<PAGE> 1
FILED PURSUANT TO RULE 424(b)(3)
FILE NO. 333-65615
3,000,000 SHARES
[LOGO]
COMMON STOCK
This Prospectus relates to the offer and sale by Waste Connections, Inc. of
shares of its Common Stock at various times as consideration for the Company's
acquisition of solid waste collection, transportation, disposal and recycling
businesses. The prices of these shares will be reasonably related to the Common
Stock's market prices when the parties agree to an acquisition or when the
Company delivers the shares. Each time the Company sells shares under this
Prospectus, it will provide a supplement (a "Prospectus Supplement") or a
post-effective amendment (a "Post-Effective Amendment") to this Prospectus,
which will specify the number of shares issued and the issue price per share,
and update the information in this Prospectus.
On October 9, 1998, the Company had 9,256,378 shares of Common Stock
outstanding. The Company's Common Stock is traded on the Nasdaq National Market
(symbol: WCNX). On October 9, 1998, the last sale price of the Common Stock on
the Nasdaq National Market was $17.5625 per share.
The Company's executive offices are located at 2260 Douglas Boulevard, Suite
280, Roseville, California 95661, and its telephone number is (916) 772-2221.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS THAT
PROSPECTIVE INVESTORS IN COMMON STOCK SHOULD CONSIDER.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED WHETHER
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is October 20, 1998.
<PAGE> 2
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-4 (the "Registration
Statement"). This Prospectus, which forms a part of the Registration Statement,
omits some of the information included in the Registration Statement. You should
refer to the Registration Statement and its exhibits for further information.
The Company files annual, quarterly and special reports, proxy statements and
other information with the Commission. You may read and copy the Registration
Statement and any reports, statements or other information on file at the
Commission's public reference rooms in Washington, D.C., Chicago, Illinois and
New York, New York. Please call the Commission at 1-800-732-0330 for further
information on the public reference rooms. You can also request copies of those
documents by writing to the Commission; you will be charged a duplicating fee.
The Company's Commission filings are also available to the public from
commercial document retrieval services and at the web site the Commission
maintains at "http://www.sec.gov." The Company's Common Stock is listed on the
Nasdaq National Market, and you may also inspect and copy the Company's
Commission filings at the offices of the National Association of Securities
Dealers, Inc., located at 1735 K Street, N.W., Washington, D.C. 20549.
2
<PAGE> 3
PROSPECTUS SUMMARY
This summary highlights some information from this Prospectus. It may not
contain all of the information that is important to you. To understand this
offering fully, you should read the entire Prospectus carefully, including the
risk factors and the financial statements. Unless otherwise specified, all
references to the "Company" or "Waste Connections" mean Waste Connections, Inc.
and its subsidiaries, and all references to "solid waste" mean non-hazardous
solid waste.
THE COMPANY
Waste Connections is a regional, integrated solid waste services company that
provides solid waste collection, transfer, disposal and recycling services in
secondary markets of the Western U.S. As of October 1, 1998, the Company served
more than 200,000 commercial, industrial and residential customers in
California, Idaho, Nebraska, Oklahoma, Oregon, South Dakota, Utah, Washington
and Wyoming. The Company currently owns and operates 22 collection operations,
five transfer stations and one Subtitle D landfill, and operates an additional
five transfer stations, one Subtitle D landfill and three recycling facilities.
See "Business -- Introduction" and "-- Services."
Waste Connections was founded in September 1997 to execute an acquisition-based
growth strategy in secondary markets of the Western U.S. The Company has
acquired 31 solid waste services related businesses since its formation. It has
identified more than 300 independent operators of such businesses in the states
where it currently operates and believes many of those may be suitable for the
Company to acquire. The Company is also currently assessing potential
acquisitions of solid waste services operations in Colorado, Kansas, Montana and
Texas. See "Business -- Acquisition Program."
The Company has targeted secondary markets in the Western U.S. because it
believes that (i) a large number of independent solid waste services companies
suitable for acquisition by the Company are located in these markets; (ii) there
is less competition in these markets from large, well-capitalized solid waste
services companies; and (iii) these markets have strong projected economic and
population growth rates. In addition, the Company's senior management team has
extensive experience acquiring and operating solid waste services businesses in
the Western U.S.
The Company has developed a market-based operating strategy tailored to the
competitive and regulatory factors that affect its markets. In certain Western
U.S. markets, where waste collection services are governed by exclusive
franchise agreements, municipal contracts and governmental certificates
(referred to in Washington as "G certificates"), the Company generally intends
to pursue a collection-based operating strategy. In these markets, the Company
believes that controlling the waste stream by providing collection services
under exclusive franchise agreements, municipal contracts and governmental
certificates is often more important to a solid waste services company's growth
and profitability than owning or operating landfills. In markets where the
Company considers ownership of landfills advantageous due to competitive and
regulatory factors, the Company generally intends to pursue an integrated,
disposal-based strategy. See "Business -- Strategy."
The Company's objective is to build a leading solid waste services company in
the secondary markets of the Western U.S. by (i) acquiring collection, transfer,
disposal and
3
<PAGE> 4
recycling operations in new markets and through "tuck-in" acquisitions in
existing markets; (ii) securing additional exclusive franchises, municipal
contracts and governmental certificates; (iii) generating internal growth in
existing markets by increasing market penetration and adding services to its
existing operations; and (iv) enhancing profitability by increasing operating
efficiencies of existing and acquired operations. The Company believes that the
experience of the members of its senior management team and their knowledge of
and reputation in the solid waste industry in the Company's targeted markets
will give the Company competitive advantages as it pursues its growth strategy.
See "Business -- Strategy."
The Company was incorporated in Delaware in 1997. Its principal executive
offices are located at 2260 Douglas Boulevard, Suite 280, Roseville, California
95661, and its telephone number is (916) 772-2221.
RECENT DEVELOPMENTS SINCE MAY 1998 INITIAL PUBLIC OFFERING
RECENT ACQUISITIONS
From its initial public offering in May 1998 to October 1, 1998, the Company
acquired 21 solid waste services businesses, including 21 collection operations,
one Subtitle D landfill, seven transfer stations and two recycling operations
representing approximately $32 million in annual revenue. These acquisitions
took the Company into five new markets in four new states: Nebraska, Oklahoma,
Oregon and Utah. The acquired businesses included "tuck in" acquisitions in
pre-existing markets, new market entries and "tuck in" acquisitions in the new
markets.
EXPANDED CREDIT FACILITY
On May 29, 1998, the Company entered into a new credit facility with a syndicate
of banks led by BankBoston, N.A., which among other things, increased the
Company's borrowing capacity from $25.0 million to $60.0 million, modified
certain covenants and lowered the Company's overall borrowing costs. As of
September 30, 1998, the aggregate outstanding principal indebtedness under the
credit facility was approximately $37.6 million.
On September 16, 1998, the Company received a preliminary letter of commitment
to amend and increase its credit facility with a syndicate of banks led by
BankBoston, N.A. The amendment will, among other things, increase the Company's
borrowing capacity from $60.0 million to $120.0 million and modify certain
covenants and may lower borrowing costs.
4
<PAGE> 5
WASTE CONNECTIONS, INC.
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION PRO FORMA SIX MONTHS ENDED
(SEPTEMBER 9, 1997) YEAR ENDED JUNE 30, 1998
THROUGH DECEMBER 31, -------------------------
DECEMBER 31, 1997 1997(1) ACTUAL PRO FORMA(1)
------------------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................ $ 6,237 $ 45,301 $ 18,520 $ 25,144
Cost of operations.............. 4,703 33,875 12,830 17,342
Selling, general and
administrative................ 619 5,043 1,868 2,564
Depreciation and amortization... 354 2,984 1,359 1,877
Start-up and integration........ 493 493 -- --
Stock compensation.............. 4,395 4,395 441 441
---------- ---------- ---------- ----------
Income (loss) from operations... (4,327) (1,489) 2,022 2,920
Interest expense................ (1,035) (3,527) (731) (1,631)
Other income (expense), net..... (36) 208 -- 29
---------- ---------- ---------- ----------
Income (loss) before income
taxes......................... (5,398) (4,808) 1,291 1,318
Income tax (provision)
benefit....................... 332 20 (717) (669)
---------- ---------- ---------- ----------
Net income (loss) before
extraordinary Item............ (5,066) (4,788) 573 649
Extraordinary item -- early
Extinguishment of debt, net of
income tax benefit of $165.... -- -- (815) (815)
---------- ---------- ---------- ----------
Net loss........................ $ (5,066) $ (4,788) $ (242) $ (166)
========== ========== ========== ==========
Redeemable convertible preferred
stock Accretion............... (531) (531) (917) (917)
---------- ---------- ---------- ----------
Net loss applicable to common
Stockholders.................. $ (5,597) $ (5,319) $ (1,159) $ (1,083)
========== ========== ========== ==========
Basic loss per common share:
Loss before extraordinary
item....................... $ (2.99) $ (2.03) $ (0.09) $ (0.06)
Extraordinary item............ -- -- (0.22) (0.18)
---------- ---------- ---------- ----------
Net loss per common share....... $ (2.99) $ (2.03) $ (0.31) $ (0.24)
========== ========== ========== ==========
Shares used in calculating basic
net loss per share............ 1,872,567 2,623,883 3,714,027 4,449,905
Pro forma basic net loss per
share(2)...................... $ (1.16) $ (0.04)
========== ==========
Shares used in calculating pro
forma basic net loss per
share......................... 4,372,565 6,397,359
Pro forma diluted net loss per
share(2)...................... $ (0.03)
==========
Shares used in calculating pro
forma diluted net loss per
share......................... 7,749,050
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
JUNE 30, 1998
DECEMBER 31, ----------------------
1997 ACTUAL PRO FORMA(3)
------------ ------- ------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................................. $ 820 $ 3,243 $ 3,585
Working capital.................................. 836 882 2,123
Property and equipment, net...................... 4,185 14,595 16,960
Total assets..................................... 18,880 79,448 100,256
Long-term debt(4)................................ 6,762 23,152 33,399
Redeemable convertible preferred stock........... 7,523 -- --
Total stockholders' equity (deficit)............. (551) 45,400 55,397
</TABLE>
- ---------------
(1) Assumes the Company's acquisitions of Shrader Refuse and Recycling Service
Company ("Shrader"), Arrow Sanitary Service, Inc. ("Arrow"), Madera Disposal
Systems, Inc. ("Madera") and the Company's predecessors occurred on January
1, 1997. See "Unaudited Pro Forma Financial Statements."
(2) Adjusted to reflect the conversion of all outstanding shares of redeemable
convertible Preferred Stock for the period from inception (September 9,
1997) through December 31, 1997, and the conversion of redeemable
convertible Preferred Stock and all outstanding shares of redeemable Common
Stock for the six months ended June 30, 1998, as if such conversions had
occurred as of the first day of each of the periods presented. See Note 11
of Notes to the Company's Financial Statements for an explanation of the pro
forma historical per share calculations.
(3) Assumes the Company's acquisition of Shrader occurred on June 30, 1998.
(4) Excludes redeemable convertible Preferred Stock.
