have a material impact on our financial position and results of operations.

 

In June 2009, the FASB issued guidance that seeks to improve the relevance and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. Specifically, this guidance eliminates the concept of a qualifying special-purpose entity, creates more stringent conditions for reporting a transfer of a portion of a financial asset as a sale, clarifies other sale-accounting criteria, and changes the initial measurement of a transferor’s interest in transferred financial assets. This guidance is effective for annual reporting periods beginning after November 15, 2009. We do not anticipate that the adoption of this guidance will have a material impact on our financial position and results of operations.

 

Effective January 1, 2009 we adopted a new accounting standard that provides guidance for determining whether an instrument or embedded feature is indexed to an entity’s own stock. Details related to our adoption of this standard and its impact on our financial position and results of operations are discussed in more detail elsewhere in this Management’s Discussion and Analysis of Financial Condition and Results of Operations and in the accompanying Consolidated Financial Statements.

 

Seasonality

 

We expect the results of our Canadian operations to vary seasonally, with revenue typically lowest in the first quarter of the year, higher in the second and third quarters, and lower in the fourth quarter than in the third quarter. This

seasonality is attributable to a number of factors. First, less solid waste is generated during the late fall, winter and early spring because of decreased construction and demolition activity. Second, certain operating costs are higher in the winter months because winter weather conditions slow waste collection activities, resulting in higher labor costs, and rain and snow increase the weight of collected waste, resulting in higher disposal costs, which are calculated on a per tonne basis. Also, during the summer months, there are more tourists and part-time residents in some of our service areas, resulting in more residential and commercial collection. Consequently, we expect operating income to be generally lower during the winter. The effect of seasonality on our results of operations from our U.S. operations, which are located in warmer climates than our Canadian operations, is less significant than on our Canadian operations.

 

Off-Balance Sheet Financing

 

We have no off-balance sheet debt or similar obligations, other than our letters of credit and performance and surety bonds discussed previously, which are not debt. We have no transactions or obligations with related parties that are not disclosed, consolidated into or reflected in our reported results of operations or financial position. We do not guarantee any third-party debt.

 

In connection with negotiations between David Sutherland-Yoest, our President and Chief Executive Officer and Lucien Rémillard, a director, with respect to our potential acquisition of the RCI Companies, a solid waste collection and disposal operation owned by Mr. Rémillard in Quebec, Canada, on November 22, 2002, we entered into a seven year put or pay Disposal Agreement (“Disposal Agreement”) with the RCI Companies, and Intersan, a subsidiary of Waste Management, Inc. (“Waste Management”). Our obligations to Intersan were secured by a letter of credit for C$4.0 million. The Disposal Agreement expired on November 22, 2009. Prior to its expiration on November 16, 2009, Waste Management demanded that the letter of credit be replaced with a letter of credit in the amount of C$7.5 million or that all outstanding balances on RCI’s disposal account, or approximately C$6.6 million, be paid in full. We took the position with Waste Management that there was no default entitling them to draw on the letter of credit. However, on November 18, 2009, Waste Management drew down the sum of C$4.0 million on the letter of credit. Waste Management had repaid all but C$1.7 million of the amount drawn on the letter of credit as of December 31, 2009, which was subsequently paid in the first quarter of 2010. The annual cost to us of maintaining the letter of credit was approximately $0.1 million. We do not expect to incur any future costs for this agreement since the agreement expired and there are no longer any further obligations.

 

Tabular Disclosure of Contractual Obligations

 

We have various commitments primarily related to funding of debt, closure and post-closure obligations and capital and operating lease commitments. You should also read our discussion regarding “Liquidity and Capital Resources” earlier in this Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of

Operations”. The following table provides details regarding our contractual cash obligations and other commercial commitments subsequent to December 31, 2009 (in thousands):

 

 

 

 

Other Contractual Arrangements

 

From time to time and in the ordinary course of business, we may enter into certain acquisitions of disposal facilities whereby we also enter into a royalty agreement. These agreements are usually based on the amount of waste deposited at our landfill sites or in certain instances, our transfer stations. Royalties are expensed as incurred and recognized as a cost of operations.

 

In the normal course of our business, we have other commitments and contingencies relating to environmental and legal matters. For a further discussion of commitments and contingencies, see our Consolidated Financial

Statements contained elsewhere in this annual report. In addition certain of our executives are retained under employment agreements. These employment agreements vary in term and related benefits. Refer to Item 11 — “Executive Compensation” for a more detailed discussion of these employment agreements.

 

 

A portion of our operations is domiciled in Canada. For each reporting period we translate the results of operations and financial condition of our Canadian operations into U.S. dollars. Therefore, the reported results of our operations and financial condition are subject to changes in the exchange relationship between the two currencies. For example, as the Canadian dollar strengthens against the U.S. dollar, revenue is favorably affected and conversely expenses are unfavorably affected. Assets and liabilities of our Canadian operations are translated from Canadian dollars into U.S. dollars at the exchange rates in effect at the relevant balance sheet dates, and revenue and expenses of our Canadian operations are translated from Canadian dollars into U.S. dollars at the average exchange rates prevailing during the period. Unrealized gains and losses on translation of our Canadian operations into U.S. dollars are reported as a separate component of shareholders’ equity and are included in comprehensive income or loss. Monetary assets and liabilities are re-measured from U.S. dollars into Canadian dollars and then translated into U.S. dollars. The effects of re-measurement are reported currently as a component of net income. Currently, we do not hedge our exposure to changes in foreign exchange rates. For the years ended December 31, 2009 and 2008 we estimate that a 10.0% increase or decrease in the relationship of the Canadian dollar to the U.S. dollar would increase or decrease operating profit from our Canadian operations by $3.0 million and $2.9 million, respectively.

 

On October 8, 2008, we refinanced our Prior Credit Facilities with new Senior Secured Credit Facilities (the “Credit Facilities”) with a consortium of new lenders. A portion of the Credit Facilities is denominated and payable in Canadian dollars, which totaled $118.9 million as of December 31, 2009. We estimate that a 10.0% increase or decrease in the relationship of the Canadian dollar to the U.S. dollar as of December 31, 2009 would increase or decrease the reported amount due under the Credit Facilities by approximately $11.9 million. We estimate that a 10.0% increase or decrease in the relationship of the Canadian dollar to the U.S. dollar would increase or decrease interest expense by approximately $0.6 million for 2009.

 

We are exposed to variable interest rates under our Credit Facilities, which are available to us as base rate loans, Eurodollar loans or Bankers Acceptance loans, plus an applicable margin, as defined, at our option in the respective lending jurisdiction. As of December 31, 2009, a 10.0% change in interest rates relative to our Credit Facilities would increase or decrease annual cash interest expense by approximately $0.7 million. We determined this impact by applying the change to the weighted average variable interest rate at December 31, 2009 and then assessing this notional rate against the borrowings outstanding as of December 31, 2009.

 

 

All financial statements and supplementary data that are required by this Item are listed in Part IV, Item 15 of this annual report and are presented beginning on Page F-1.

 

 

Not Applicable

 

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported accurately within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures are also designed to provide reasonable assurance that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure. As of the end of the period covered by this report, an evaluation was