6
<PAGE> 7
RISK FACTORS
You should carefully consider the following factors and other information in
this Prospectus before purchasing the shares of Common Stock offered by this
Prospectus. This Prospectus contains certain forward-looking statements that
involve risks and uncertainties. Discussions containing such forward-looking
statements are found in the material set forth under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as in the Prospectus generally.
The cautionary statements contained in this Prospectus apply to all related
forward-looking statements wherever they appear in this Prospectus. The
Company's actual results could differ materially from those discussed here as a
result of various factors, including, but not limited to, those discussed below
and elsewhere in this Prospectus.
Limited Operating History; Integration of Completed Acquisitions. The Company
was formed in September 1997 and commenced operations on October 1, 1997.
Accordingly, the Company has only a limited operating history on which you may
evaluate its business and its prospects. You should consider the disclosures
about the Company in this Prospectus in light of the risks, expenses and
difficulties that companies frequently encounter in their early stages of
development. The Company's recently assembled senior management team may not be
able to manage the Company successfully or to implement the Company's operating
and growth strategies effectively.
The Company's growth and future financial performance depend significantly on
its ability to integrate acquired businesses into its organization and
operations. Part of the Company's strategy is to achieve economies of scale and
operating efficiencies by increasing its size through acquisitions. The Company
may not achieve these goals unless it effectively combines the operations of
acquired businesses with its existing operations. The Company's recently
assembled senior management team may not be able to integrate the Company's
completed and future acquisitions. Any difficulties the Company encounters in
the integration process could materially and adversely affect its business,
financial condition and operating results.
Growth Strategy Implementation; Ability to Manage Growth. The Company's growth
strategy includes (i) expanding through acquisitions, (ii) acquiring additional
exclusive franchise agreements and municipal contracts and (iii) generating
internal growth. Whether the Company can execute its growth strategy depends on
several factors, including the success of existing and emerging competition, the
availability of acquisition targets, the ability to maintain profit margins in
the face of competitive pressures, the ability to continue to recruit, train and
retain qualified employees, the strength of demand for the Company's services
and the availability of capital to support its growth.
From October 1, 1997, through October 1, 1998, the Company acquired 31 solid
waste services related business. The Company may grow rapidly at times, which
could significantly strain its management, operational, financial and other
resources. To maintain and manage its growth, the Company will need to expand
its management information systems capabilities and its operational and
financial systems and controls. The Company will also need to attract, train,
motivate, retain and manage additional senior managers, technical professionals
and other employees. Failure to do any of these things would materially and
adversely affect the Company's business, financial condition and operating
results. See "Business -- Strategy."
7
<PAGE> 8
Availability of Acquisition Targets. Although the Company has identified
numerous acquisition candidates that it believes are suitable, the Company may
not be able to acquire them at prices or on terms and conditions favorable to
the Company. The Company's failure to make acquisitions would limit its growth.
See "Business -- Strategy" and "-- Acquisition Program."
The Company competes for acquisition candidates with other entities, some of
which have greater financial resources than the Company. Increased competition
for acquisition candidates may make fewer acquisition opportunities available to
the Company, and may cause acquisitions to be made on less attractive terms,
such as higher purchase prices. Acquisition costs may increase to levels that
are beyond the Company's financial capability or that would adversely affect the
Company's operating results and financial condition. The Company's ability to
make acquisitions will depend in part on the relative attractiveness of shares
of the Company's Common Stock as consideration for potential acquisition
candidates. This attractiveness may depend largely on the relative market price
and capital appreciation prospects of the Common Stock compared to the stock of
the Company's competitors. If the market price of the Company's Common Stock
were to decline materially over a prolonged period of time, the Company's
acquisition program could be materially adversely affected.
Highly Competitive Industry. The solid waste services industry is highly
competitive and fragmented and requires substantial labor and capital resources.
Some of the markets in which the Company competes or will likely compete are
served by one or more large, national solid waste companies, as well as by
numerous regional and local solid waste companies of varying sizes and
resources, some of which have accumulated substantial goodwill. The Company also
competes with counties, municipalities and solid waste districts that maintain
their own waste collection and disposal operations. These operators may have
financial advantages over the Company, because of their access to user fees and
similar charges, tax revenues and tax-exempt financing. Some of the Company's
competitors may also be better capitalized, have greater name recognition or be
able to provide services at a lower cost than the Company. The Company's
inability to compete with governmental service providers and larger and better
capitalized companies could materially and adversely affect the Company's
business, financial condition and operating results.
The Company derives a substantial portion of its revenue from exclusive
municipal contracts and franchise agreements. Many of these will be subject to
competitive bidding at some time in the future. See "Business -- Services." The
Company intends to bid on additional municipal contracts and franchise
agreements. However, the Company may not be the successful bidder to obtain or
retain contracts that come up for competitive bidding. In addition, some of the
Company's customers may terminate their contracts before the end of the contract
term. Municipalities in Washington may by law annex unincorporated territory,
which would remove such territory from the area covered by G certificates issued
by the Washington Utilities and Transportation Commission. Such annexation could
reduce the areas covered by the Company's G certificates and subject more of the
Company's Washington operations to competitive bidding in the future. Moreover,
legislative action could amend or repeal the laws governing G Certificates,
which could materially and adversely affect the Company. See "Business -- G
Certificates." If the Company were not able to replace revenues from contracts
lost through competitive bidding or early termination or the renegotiation of
existing contracts with other revenues
8
<PAGE> 9
within a reasonable time period, the lost revenues could materially and
adversely affect the Company's business, financial condition and operating
results.
Intense competition exists not only to provide services to customers but also to
acquire other businesses within each market. Other companies have adopted or
will probably adopt the Company's strategy of acquiring and consolidating
regional and local businesses to develop a national presence. The Company
expects that increased consolidation in the solid waste services industry will
increase competitive pressures. See "Business -- Competition."
Potential Inability to Finance the Company's Potential Growth. The Company
expects to finance future acquisitions through cash from operations, borrowings
under its bank line of credit, the issuance of shares of the Company's Common
Stock and/or seller financing. If acquisition candidates are unwilling to
accept, or the Company is unwilling to issue, shares of the Company's Common
Stock as part of the consideration for such acquisitions, the Company may have
to use more of its available cash resources or borrowings under its credit
facility to fund acquisitions. If cash from operations and borrowings under the
credit facility are insufficient to fund acquisitions, the Company will need
additional equity and/or debt financing. The Company will also need to make
substantial capital expenditures to fund the development or acquisition of new
landfills, transfer stations and other facilities and the maintenance of such
properties. The Company may not have enough capital or be able to raise enough
additional capital on satisfactory terms to meet its capital requirements.
The Company's credit facility requires the Company to obtain the consent of the
lending banks before acquiring any other business for more than $7.0 million in
cash (including all liabilities assumed). If the Company is not able to obtain
such consent, it may not be able to complete certain acquisitions, which could
inhibit the Company's growth. The Company's credit facility also contains
financial covenants based on the Company's current and projected financial
condition after completing an acquisition. If the Company cannot satisfy these
financial covenants on a pro forma basis after completing an acquisition, it
would not be able to complete the acquisition without a waiver from its lending
banks. Whether or not a waiver is needed, if the results of the Company's future
operations differ materially from what the Company expects, the Company may no
longer be able to comply with the covenants in the credit facility. The
Company's failure to comply with such covenants may result in a default under
the credit facility, which would allow the Company's banks to accelerate the
date for repayment of debt incurred under the credit facility and materially and
adversely affect the Company's business, financial condition and operating
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and Note 12 of Notes
to the Company's Financial Statements.
Dependence on Management. The Company depends significantly on the services of
the members of its senior management team. The departure of any of those persons
might materially and adversely affect the Company's business, financial
condition and operating results. The Company currently maintains "key man" life
insurance with respect to Ronald J. Mittelstaedt, its President, Chief Executive
Officer and Chairman, in the amount of $3.0 million. See "Management." Key
members of the Company's management have entered into employment agreements with
the Company with terms ranging from three to five years. See
"Management -- Employment Agreements." These agreements may not be enforceable
by the Company.
9
<PAGE> 10
Geographic Concentration. The Company's operations and customers are located in
California, Idaho, Nebraska, Oklahoma, Oregon, South Dakota, Utah, Washington
and Wyoming. The Company expects to focus its operations on the Western U.S. for
at least the foreseeable future. The Company estimates that as of October 1,
1998, over 38% of the Company's total annualized revenues were from customers in
Washington. Therefore, the Company's business, financial condition and operating
results would be negatively affected by downturns in the general economy in the
Western U.S., particularly in Washington, and other factors affecting the
region, such as state regulations affecting the solid waste services industry
and severe weather conditions. In addition, the costs and time involved in
permitting, and the scarcity of, available landfills in the Western U.S. could
make it difficult for the Company to expand vertically in those markets. The
Company may not complete enough acquisitions in other markets to lessen its
geographic concentration. See "Business -- Strategy."
Seasonality of Business. Based on historic trends experienced by the businesses
acquired by the Company, the Company expects its operating results to vary
seasonally, with revenues 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 second and third quarters. This seasonality reflects the lower volume of
solid waste generated during the late fall, winter and early spring months,
because of decreased construction and demolition activities during the winter
months in the Western U.S. In addition, certain of the Company's operating costs
should be generally higher in the winter months, because adverse winter weather
conditions slow waste collection activities, resulting in higher labor costs,
and greater precipitation increases the weight of collected waste, resulting in
higher disposal costs, which are calculated on a per ton basis. Because the
Company expects most of its operating expenses to remain fairly constant
throughout the fiscal year, it expects operating income to be generally lower in
the winter months. Future seasonal and quarterly fluctuations may materially and
adversely affect the Company's business, financial condition and operating
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Government Regulation. The Company is subject to extensive and evolving
environmental laws and regulations. These have been enforced more and more
stringently in recent years because of greater public interest in protecting the
environment. These laws and regulations impose substantial costs on the Company
and affect the Company's business in many ways, including as set forth below and
under "Business -- Regulation." In addition, federal, state and local
governments may change the rights they grant to and the restrictions they impose
on solid waste services companies, and such changes could have a material
adverse effect on the Company.
To own and operate landfills, the Company must obtain and maintain licenses or
permits and zoning, environmental and/or other land use approvals. These
licenses or permits and approvals are difficult and time-consuming to obtain and
renew, and elected officials and citizens' groups frequently oppose them. See
"Business -- Legal Proceedings." The Company may not be able to obtain and
maintain the permits and approvals it needs to own or operate landfills
(including increasing their capacity), and failing to do so could materially and
adversely affect the Company's operating results and financial condition.
Extensive regulations govern the design, operation and closure of landfills.
These regulations include the regulations ("Subtitle D Regulations") that
establish minimum
10
<PAGE> 11
federal requirements adopted by the U.S. Environmental Protection Agency (the
"EPA") in October 1991 under Subtitle D of the Resource Conservation and
Recovery Act of 1976 ("RCRA"). If the Company fails to comply with these
regulations, it could be required to undertake investigatory or remedial
activities, curtail operations or close a landfill temporarily or permanently.
Future changes to these regulations may require the Company to modify,
supplement or replace equipment or facilities at substantial costs. The failure
of regulatory agencies to enforce these regulations vigorously or consistently
may give an advantage to competitors of the Company whose facilities do not
comply with the Subtitle D Regulations or their state counterparts. The
Company's financial obligations arising from any failure to comply with these
regulations could materially and adversely affect the Company's business,
financial condition and operating results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
Companies in the solid waste services business are frequently subject in the
normal course of business to judicial and administrative proceedings involving
federal, state or local agencies or citizens' groups. Governmental agencies may
seek to impose fines or penalties on the Company, to revoke or deny renewal of
the Company's operating permits, franchises or licenses for violations or
alleged violations of environmental laws or regulations, or to require the
Company to remediate potential environmental problems relating to waste that the
Company or its predecessors collected, transported, disposed of or stored. The
Company may also be subject to actions brought by individuals or community
groups in connection with its operations. Any adverse outcome in these
proceedings could have a material adverse effect on the Company's business,
financial condition and operating results and create adverse publicity about the
Company. See "Potential Environmental Liability" below and "Business -- Legal
Proceedings."
Potential Environmental Liability. The Company is liable for any environmental
damage that its solid waste facilities cause, including damage to neighboring
landowners or residents, particularly as a result of the contamination of soil,
groundwater or surface water, and especially drinking water. The Company may be
liable for damage resulting from conditions existing before it acquired such
facilities. The Company may also be liable for any off-site environmental
contamination caused by pollutants or hazardous substances whose transportation,
treatment or disposal the Company or its predecessors arranged. Any substantial
liability of the Company for environmental damage could materially and adversely
affect the Company's business, financial condition and operating results. See
"Business -- Regulation."
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), imposes strict, joint and several
liability on the present owners and operators of facilities from which a release
of hazardous substances into the environment has occurred, as well as any party
that owned or operated the facility at the time of disposal of the hazardous
substances, regardless of when the hazardous substance was first detected.
CERCLA defines the term "hazardous substances" very broadly to include more than
700 substances that are specified under RCRA, have specific hazardous
characteristics defined under RCRA or are regulated under any of several other
statutes.
CERCLA imposes similar liability on generators of waste that contains hazardous
substances and on hazardous substance transporters that select the treatment,
storage or
11
<PAGE> 12
disposal site. All such persons, who are referred to as potentially responsible
parties ("PRPs"), generally are jointly and severally liable for the expense of
waste site investigation, waste site cleanup costs and natural resource damages,
regardless of whether they exercised due care and complied with all relevant
laws and regulations. These costs can be very substantial. Furthermore,
liability under CERCLA can be based on the existence of even very small amounts
of hazardous substances; unlike most of the other laws that regulate hazardous
substances, CERCLA does not require any minimum volume or concentration of a
hazardous substance to be present before imposing liability. It is likely that
hazardous substances have in the past come to be located in landfills that the
Company owns or operates. If any of the Company's sites or operations ever
experiences environmental problems, the Company could be subject to substantial
liability, which could materially and adversely affect its business, financial
condition and operating results. The Company has not been named as a PRP in any
action brought under CERCLA. See "Business -- Regulation."
Each business that the Company acquires or has acquired may have liabilities
that the Company fails or is unable to discover, including liabilities that
arise from prior owners' failure to comply with environmental laws. As a
successor owner, the Company may be legally responsible for these liabilities.
Even if the Company obtains legally enforceable representations, warranties and
indemnities from the sellers of such businesses, they may not cover fully the
liabilities. Some environmental liabilities, even if the Company does not
expressly assume them, may be imposed on the Company under various legal
theories, particularly under CERCLA. The Company's insurance program does not
cover liabilities associated with any environmental cleanup or remediation of
the Company's own sites. A successful uninsured claim against the Company could
materially and adversely affect the Company's business, financial condition and
operating results. See "Business -- Acquisition Program."
Limitations on Landfill Permitting and Expansion. The Company currently owns and
operates one landfill and operates another landfill. The Company's ability to
meet its growth objectives may depend in part on its ability to acquire, lease
and expand landfills and develop new landfill sites. As of October 1, 1998, the
estimated total remaining permitted disposal capacity of the Fairmead Landfill
in Madera County, California operated by the Company was approximately 600,000
tons, with approximately 3.5 million additional tons of disposal capacity in
various stages of permitting. As of that date, the estimated total remaining
permitted disposal capacity of the Red Carpet Landfill in Major County, Oklahoma
owned and operated by the Company was approximately 650,000 tons, with
approximately 1.7 million additional tons of disposal capacity in various stages
of permitting. The Company may not be able to obtain new landfill sites or
expand the permitted capacity of the Fairmead and Red Carpet Landfills when
necessary.
In some areas in which the Company operates, suitable land for new sites or
expansion of existing landfill sites may be unavailable. Operating permits for
landfills in states where the Company operates must generally be renewed at
least every five years. Obtaining required permits and approvals to build,
operate and expand solid waste management facilities, including landfills and
transfer stations, has become increasingly difficult and expensive. It often
takes several years, requires numerous hearings and compliance with zoning,
environmental and other requirements and is resisted by citizen, public interest
or other groups. The Company may not be able to obtain or maintain the permits
it requires to expand, and such permits may contain burdensome terms and
conditions. Even when
12
<PAGE> 13
granted, final permits to expand are often not approved until the remaining
permitted disposal capacity of a landfill is very low. Local laws and ordinances
also may affect the Company's ability to obtain permits to expand landfills. If
the Company were to exhaust its permitted capacity at a landfill, its ability to
expand internally would be limited, and the Company could be required to cap and
close that landfill and forced to dispose of collected waste at more distant
landfills or at landfills operated by its competitors. The resulting increased
costs would materially and adversely affect the Company's business, financial
condition and operating results. See "Business -- Services -- Landfills."
Alternatives to Landfill Disposal; Waste Reduction Programs. Alternatives to
landfill disposal, such as recycling, composting and incineration, are available
in some areas in which the Company operates. In addition, state and local
authorities increasingly require recycling and waste reduction at the source and
prohibit the disposal of certain types of wastes, such as yard wastes, at
landfills. These developments may reduce the volume of waste in certain areas.
For example, California has adopted plans that set goals for percentages of
certain solid waste items to be recycled, which are being phased in over the
next several years. Increased use of alternatives to landfill disposal may
materially and adversely affect the Company's business, financial condition and
operating results.
Potential Inadequacy of Accruals for Closure and Post-Closure Costs. The Company
may be required to pay closure and post-closure costs of landfills and any
disposal facilities that it owns or operates. The Company accrues for future
closure and post-closure costs of its owned landfills (generally for a term of
30 years after final closure of a landfill), based on engineering estimates of
consumption of permitted landfill airspace over the useful life of any such
landfill. The Company's obligations to pay closing or post-closing costs may
exceed the amount the Company accrued and reserved and other amounts available
from funds or reserves established to pay such costs. This could materially and
adversely affect the Company's business, financial condition and operating
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Services -- Landfills."
Charges Related to Capitalized Expenditures. In accordance with generally
accepted accounting principles, the Company capitalizes some expenditures and
advances relating to acquisitions, pending acquisitions and landfill development
projects. As of June 1998, the Company had no capitalized expenditures relating
to landfill development projects and $2,912 in capitalized expenditures relating
to acquisitions and pending acquisitions. The Company expenses indirect
acquisition costs such as executive salaries, general corporate overhead, public
affairs and other corporate services as it incurs those costs. The Company
charges against earnings any unamortized capitalized expenditures and advances
(net of any portion thereof that the Company estimates it will recover, through
sale or otherwise) that relate to any operation that is permanently shut down,
any pending acquisition that is not consummated and any landfill development
project that the Company does not expect to complete. Therefore, the Company may
incur charges against earnings in future periods, which could materially and
adversely affect the Company's business, financial condition and operating
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Potential Inability to Obtain Performance or Surety Bonds, Letters of Credit or
Insurance. Municipal solid waste services contracts and landfill closure
obligations may require the Company to obtain performance or surety bonds,
letters of credit, or other means of
13
<PAGE> 14
financial assurance to secure its performance. Some of the Company's existing
solid waste collection and recycling contracts require the Company to obtain
performance bonds, which it has obtained. If the Company in the future is not
able to obtain performance or surety bonds or letters of credit in sufficient
amounts or at acceptable rates, it may not be able to enter into additional
municipal solid waste services contracts or obtain or retain landfill operating
permits. Any future difficulty in obtaining insurance could also make it more
difficult for the Company to secure future contracts conditioned on the
contractor's having adequate insurance coverage. The Company's failure to obtain
means of financial assurance or adequate insurance coverage could materially and
adversely affect its business, financial condition and operating results. See
"Business -- Risk Management, Insurance and Performance Bonds."
Commodity Risk On Resale of Recyclables. The Company provides recycling services
to some of its customers. The sale prices of and demand for recyclable waste
products, particularly wastepaper, are frequently volatile and may affect the
Company's operating results. See "Business -- Services -- Recycling and Other
Services."
Potential Anti-Takeover Effect of Certain Charter and By-Law Provisions and
Delaware Law. Under the Company's Amended and Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation") and Amended and
Restated By-Laws (the "Restated By-Laws"), the Company's Board of Directors is
divided into three classes of directors who serve staggered three-year terms. As
a result, approximately one-third of the Company's Board is elected each year.
The classified Board is intended to ensure continuity and stability in the
Board's composition and policies if another party attempts a hostile takeover of
the Company or initiates a proxy contest. The classification of the Board
extends the time required to change the control of the Board and may discourage
any hostile takeover bid for the Company. The classified Board may also make it
harder to remove the Company's incumbent management, even if such removal would
generally benefit stockholders. Therefore, it may discourage some tender offers.
The authorized capital of the Company includes 10,000,000 shares of "blank
check" Preferred Stock. No shares of Preferred Stock are currently outstanding.
The Company may issue Preferred Stock and determine its price, rights,
preferences, privileges and restrictions, including voting and dividend rights,
without stockholder approval. The rights of holders of Preferred Stock that the
Company may issue in the future may adversely affect the rights of the holders
of Common Stock. The issuance of Preferred Stock may make it more difficult for
a third party to acquire the Company. The Company has no present plan to issue
Preferred Stock.
The Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law. That section generally prohibits the Company
from engaging in a "business combination" with an "interested stockholder" for
three years after the time that such stockholder became an interested
stockholder. Section 203 also could delay or prevent a change of control of the
Company. These provisions, and provisions of the Restated Certificate of
Incorporation and Restated By-Laws, may deter hostile takeovers or delay or
prevent changes in control or management of the Company, including transactions
in which stockholders might be paid more than current market prices for their
shares. These provisions may also limit stockholders' ability to approve
transactions that they believe are in their best interests. See "Description of
Capital Stock -- Preferred Stock" and "-- Certain Statutory, Charter and By-Law
Provisions."
14
<PAGE> 15
Subsequent Share Issuances; Shares Eligible for Future Sale. The market price of
the Company's Common Stock could drop if a large number of shares of Common
Stock are sold in the public market, or if market participants believe that such
sales could occur, or if the Company issues a large number of shares in
acquisitions. Such issuances could also make it more difficult for the Company
to fund acquisitions by issuing Common Stock. Shares issued under this
Registration Statement may generally be sold in the public market immediately
after they are issued. See "Shares Eligible for Future Sale."
Fluctuations in Quarterly Results; Potential Stock Price Volatility. The Company
believes that investors should not rely on period-to-period comparisons of its
operating results as an indication of future performance. Many factors,
including general economic conditions, government regulatory action,
acquisitions, capital expenditures and other costs related to expanding
operations and services, pricing changes and adverse weather conditions, may
cause the Company's operating results to fall below the expectations of
securities analysts and investors in future quarters. This would likely cause
the price of the Company's Common Stock to drop. In addition, the stock market
sometimes experiences large price and volume fluctuations generally. Although
these broad market fluctuations may not relate to the operating performance of
companies whose securities are publicly traded, they may cause the market price
of such companies' stock, including the Company's Common Stock, to drop. After
periods of volatility in the market price of a company's securities,
shareholders often bring class action lawsuits against that company. The Company
may be the target of such lawsuits in the future, which could be expensive and
divert management's attention and resources. This could materially and adversely
affect the Company's business, financial condition and operating results. In
addition, any adverse determination in any such lawsuit could subject the
Company to significant liabilities.
No Dividends. The Company does not intend to pay cash dividends on the Common
Stock. In addition, the Company's credit facility prohibits the Company from
paying dividends without the consent of the lenders. See "Dividend Policy."
Impact of the Year 2000. The Company will need to modify or replace portions of
its software so that its computer systems will function properly with respect to
dates in the year 2000 ("Year 2000") and afterwards. The Company expects to
complete those modifications and upgrades during 1999, at a total cost of
approximately $100,000. The Company has spent part of its Year 2000 budget on
replacing its billing systems in Maltby and Vancouver. Because the Company's
operations rely primarily on mechanical systems such as trucks to collect solid
waste, the Company does not expect its operations to be significantly affected
by Year 2000 issues. The Company's customers may need to make Year 2000
modifications to software and hardware that they use to generate records, bills
and payments relating to the Company. The Company does not rely on vendors on a
routine basis except for disposal sites. The Company brings waste to a site and
is normally billed based on tonnage received. The Company believes that if its
disposal vendors encounter Year 2000 problems, they will convert to manual
billing based on scale recordings until they resolve those issues.
In assessing the Company's exposure to Year 2000 issues, management believes its
biggest challenges lie in the following areas: Year 2000 issues at the Company's
banks, large (typically municipal) customers, and acquired businesses between
the time the Company acquires them and the time the Company implements its own
systems. The Company is obtaining Year 2000 compliance certifications from its
vendors, banks and customers. If
15
<PAGE> 16
the Company and its vendors, banks and customers do not complete the required
Year 2000 modifications on time, the Year 2000 issue could materially affect the
Company's operations. The Company believes, however, that in the most reasonably
likely worst case, the effects of Year 2000 issues on its operations would be
brief and small relative to the Company's overall operations. The Company has
not made a contingency plan to minimize operational problems if the Company and
its vendors, banks and customers do not timely complete all required Year 2000
modifications.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Company does
not currently anticipate paying any cash dividends on the Common Stock. The
Company intends to retain all earnings to fund the operation and expansion of
its business. In addition, the Company's credit facility restricts the payment
of cash dividends.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "WCNX." The following table shows the high and low sale prices for the
Common Stock for the period from May 22, 1998, the date of the Company's initial
public offering, through September 30, 1998.
<TABLE>
<CAPTION>
1998 HIGH LOW
---- ------- ------
<S> <C> <C>
Second Quarter (from May 22, 1998).......................... $ 20.75 $13.75
Third Quarter............................................... $23.375 $17.75
</TABLE>
On October 9, 1998, the last sale price of the Common Stock as reported by the
Nasdaq National Market was $17.5625 per share. See "Description of Capital
Stock."
16
<PAGE> 17
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table presents selected historical and pro forma consolidated
statements of operations and balance sheet data of the Company and its
predecessors for the periods indicated.
The entities the Company acquired in September 1997 from BFI are collectively
referred to as the Company's predecessors. BFI acquired the predecessors during
1995 and 1996. Before being acquired by BFI, the predecessors operated as
separate stand-alone businesses. The selected financial information of the
Company's predecessors as of December 31, 1996, for the nine months ended
September 30, 1997, and for the years ended December 31, 1995 and 1996 is based
on audited financial statements included elsewhere in this Prospectus. The
selected financial information of the Company as of December 31, 1997, and for
the period from inception (September 9, 1997) through December 31, 1997, is
based on audited financial statements included elsewhere in this Prospectus. The
selected financial information of the Company's predecessors as of December 31,
1993, 1994 and 1995, and for the years ended December 31, 1993 and 1994 is based
on financial statements that have not been audited. The Company's selected
financial information as of June 30, 1998 and for the six months ended June 30,
1997 and 1998 is based on unaudited financial statements included elsewhere in
this Prospectus. The Company's management believes that the unaudited financial
data include all adjustments necessary to fairly present the financial position
and operating results for the unaudited periods. The Company's operating results
for the six months ended June 30, 1998 do not necessarily indicate the results
that may be expected for the year ended December 31, 1998. Various factors
affect the year-to-year comparability of the amounts presented. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Basis of Presentation" and "-- Results of Operations" for
additional information about the Company and its predecessors.
The selected pro forma financial information for the six months ended June 30,
1998 and for the year ended December 31, 1997, has been adjusted to reflect the
Company's acquisitions of Shrader, Arrow, Madera and the Company's predecessors
as of the dates and for the periods indicated. This information is based on
unaudited pro forma financial statements included elsewhere in this Prospectus.
The pro forma financial information does represent what the Company's results
actually would have been had those events occurred on the dates indicated, and
it does not project the Company's future results.
You should read the selected historical and pro forma financial information with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, the audited and unaudited Financial Statements and Notes of the
Company and its predecessors, and the Unaudited Pro Forma Financial Statements
and Notes included in this Prospectus.
17
<PAGE> 18
WASTE CONNECTIONS, INC. AND PREDECESSORS
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FIBRES
INTERNATIONAL,
THE THE INC.
FIBRES DISPOSAL FIBRES DISPOSAL PERIOD FROM
INTERNATIONAL GROUP INTERNATIONAL, GROUP JANUARY 1, PREDECESSORS
INC. COMBINED INC. COMBINED 1995 ONE MONTH
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, NOVEMBER 30, DECEMBER 31,
1993 1993 1994 1994 1995 1995
------------- ------------ -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA(1):
Revenues.............. $3,787 $20,794 $5,610 $22,004 $7,340 $595
Cost of operations...... 2,737 16,775 4,432 18,298 5,653 527
Selling, general and
administrative...... 553 3,559 552 3,320 823 72
Depreciation and
amortization........ 428 520 642 606 715 74
------ ------- ------ ------- ------ ----
Income (loss) from
operations.......... 69 (60) (16) (220) 149 (78)
Interest expense...... (78) (390) (191) (548) (162) (1)
Other income
(expense), net...... 1 684 (2) 871 98 5
------ ------- ------ ------- ------ ----
Income (loss) before
income taxes........ (8) 234 (209) 103 85 (74)
Income tax (provision)
benefit............. -- (77) -- -- (29) --
------ ------- ------ ------- ------ ----
Net income (loss)....... $ (8) $ 157 $ (209) $ 103 $ 56 $(74)
====== ======= ====== ======= ====== ====
<CAPTION>
THE
DISPOSAL
THE GROUP
DISPOSAL COMBINED
PERIOD FROM PREDECESSORS
GROUP JANUARY 1, COMBINED
COMBINED 1996 PERIOD
YEAR ENDED THROUGH ENDED
DECEMBER 31, JULY 31, DECEMBER 31,
1995 1996 1996
------------ ---------- ------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA(1):
Revenues.............. $19,660 $8,738 $13,422
Cost of operations...... 16,393 6,174 11,420
Selling, general and
administrative...... 3,312 2,126 1,649
Depreciation and
amortization........ 628 324 962
------- ------ -------
Income (loss) from
operations.......... (673) 114 (609)
Interest expense...... (206) (12) (225)
Other income
(expense), net...... -- 2,661 (147)
------- ------ -------
Income (loss) before
income taxes........ (879) 2,763 (981)
Income tax (provision)
benefit............. 298 (505) --
------- ------ -------
Net income (loss)....... $ (581) $2,258 $ (981)
======= ====== =======
</TABLE>
(See footnotes on page 20)
18
<PAGE> 19
<TABLE>
<CAPTION>
WASTE
CONNECTIONS, INC.
PREDECESSORS PERIOD FROM PREDECESSORS
COMBINED INCEPTION COMBINED WASTE CONNECTIONS, INC.
NINE MONTHS (SEPTEMBER 9, PRO FORMA SIX MONTHS SIX MONTHS ENDED
ENDED 1997) THROUGH YEAR ENDED ENDED JUNE 30, 1998
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, JUNE 30, -------------------------
1997 1997 1997(2) 1997 ACTUAL PRO FORMA(2)
------------- ----------------- ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA(1):
Revenues.......................... $18,114 $ 6,237 $ 45,301 $11,784 $ 18,520 $ 25,144
Cost of operations................ 14,753 4,703 33,875 9,784 12,830 17,342
Selling, general and
administrative.................. 3,009 619 5,043 1,305 1,868 2,564
Depreciation and amortization..... 1,083 354 2,984 745 1,359 1,877
Start-up and integration.......... -- 493 493 -- -- --
Stock compensation................ -- 4,395 4,395 -- 441 441
------- ---------- ---------- ------- ---------- ----------
Income (loss) from operations..... (731) (4,327) (1,489) (50) 2,022 2,920
Interest expense.................. (456) (1,035) (3,527) (304) (731) (1,631)
Other income (expense), net....... 14 (36) 208 4 -- 29
------- ---------- ---------- ------- ---------- ----------
Income (loss) before income
taxes........................... (1,173) (5,398) (4,808) (350) 1,291 1,318
Income tax (provision) benefit.... -- 332 20 -- (717) (669)
------- ---------- ---------- ------- ---------- ----------
Net income (loss) before
extraordinary item.............. (1,173) (5,066) (4,788) (350) 573 649
Extraordinary item -- early
extinguishment of debt, net of
income tax benefit of $165...... -- -- -- -- (815) (815)
------- ---------- ---------- ------- ---------- ----------
Net income (loss)................. $(1,173) $ (5,066) $ (4,788) $ (350) $ (242) $ (166)
======= ========== ========== ======= ========== ==========
Redeemable convertible referred
stock accretion................. (531) (531) (917) (917)
---------- ---------- ---------- ----------
Net loss applicable to common
stockholders.................... $ (5,597) $ (5,319) $ (1,159) $ 1,083
========== ========== ========== ==========
Basic loss per common share:
Loss before extraordinary
item.......................... $ (2.99) $ (2.03) $ (0.09) $ (0.06)
Extraordinary item.............. -- -- (0.22) (0.18)
---------- ---------- ---------- ----------
Net loss per common share....... $ (2.99) $ (2.03) $ (0.31) $ (0.24)
========== ========== ========== ==========
Shares used in calculating basic
net loss per share.............. 1,872,567 2,623,883 3,714,027 4,449,905
Pro forma basic net loss per
share(3)........................ $ (1.16) $ (0.04)
========== ==========
Shares used in calculating pro
forma basic net loss per
share........................... 4,372,565 6,397,359
Pro forma diluted net loss per
share(3)........................ $ (0.03)
==========
Shares used in calculating pro
forma diluted net loss per
share........................... 7,749,050
</TABLE>
(See footnotes on following page)
19
<PAGE> 20
<TABLE>
<CAPTION>
FIBRES THE DISPOSAL FIBRES THE DISPOSAL THE DISPOSAL
INTERNATIONAL, GROUP INTERNATIONAL, GROUP PREDECESSORS GROUP
INC. COMBINED INC. COMBINED COMBINED COMBINED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1993 1994 1994 1995 1995
-------------- ------------ -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash and equivalents......... $ 3 $ 196 $ 321 $ 203 $ 184 $ 961
Working capital.............. 494 (1,497) 155 (4,279) 90 2,498
Property and equipment,
net........................ 1,454 2,440 3,810 2,771 4,035 2,221
Total assets................. 3,325 7,455 6,317 7,318 9,151 6,942
Long-term debt(5)............ 1,167 1,258 2,353 90 149 6,890
Redeemable convertible
preferred stock............ -- -- -- -- -- --
Total stockholders' equity
(deficit).................. 991 (163) 3,045 (1,486) -- (2,067)
<CAPTION>
WASTE CONNECTIONS, INC.
PREDECESSORS -------------------------------------
COMBINED JUNE 30, 1998
DECEMBER 31, DECEMBER 31, ----------------------
1996 1997 ACTUAL PRO FORMA(4)
------------ ------------ ------- ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash and equivalents......... $ 102 $ 820 $ 3,243 $ 3,585
Working capital.............. 695 836 882 2,123
Property and equipment,
net........................ 5,069 4,185 14,595 16,960
Total assets................. 15,291 18,880 79,448 100,256
Long-term debt(5)............ 89 6,762 23,152 33,399
Redeemable convertible
preferred stock............ -- 7,523 -- --
Total stockholders' equity
(deficit).................. -- (551) 45,400 55,397
</TABLE>
- ---------------
(1) The entities the Company acquired in September 1997 from BFI are
collectively called the Company's predecessors. BFI acquired the
predecessors at various times during 1995 and 1996, and prior to being
acquired by BFI, the predecessors operated as separate stand-alone
businesses. Various factors affect the year-to-year comparability of the
amounts presented. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Basis of Presentation" and
"-- Results of Operations" for additional information concerning the Company
and its predecessors.
(2) Assumes the Company's acquisitions of Arrow, Shrader, Madera and the
Company's predecessors occurred on January 1, 1997. See "Unaudited Pro Forma
Financial Statements."
(3) Adjusted to reflect the conversion of all outstanding shares of redeemable
convertible Preferred Stock for the period from inception through December
31, 1997, and the conversion of redeemable convertible Preferred Stock and
all outstanding shares of redeemable Common Stock for the six months ended
June 30, 1998, as if such conversions had occurred as of the first day of
each of the periods presented. See Note 11 of Notes to the Company's
Financial Statements included elsewhere herein for an explanation of the pro
forma historical per share calculations.
(4) Assumes the Company's acquisition of Shrader occurred on June 30, 1998.
(5) Excludes redeemable convertible Preferred Stock.
20
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion in conjunction with the audited and unaudited
financial statements and other financial information in this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
discussed in the forward-looking statements because of various factors,
including, but not limited to, those listed in "Risk Factors" and the matters
discussed in this Prospectus generally.
OVERVIEW
Waste Connections is a regional, integrated solid waste services company that
provides solid waste collection, transfer, disposal and recycling services in
secondary markets of the Western U.S.
The Company generally intends to pursue an acquisition-based growth strategy and
has acquired 31 companies since its inception in September 1997. The Company
accounted for all of these acquisitions as purchases. Accordingly, the Company
has included the operating results of these acquired businesses in the Company's
financial statements only from the dates that the Company acquired them. The
Company expects a substantial part of its future growth to come from acquiring
additional solid waste collection, transfer and disposal businesses. Additional
acquisitions could continue to affect period-to-period comparisons of its
operating results. The Company also expects to invest in collection vehicles and
equipment, maintenance of existing equipment, and management information
systems, which should enable the Company to expand internally and through
acquisitions based on its existing infrastructure. The Company expects to fund
future acquisitions through cash from operations, borrowings under its bank line
of credit, the issuance of shares of the Company's Common Stock and/or seller
financing. As of October 1, 1998, the Company had consummated the following
acquisitions:
Initial Acquisitions. In September 1997, the Company joined with two other
parties to bid on certain solid waste and recycling businesses offered for sale
by BFI. The Company acquired the stock of Browning-Ferris Industries of
Washington, Inc., a provider of solid waste services to more than 78,000
customers through three municipal contracts and one G certificate in and around
Clark County, Washington, and the stock of its subsidiary, Fibres International,
Inc., a provider of solid waste services to more than 24,000 customers through
eight municipal contracts and one G certificate in King and Snohomish Counties,
Washington. The acquired companies subsequently changed their names to Waste
Connections of Washington, Inc. and Waste Connections International, Inc.,
respectively. The two other parties acquired selected BFI solid waste collection
and transportation assets and operations in Idaho, and BFI's recycling assets
and operations in Washington, Idaho and Oklahoma.
California Acquisitions. Effective February 1, 1998, the Company acquired the
stock of Madera, an integrated solid waste services company operating in north
central California. In connection with the Madera acquisition, the Company
acquired one franchise agreement and one municipal contract, pursuant to which
it serves more than 9,000 commercial, industrial and residential customers, and
agreements to operate two transfer stations, one Subtitle D landfill and one
recycling facility. On September 9, 1998, the Company acquired certain
collection assets from Youngclaus Enterprises, which "tuck in"
21
<PAGE> 22
to its Madera operations. On September 22, 1998, Curry Transfer and Recycling, a
wholly owned subsidiary of the Company, acquired certain business assets of
Harrell's Septic, which provides portable toilet and septic services in Crescent
City, California, Del Norte and Humboldt Counties, California and Curry County,
Oregon (see "Oregon Acquisitions" below).
Idaho Acquisitions. On January 30, 1998, the Company acquired the stock of Waste
Connections of Idaho, Inc., which provides solid waste collection services to
more than 10,000 customers in and around Idaho Falls and Pocatello, Idaho
through subscription agreements with residential customers and seven municipal
contracts. Waste Connections of Idaho, Inc., was formed in September 1997 by
affiliates of the Company for the purpose of acquiring certain assets of
Browning-Ferris Industries of Idaho, Inc. Effective March 1, 1998, the Company
acquired certain solid waste collection assets from Hunter Enterprises, Inc., a
solid waste services company located in eastern Idaho. These assets "tuck in" to
the Company's Idaho operations and serve approximately 2,800 residential and
commercial customers.
Nebraska Acquisitions. On July 31, 1998, a wholly owned subsidiary of the
Company merged into Shrader, which provides solid waste and recyclables
collection services to more than 22,500 customers in eastern Nebraska. On August
3, 1998, the Company acquired the stock of J&J Sanitation, Inc. and Big Red Roll
Off, Inc. (together, "J&J"), which together serve more than 9,500 customers in
eastern Nebraska. On September 18, 1998, Waste Connections of Nebraska, Inc., a
wholly owned subsidiary of the Company, acquired substantially all the assets of
Affiliated Waste Services, L.L.C., which provides solid waste collection and
transportation services to approximately 4,700 customers in Norfolk, NE. On the
same date, Waste Connections of Nebraska, Inc. acquired substantially all of the
assets of Wolff's Trashmasher and Haul It All Sanitary Service, two sole
proprietorships that provide solid waste collection and transportation services
to approximately 1,400 customers in Stanton and Norfolk, Nebraska and certain
unincorporated areas of Stanton, Nebraska.
Oklahoma Acquisitions. On June 5, 1998, the Company acquired the stock of B&B
Sanitation, Inc., Red Carpet Landfill, Inc. and Darlin Equipment, Inc.
(together, "B&B"), which together provide solid waste and recyclables collection
and transportation, landfill, and equipment leasing services to more than 2,600
customers in western Oklahoma.
Oregon Acquisitions. On June 17, 1998, the Company acquired the stock of Arrow,
which provides solid waste and recyclables collection, transportation and
handling services to more than 2,000 customers in Clark County, Washington and
Multnomah and Clackamas Counties, Oregon. On June 25, 1998, the Company acquired
the stock of Curry Transfer and Recycling, Inc. ("Curry") and certain real
estate located in Curry County, Oregon and used in that business. Curry provides
solid waste and recyclables collection and transportation services to more than
5,400 customers in Brookings, Goldbeach and Port Orford, Oregon and the
unincorporated areas of Curry and Lane Counties, Oregon. On September 25, 1998,
Curry acquired certain business assets of Westlane Disposal, which provides
solid waste collection and transportation services to approximately 2,210
customers in Lane, Lincoln and Douglas Counties, Oregon.
Utah Acquisitions. On June 1, 1998, the Company acquired substantially all of
the business assets of Contractor's Waste Removal, L.C. ("Contractor's"), a
provider of solid waste collection and transportation services to more than 450
customers in Orem, Utah. On July 27, August 10 and August 21, 1998, the Company
acquired certain business assets
22
<PAGE> 23
of Miller Containers, Inc., ABC Waste, Inc., and Contractors Waste, Inc.,
respectively, which together provide solid waste collection services to
approximately 290 customers in Utah and "tuck in" to the Company's Utah
operations. On September 21, 1998, Waste Connections of Utah, Inc., a wholly
owned subsidiary of the Company, acquired certain assets of Country Garbage
Services, Inc., which provides solid waste collection and transportation
services in central Utah.
Wyoming and South Dakota Acquisitions. On April 8, 1998, the Company acquired
certain solid waste collection assets from A-1 Disposal, Inc. and Jesse's
Disposal, both unrelated parties operating in northeastern Wyoming, and together
serving approximately 2,300 customers. On May 11, 1998, the Company acquired T&T
Disposal, Inc., a provider of solid waste and recyclables collection services to
more than 500 customers in eastern Wyoming. On May 8, 1998, the Company acquired
Sowers' Sanitation, Inc. and Sunshine Sanitation Incorporated, providers of
solid waste and recyclables collection services to an aggregate of more than
7,000 customers in western South Dakota. On August 3, 1998, the Company acquired
certain assets of a South Dakota waste collection business owned by the
shareholders of J&J, which "tucks in" to the Company's Wyoming and South Dakota
operations. (See "Nebraska Acquisitions" above.).
Washington Acquisitions. On September 21, 1998, a wholly owned subsidiary of the
Company merged into Evergreen Waste Systems, Inc. As a result of this merger,
Evergreen Waste Systems, Inc. became a wholly owned subsidiary of the Company
that provides solid waste and recyclables collection and transportation services
to more than 6,650 customers in Washougal, Camas and Vancouver, Washington and
unincorporated areas of Clark County, Washington and Multnomah County, Oregon.
GENERAL
The Company's revenues consist mainly of fees it charges customers for solid
waste collection, transfer, disposal and recycling services. A large part of the
Company's collection revenues come from commercial, industrial and residential
services. The Company frequently performs these services under service
agreements or franchise agreements with counties or municipal contracts. County
franchise agreements and municipal contracts generally last from one to ten
years. The Company's existing franchise agreement and all of its existing
municipal contracts give the Company the exclusive right to provide specified
waste services in the specified territory during the contract term. These
exclusive arrangements are awarded, at least initially, on a competitive bid
basis and subsequently on a bid or negotiated basis. The Company also provides
residential collection services on a subscription basis with individual
households. The Company provides a large part of its collection services in
Washington under G certificates awarded by the Washington Utilities and
Transportation Commission. G certificates grant the Company collection rights in
certain areas, which rights are generally perpetual and exclusive. See
"Business -- G Certificates." Contracts with counties and municipalities and G
certificates provide relatively consistent cash flow during the term of the
contracts. Because the Company bills most residential customers on a
subscription basis quarterly, subscription agreements also are a stable source
of revenues for the Company. The Company's collection business also generates
revenues from the sale of recyclable commodities.
The Company charges transfer station and landfill customers a tipping fee on a
per ton basis for disposing of their solid waste at the transfer stations and
disposal facility the Company operates in Madera, California and the landfill
the Company owns and operates in Major County, Oklahoma. Most of the Company's
transfer and landfill customers are
23
<PAGE> 24
under one to ten year disposal contracts, most of which provide for annual cost
of living increases.
The Company typically determines the prices for its solid waste services by the
collection frequency and level of service, route density, volume, weight and
type of waste collected, type of equipment and containers furnished, the
distance to the disposal or processing facility, the cost of disposal or
processing, and prices charged by competitors for similar services. The terms of
the Company's contracts sometimes limit its ability to pass on price increases.
Long-term solid waste collection contracts typically contain a formula,
generally based on a published price index, that automatically adjusts fees to
cover increases in some, but not all, operating costs.
Costs of operations include labor, fuel, equipment maintenance and tipping fees
paid to third party disposal facilities, worker's compensation and vehicle
insurance, the cost of materials purchased to be recycled, third party
transportation expense, district and state taxes, host community fees and
royalties. The Company owns and/or operates ten transfer stations, which reduce
the Company's costs by allowing it to use collection personnel and equipment
more fully and by consolidating waste to gain the more favorable disposal rates
that may be available for larger quantities of waste.
Selling, general and administrative ("SG&A") expenses include management,
clerical and administrative compensation and overhead costs associated with the
Company's marketing and sales force, professional services and community
relations expense.
Depreciation and amortization expense includes depreciation of fixed assets over
the estimated useful life of the assets using the straight line method and
amortization of goodwill and other intangible assets using the straight line
method.
The Company capitalizes some third party expenditures related to pending
acquisitions or development projects, such as legal and engineering expenses.
The Company expenses indirect acquisition costs, such as executive and corporate
overhead, public relations and other corporate services, as they are incurred.
The Company charges against net income any unamortized capitalized expenditures
and advances (net of any portion that the Company believes it may recover,
through sale or otherwise) that relate to any operation that is permanently shut
down and any pending acquisition or landfill development project that is not
completed. The Company routinely evaluates all capitalized costs, and expenses
those related to projects that the Company believes are not likely to succeed.
As of June 30, 1998, the Company had no capitalized expenditures relating to
landfill development projects and $2,912 in capitalized expenditures relating to
acquisitions and pending acquisitions.
The Company accrues for estimated landfill closure and post-closure maintenance
costs at the Red Carpet Landfill it owns in Major County, Oklahoma. Under
applicable regulations, the Company and Madera County, as operator and owner,
respectively, are jointly liable for closure and post-closure liabilities with
respect to the Fairmead landfill. The Company has not accrued for such
liabilities because Madera County, as required by state law, has established a
special fund, into which it deposits a portion of tipping fee surcharges, to pay
such liabilities. Consequently, management of the Company does not believe
Madera had any financial obligation for closure and post-closure costs for the
Fairmead Landfill as of June 30, 1998. The Company will have additional material
financial obligations relating to closure and post-closure costs of any disposal
facilities it may own or operate in the future. In such case, the Company will
accrue for those
24
<PAGE> 25
obligations, based on engineering estimates of consumption of permitted landfill
airspace over the useful life of any such landfill.
BASIS OF PRESENTATION
The entities the Company acquired in September 1997 from BFI are collectively
called the Company's predecessors. BFI acquired the predecessors at various
times during 1995 and 1996. Before being acquired by BFI, the predecessors
operated as separate stand-alone businesses.
During the periods in which the Company's predecessors operated as wholly owned
subsidiaries of BFI, they maintained intercompany accounts with BFI for
recording intercompany charges for costs and expenses, intercompany purchases of
equipment and additions under capital leases and intercompany transfers of cash,
among other transactions. It is not feasible to ascertain the amount of related
interest expense that would have been recorded in the historical financial
statements had the predecessors been operated as stand-alone entities. BFI
allocated charges for interest expense to the Company's predecessors as
disclosed in the statement of operations data. The interest expense allocations
from BFI are based on formulas that may not correspond to the balances in the
related intercompany accounts. Moreover, the financial position and results of
operations of the predecessors during this period may not indicate the financial
position or results of operations that would have been realized had the
predecessors been operated as stand-alone entities. For the periods in which the
predecessors operated as wholly owned subsidiaries of BFI, the statements of
operations include amounts allocated by BFI to the predecessors for selling,
general and administrative expenses.
During the periods before they were acquired by BFI, the Company's predecessors
operated as separate stand-alone businesses. BFI accounted for the acquisitions
of the predecessors using the purchase method of accounting and allocated the
respective purchase prices to the fair values of the assets acquired and
liabilities assumed. Similarly, the Company accounted for its acquisitions of
the predecessors from BFI in September 1997 using the purchase method of
accounting and allocated the purchase price to the fair value of the assets
acquired and liabilities assumed. Consequently, the amounts of depreciation and
amortization included in the statements of operations for the periods presented
reflect the changes in basis of the underlying assets that resulted from changes
in ownership that occurred during those periods. In addition, because the
predecessors operated independently and were not under common control or
management during these periods, and because different tax strategies may have
influenced their operating results, the data may not be comparable to or
indicative of their operating results after their acquisition by BFI.
25
<PAGE> 26
RESULTS OF OPERATIONS
The financial information for the Company and its predecessors included in this
section and in the audited financial statements included elsewhere in this
Prospectus relates to the following entities for the periods indicated:
<TABLE>
<S> <C>
YEAR ENDED DECEMBER 31, 1995:
The Disposal Group Combined Year ended December 31, 1995
Fibres International, Inc. January 1, 1995 through November 30, 1995
(BFI acquisition date)
Predecessors One month ended December 31, 1995
(represents the results of operations of
Fibres International, Inc. subsequent to
the BFI acquisition date)
YEAR ENDED DECEMBER 31, 1996:
The Disposal Group Combined January 1, 1996 through July 31, 1996 (BFI
acquisition date)
Predecessors Combined Period ended December 31, 1996 (represents
the combined results of operations of The
Disposal Group subsequent to the BFI
acquisition date and the operations for
the year ended December 31, 1996 of Fibres
International, Inc., which was acquired by
BFI in 1995)
YEAR ENDED DECEMBER 31, 1997:
Predecessors Combined Nine months ended September 30, 1997
(represents the combined results of
operations for the nine month period of
the entities acquired by BFI in 1995 and
1996 described above)
Waste Connections, Inc. Period from inception (September 9, 1997)
through December 31, 1997
</TABLE>
The Disposal Group Combined consists of three entities that were under common
control before their acquisition by BFI: Diamond Fab and Welding Service, Inc.,
Buchmann Sanitary Service, Inc., and The Disposal Group.
Because the predecessors existed for different periods, year-to-year comparisons
are not meaningful and therefore the Company has not included discussions of
SG&A, depreciation and amortization and interest expense in this Prospectus.
WASTE CONNECTIONS, INC. -- SIX MONTHS ENDED JUNE 30, 1998 VS. PREDECESSORS
COMBINED -- SIX MONTHS ENDED JUNE 30, 1997
Revenue. Revenues for the six months ended June 30, 1998 increased $6.7 million,
or 57.2%, to $18.5 million from $11.8 million for the six months ended June 30,
1997. The increase was primarily attributable to the inclusion of the
acquisitions closed since the beginning of 1998 and minor growth in the base
business.
Cost of Operations. Cost of operations for the six months ended June 30, 1998
increased $3.0 million, or 31.1%, to $12.8 million in 1998 from $9.8 million for
the six months ended
26
<PAGE> 27
June 30, 1997. The increase was primarily attributable to acquisitions closed
since the beginning of 1998 and a decline in expenses in the core business as a
result of cost reduction measures.
1997 VS. 1996
Revenue. The Company's total revenue for 1997 was $6.2 million. The total
revenue was attributable to the purchase of the Company's predecessors on
September 30, 1997. Revenues related to the Company's Predecessors Combined for
the nine months ended September 30, 1997 were $18.1 million. The Company's
Predecessors Combined for the period ended December 31, 1996 had revenues of
$13.4 million. The Disposal Group Combined had revenues of $8.7 million for the
period from January 1, 1996 to July 31, 1996. The monthly revenue run rate for
the Company and the Company's Predecessors Combined was essentially the same in
1997 and 1996.
Cost of Operations. The Company's total cost of operations in 1997 was $4.7
million, or 75.4% of revenue. The total cost of operations was attributable to
the purchase of the Company's predecessors on September 30, 1997. Cost of
operations of the Company's Predecessors Combined for the nine months ended
September 30, 1997 was $14.8 million, or 81.4% of revenue. The Company's
Predecessors Combined for the period ended December 31, 1996 had cost of
operations of $11.4 million, or 85.1% of revenue. The Disposal Group during the
period from January 1, 1996 to July 31, 1996 had cost of operations of $6.2
million, or 70.7% of revenue. The Company's cost of operations as a percentage
of revenue in 1997 declined from the Company's Predecessors Combined cost of
operations as a percentage of revenues in 1997 and 1996, due to price increases
in the fourth quarter of 1997 and operating cost savings in lease expense,
environmental accrual fee allocations from BFI, franchise fees and amortization
of loss contract accrual. The Company's Predecessors Combined cost of operations
as a percentage of revenue for the nine months ended September 30, 1997 declined
from 1996 due to the rollover effect of the acquisition of The Disposal Group in
1996, which had generally higher margins than the existing businesses.
1996 VS. 1995
Revenue. The Company's Predecessors Combined total revenue for 1996 was $13.4
million. The Disposal Group Combined total revenue for the period from January
1, 1996 to July 31, 1996 was $8.7 million. The Company's Predecessors Combined
had revenues of $595,000 for the period ended December 31, 1995. The Disposal
Group Combined had revenues of $19.7 million for the year ended December 31,
1995. Fibres International, Inc. had revenues of $7.3 million for the period
from January 1, 1995 to November 30, 1995. The monthly revenue run rate for all
of the Company's predecessors declined in 1996 from 1995 because of the
expiration of a municipal contract and a reduction in revenue from sales of
recyclable materials due to a reduction in prices of recyclable materials.
Cost of Operations. The Company's Predecessors Combined total cost of operations
for 1996 was $11.4 million, or 85.1% of revenue, and The Disposal Group Combined
cost of operations for the period from January 1, 1996 to July 31, 1996 was $6.2
million, or 70.7% of revenue. Cost of operations of the Company's Predecessors
Combined for the period ended December 31, 1995 was $527,000 or 88.6% of
revenue. Cost of operations of The Disposal Group Combined for the year ended
December 31, 1995 was $16.4 million, or
27
<PAGE> 28
83.4% of revenue. Cost of operations of Fibres International, Inc. for the
period from January 1, 1995 to November 30, 1995 was $5.7 million, or 77.0% of
revenue. Cost of operations as a percentage of revenue increased because of
reductions in prices of recyclable materials in 1996, but that was offset by the
expiration of a low margin municipal contract in 1995.
MADERA GENERAL
Effective February 1, 1998, the Company acquired Madera, an integrated solid
waste services company operating in north central California, with 1997 revenues
of approximately $7.8 million. In connection with the Madera acquisition, the
Company acquired one franchise agreement and one municipal contract, pursuant to
which it serves more than 9,000 commercial, industrial and residential
customers, and agreements to operate two transfer stations, one Subtitle D
landfill and one recycling facility. Selected historical financial data for
Madera follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues.......................................... $7,008 $7,770 $7,845
Operating expenses:
Cost of operations............................. 5,288 5,512 5,289
Selling, general and administrative............ 996 969 1,041
Depreciation and amortization.................. 467 585 627
------ ------ ------
Income from operations......................... 257 704 888
Interest expense............................... (237) (259) (280)
Other income, net.............................. 68 113 173
------ ------ ------
Net income..................................... $ 88 $ 558 $ 781
====== ====== ======
Pro forma income taxes(1)...................... $ (30) $ (208) $ (295)
------ ------ ------
Pro forma net income(1)........................ $ 58 $ 350 $ 486
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents...................................... $1,064 $1,527
Working capital........................................... 622 942
Property and equipment, net............................... 3,800 3,636
Total assets.............................................. 6,004 6,297
Long-term obligations, net of current portion............. 2,194 1,894
Total shareholders' equity................................ 2,264 2,800
</TABLE>
- ---------------
(1) Before its acquisition by the Company, Madera operated under Subchapter S of
the Internal Revenue Code and was not subject to corporate federal and state
income tax. Madera's Subchapter S election was terminated when the Company
acquired it.. Had Madera filed federal and state income tax returns as a
regular corporation for 1995, 1996 and 1997, income tax expense under the
provisions of Financial Accounting Standards No. 109 would have been $30,
$208 and $295, respectively. See Note 7 of Notes to Madera's Financial
Statements included elsewhere in this Prospectus.
28
<PAGE> 29
MADERA 1997 VS. 1996
Revenue. Total revenues increased $75,000, or 1.0%, to $7.8 million in 1997 from
$7.8 million in 1996. Exclusive of Madera's Professional Cleaning Division
("PCD"), which ceased operations in July, 1997, revenues increased $667,000, or
9.5%, to $7.7 million in 1997 from $7.0 million in 1996. This increase was
primarily attributable to increased landfill and collection volumes resulting
from existing franchise contracts, partially offset by a reduction in landfill
construction revenues.
Cost of Operations. Total cost of operations decreased $223,000 to $5.3 million
in 1997 from $5.5 million in 1996. The decrease was principally due to the
elimination of PCD, which was offset by increased operating cost associated with
increased volumes of waste from existing contracts. Cost of operations as a
percentage of revenues decreased to 67.4% from 70.9% in 1996. The percentage
decrease was primarily due to the elimination of PCD.
SG&A. SG&A expenses increased approximately $72,000 to $1.0 million in 1997 from
$969,000 in 1996. As a percentage of revenues, SG&A increased to 13.3% from
12.5% in 1996.
Depreciation and Amortization. Depreciation and amortization expense increased
approximately $42,000 to $627,000 in 1997 from $585,000 in 1996. Depreciation
and amortization increased as a percentage of revenues to 8.0% from 7.5%.
Interest Expense. Interest expense increased approximately $21,000 to $280,000
in 1997 from approximately $259,000 in 1996. Interest expense as a percentage of
revenues increased to 3.6% in 1997 from 3.3% in 1996.
MADERA 1996 VS. 1995
Revenue. Total revenues increased $762,000, or 10.9%, to $7.8 million in 1996
from $7.0 million in 1995. Exclusive of PCD, revenues increased $508,000, or
7.8%, to $7.0 million in 1996 from $6.5 million in 1995. This increase was
primarily attributable to increased landfill and collection volumes resulting
from existing franchise contracts and landfill construction revenues. This was
partially offset by decreased revenue from sales of recyclable materials due to
a decrease in the pricing associated with recyclable materials.
Cost of Operations. Total cost of operations increased $224,000 to $5.5 million
in 1996 from $5.3 million in 1995. The principal reason for the increase was the
start up of the PCD. Cost of operations as a percentage of revenues decreased to
70.9% from 75.5% in 1996. The decrease was primarily due to the increased volume
of proportionately higher margin services.
SG&A. SG&A expenses decreased approximately $27,000 to $969,000 in 1996 from
$996,000 in 1995. As a percentage of revenues, SG&A decreased to 12.5% from
14.2% in 1996 due to improved economies of scale in the Company's landfill and
collections operations as a result of additional volumes from existing
customers.
Depreciation and Amortization. Depreciation and amortization expense increased
approximately $118,000 to $585,000 in 1996 compared to $467,000 in 1995.
Depreciation and amortization increased as a percentage of revenues to 7.5% in
1996 from 6.7% in 1995.
29
<PAGE> 30
Interest Expense. Interest expense increased approximately $22,000 to $259,000
in 1996 from approximately $237,000 in 1995. Interest expense as a percentage of
revenues decreased to 3.3% in 1996 from 3.4% in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is capital intensive. The Company's capital requirements
include acquisitions and fixed asset purchases. The Company expects that in the
future it will also make capital expenditures for landfill cell construction,
landfill development and landfill closure activities. The Company plans to meet
its capital needs through various financing sources, including internally
generated funds and debt and equity financing.
As of June 30, 1998, the Company had working capital of $882,000, including cash
and cash equivalents of $3.2 million. In managing its working capital, the
Company generally applies the cash generated from its operations that remains
available after satisfying its working capital and capital expenditure
requirements to reduce its indebtedness under its bank revolving credit facility
and to minimize its cash balances. The Company finances its working capital
requirements from internally generated funds and bank borrowings.
At inception, the Company sold 2,300,000 shares of Common Stock at $0.01 per
share to its founders and 2,499,998 shares of Series A Preferred Stock at $2.80
per share. In May and June 1998, the Company received approximately $23.9
million in net proceeds from the sale of 2,300,000 shares in its initial public
offering (including exercise by the underwriters of that offering of their
overallotment option). As of October 1, 1998, the Company had sold or issued an
additional 2,156,380 shares of Common Stock at a weighted average value of
$10.54 per share, and granted options and warrants to purchase 2,488,319 shares
of Common Stock at a weighted average exercise price of $4.87 per share. The
weighted average value at which shares were issued, and the weighted average
exercise price of the outstanding options and warrants, are significantly below
the $12.00 initial public offering price per share of Common Stock. The
Company's liquidity and capital resources would be greater if the Company had
sold shares at higher prices and issued options and warrants with higher
exercise prices. In addition, the Company's earnings per share would be higher
if there were fewer shares outstanding. See "Risk Factors -- Subsequent Share
Issuances; Shares Eligible for Future Sale."
The Company has a $60.0 million revolving credit facility with a syndicate of
banks for which BankBoston, N.A. acts as agent, which is secured by all assets
of the Company, including the Company's interest in the equity securities of its
subsidiaries. The credit facility matures in 2001 and bears interest at a rate
per annum equal to, at the Company's discretion, either: (i) the BankBoston Base
Rate; or (ii) the Eurodollar Rate plus applicable margin. The credit facility
requires the Company to maintain certain financial ratios and satisfy other
predetermined requirements, such as minimum net worth, net income and limits on
capital expenditures. It also requires the lenders' approval of acquisitions in
certain circumstances. See "Risk Factors -- Potential Inability to Finance the
Company's Potential Growth." As of September 30, 1998, an aggregate of
approximately $37.6 million was outstanding under the Company's credit facility,
and the interest rate on outstanding borrowings under the current credit
facility was approximately 7.3%.
30
<PAGE> 31
For the six months ended June 30, 1998, net cash provided by operations was
approximately $1.9 million and was primarily provided by operating results for
the period exclusive of non-cash charges.
For the six months ended June 30, 1998, net cash used by investing activities
was $31.1 million. Of this, $30.3 million was used to fund the cash portion of
acquisitions, with the rest invested in MIS systems, trucks and containers.
For the six months ended June 30, 1998, net cash provided by financing
activities was $31.6 million, which included net borrowings under the Company's
debt arrangements and $23.9 million in proceeds from the sale of Common Stock in
an initial public offering.
The Company recorded an income tax benefit of $332,000 for the period from
inception (September 9, 1997) through December 31, 1997. The income tax benefit
was recognized because the Company believes it will likely be used when existing
temporary differences reverse.
The Company currently expects to make approximately $5.6 million in capital
expenditures in 1998. On June 16, 1998, Madera completed a $1.8 million bond
financing for certain capital expenditures that were contingent on the
financing. These expenditures are expected to be largely completed in 1998. On
June 11, 1998, the Company won an additional contract to provide services to the
city of Vancouver, which will require approximately $1.2 million of additional
capital expenditures. These expenditures, coupled with the capital expenditures
required for the acquisitions closed since the Company's initial public
offering, have increased the estimated capital expenditures for 1998 to
approximately $5.6 million. The Company intends to fund its planned 1998 capital
expenditures principally through existing cash, internally generated funds, and
borrowings under its existing credit facility. In addition, the Company may make
substantial additional capital expenditures in acquiring solid waste collection
and disposal businesses. If the Company acquires additional landfill disposal
facilities, the Company may also be required to make significant expenditures to
bring any such newly acquired disposal facilities into compliance with
applicable regulatory requirements, obtain permits for any such newly acquired
disposal facilities or expand the available disposal capacity at any such newly
acquired disposal facilities. The Company cannot currently determine the amount
of these expenditures, because they will depend on the nature and extent of any
acquired landfill disposal facilities, the condition of any facilities acquired
and the permitted status of any acquired sites. The Company believes that the
credit facility, the funds expected to be generated from operations, and the net
proceeds of its initial public offering will provide adequate cash to fund the
Company's working capital and other cash needs for the foreseeable future.
The Company derives a substantial portion of its revenues from exclusive
municipal contracts and franchise agreements. Its single largest contract, with
the City of Vancouver, accounted for approximately 18.1% of the Company's
revenues during the period from inception (September 9, 1997) through December
31, 1997, and 12.6% during the six months ended June 30, 1998. There are
approximately nine years remaining under that contract. No other single contract
or customer accounted for more than 7.1% of the Company's revenues during the
period from inception (September 9, 1997) through December 31, 1997, or more
than 5.0% during the six months ended June 30, 1998 or is material to its
liquidity and cash flow.
31
<PAGE> 32
INFLATION
To date, inflation has not significant affected the Company's operations.
Consistent with industry practice, many of the Company's contracts allow the
Company to pass through certain costs to the customers, including increases in
landfill tipping fees and, in some cases, fuel costs. Therefore, the Company
believes that it should be able to increase prices to offset many cost increases
that result from inflation. However, competitive pressures may require the
Company to absorb at least part of these cost increases, particularly during
periods of high inflation.
SEASONALITY
Based on historic trends experienced by the businesses the Company has acquired,
the Company expects its operating results to vary seasonally, with revenues
typically lowest in the first quarter, higher in the second and third quarters
and lower in the fourth quarter than in the second and third quarters. See "Risk
Factors -- Seasonality of Business."
YEAR 2000 ISSUES
The Company will need to modify or replace portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
("Year 2000") and afterwards. The Company expects to complete those
modifications and upgrades during 1999, at a total cost of approximately
$100,000. The Company has spent part of its Year 2000 budget on replacing its
billing systems in Maltby and Vancouver. Because the Company's operations rely
primarily on mechanical systems such as trucks to collect solid waste, the
Company does not expect its operations to be significantly affected by Year 2000
issues. The Company's customers may need to make Year 2000 modifications to
software and hardware that they use to generate records, bills and payments
relating to the Company. The Company does not rely on vendors on a routine basis
except for disposal sites. The Company brings waste to a site and is normally
billed based on tonnage received. The Company believes that if its disposal
vendors encounter Year 2000 problems, they will convert to manual billing based
on scale recordings until they resolve those issues.
In assessing the Company's exposure to Year 2000 issues, management believes its
biggest challenges lie in the following areas: Year 2000 issues at the Company's
banks, large (typically municipal) customers, and acquired businesses between
the time the Company acquires them and the time the Company implements its own
systems. The Company is obtaining Year 2000 compliance certifications from its
vendors, banks and customers. If the Company and its vendors, banks and
customers do not complete the required Year 2000 modifications on time, the Year
2000 issue could materially affect the Company's operations. The Company
believes, however, that in the most reasonably likely worst case, the effects of
Year 2000 issues on its operations would be brief and small relative to the
Company's overall operations. The Company has not made a contingency plan to
minimize operational problems if the Company and its vendors, banks and
customers do not timely complete all required Year 2000 modifications.
32
<PAGE> 33
BUSINESS
INTRODUCTION
Waste Connections is a regional, integrated solid waste services company that
provides solid waste collection, transfer, disposal and recycling services in
secondary markets of the Western U.S. As of October 1, 1998, the Company served
more than 200,000 commercial, industrial and residential customers in
California, Idaho, Nebraska, Oklahoma, Oregon, South Dakota, Utah, Washington
and Wyoming. The Company currently owns and operates 22 collection operations,
five transfer stations and one Subtitle D landfill and operates an additional
five transfer stations, one Subtitle D landfill and three recycling facilities.
Waste Connections was founded in September 1997 to execute an acquisition-based
growth strategy in secondary markets of the Western U.S. The Company has
acquired 31 solid waste services related businesses since its formation and has
identified more than 300 independent operators of such businesses in the states
where it currently operates, many of which it believes may be suitable for
acquisition by the Company. In addition, the Company is currently assessing
potential acquisitions of solid waste services operations in Colorado, Kansas,
Montana and Texas.
The Company has targeted secondary markets in the Western U.S. because it
believes that: (i) a large number of independent solid waste services companies
suitable for acquisition by the Company are located in these markets; (ii) there
is less competition in these markets from large, well-capitalized solid waste
services companies; and (iii) these markets have strong projected economic and
population growth rates. In addition, the Company's senior management team has
extensive experience acquiring and operating solid waste services businesses in
the Western U.S.
INDUSTRY OVERVIEW
According to Waste Age, an industry trade publication, the U.S. solid waste
services industry generated estimated revenues of $36.9 billion in 1997. The
solid waste services industry has been significantly consolidated and integrated
since 1990. The Company believes that, particularly in the Western U.S., this
consolidation and integration have been caused primarily by: (i) stringent
environmental regulation and enforcement, resulting in increased capital
requirements for collection companies and landfill operators; (ii) the evolution
of an industry competitive model that emphasizes integrating collection and
disposal capabilities; (iii) the ability of larger integrated operators to
achieve certain economies of scale; and (iv) the existence of a regulatory
framework that allows the acquisition of exclusive, long-term waste collection
rights through franchise agreements, municipal contracts and governmental
certificates.
Increased Regulatory Impact. Stringent industry regulations, such as the
Subtitle D regulations, have caused operating and capital costs to rise and have
accelerated consolidation and acquisition activities in the solid waste
collection and disposal industry. Many smaller industry participants have found
these costs difficult to bear and have decided to either close their operations
or sell them to larger operators. In addition, Subtitle D requires more
stringent engineering of solid waste landfills, including liners, leachate
collection and monitoring and gas collection and monitoring. These ongoing costs
are combined with increased financial reserve requirements for solid waste
landfill operators
33
<PAGE> 34
relating to closure and post-closure monitoring. As a result, the number of
solid waste landfills is declining while the size of solid waste landfills is
increasing.
Integrating Collection and Disposal Operations. Competitive pressures are
forcing operators to become more efficient by establishing an integrated network
of solid waste collection operations and transfer stations, through which they
secure solid waste streams for disposal. Operators have adopted a variety of
disposal strategies, including owning landfills, establishing strategic
relationships to secure access to landfills and otherwise capturing significant
waste stream volumes, to gain leverage in negotiating lower landfill fees and
securing long-term, most-favored-pricing contracts with high capacity landfills.
Economies of Scale. Larger, integrated operators achieve economies of scale by
vertically integrating their operations. These integrated companies have made
more acquisitions and expanded the breadth of services and density in their
market areas. Control of the waste stream in these market areas, combined with
access to significant financial resources to make acquisitions, has allowed
larger solid waste collection and disposal companies to be more cost-effective
and competitive.
Despite the considerable consolidation and integration that has occurred in the
solid waste industry since 1990, the industry remains primarily regional in
nature and highly fragmented. Based on published industry sources, approximately
27% of the total revenues of the U.S. solid waste industry is accounted for by
more than 5,000 private, predominantly small, collection and disposal
businesses, approximately 41% by publicly traded solid waste companies and
approximately 32% by municipal governments that provide collection and disposal
services. The Company expects the current consolidation trends in the solid
waste industry to continue, because many independent landfill and collection
operators lack the capital resources, management skills and technical expertise
necessary to comply with stringent environmental and other governmental
regulations and to compete with larger, more efficient integrated operators. The
Company believes that the fragmented nature of the industry offers significant
consolidation and growth opportunities for companies with disciplined
acquisition programs, decentralized operating strategies and access to financial
resources.
Regulatory Framework. In the Western U.S., waste collection services are
provided largely under three types of contractual arrangements: certificates or
permits, franchise agreements and municipal contracts. Certificates or permits,
such as G certificates awarded to waste collection service providers in
unincorporated areas and electing municipalities of Washington by the Washington
Utilities and Transportation Commission, typically grant the certificate holder
the right, which is generally perpetual and exclusive, to provide specific
residential, commercial and industrial waste services in a specified area. See
"G Certificates" below. Franchise agreements typically provide an exclusive
service period of five to ten years or longer and specify the service territory,
a broad range of services to be provided, and rates for the services. They also
often give the service provider a right of first refusal to extend the term of
the agreement. Municipal contracts typically provide a shorter service period
and a more limited scope of services than franchise agreements and generally
require competitive bidding at the end of the contract term. Unless customers
within the areas covered by certain permits or certificates (including G
certificates), franchise agreements and municipal contracts elect not to receive
any waste collection services, they are required to pay collection fees to the
company providing such services in their area.
34
<PAGE> 35
The Company operates two landfills, of which it owns one, and may acquire or
operate others in the future. The Company believes, however, that in those
secondary markets of the Western U.S. where waste collection services are
provided under exclusive certificates, franchises or contracts, or where waste
disposal is municipally funded or available from multiple sources, controlling
the waste stream by providing collection services under exclusive arrangements
is often more important to a waste services company's growth and profitability
than owning or operating landfills. Several other characteristics of secondary
markets in the Western U.S. limit the economic attractiveness of owning or
operating landfills in those markets. For example, certain state and local
regulations in the Western U.S. restrict the amount of waste that may be
accepted from specific geographic areas. In addition, the relatively expansive
geographic area of many western states increases the cost of interstate and long
haul disposal, which heightens the effects of state and local regulations
limiting the type and origin of waste that may be accepted at a landfill and
makes it more difficult for a landfill to achieve the disposal volume necessary
to operate profitably, given its capital and operating costs. The Company
believes that significant opportunities exist for a well-capitalized company
operating in secondary markets of the Western U.S., and that the highly
fragmented nature of this industry should allow the Company to consolidate
existing solid waste services businesses in this region.
STRATEGY
The Company's objective is to build a leading integrated solid waste services
company in secondary markets of the Western U.S. The Company's strategy for
achieving this objective is to: (i) acquire collection, transfer, disposal and
recycling operations in new markets and through "tuck-in" acquisitions in
existing markets; (ii) secure additional franchises, municipal contracts and
governmental certificates; (iii) generate internal growth in existing markets by
increasing market penetration and adding services to its existing operations;
and (iv) enhance profitability by increasing operating efficiencies of existing
and acquired operations. The Company's ability to implement this strategy is
enhanced by the experience of the members of its senior management team and
their knowledge of and reputation in the solid waste services industry in the
Company's targeted markets. The Company intends to implement its strategy as
follows:
EXPANSION THROUGH ACQUISITIONS
The Company intends to expand significantly the scope of its operations by: (i)
acquiring solid waste collection, transfer, disposal and recycling operations in
new markets; and (ii) acquiring solid waste collection, transfer, disposal and
recycling operations in existing and adjacent markets through "tuck-in"
acquisitions.
The Company intends to follow a regional expansion strategy by entering new
markets through acquisitions. An initial acquisition in a new market is used as
an operating base for the Company in that area. The Company then seeks to
strengthen the acquired operation's presence in that market by providing
additional services, adding new customers and making tuck-in acquisitions.
The Company can then broaden its regional presence by adding additional
operations in markets adjacent to the new location. The Company is currently
examining opportunities to expand its presence in the Western U.S. in states
other than California, Idaho, Nebraska, Oklahoma, Oregon, South Dakota, Utah,
Washington and Wyoming and is
35
<PAGE> 36
assessing potential acquisitions of solid waste services operations in Colorado,
Kansas, Montana and Texas.
The Company believes that numerous "tuck-in" acquisition opportunities exist
within its current and targeted market areas. For example, the Company has
identified more than 300 independent entities that provide collection and
disposal services in the states where it currently operates. The Company
believes that throughout the Western U.S., many independent entities are
suitable for acquisition by the Company and would provide the Company
opportunities to increase market share and route density.
FRANCHISE AGREEMENTS, MUNICIPAL CONTRACTS AND GOVERNMENTAL CERTIFICATES
The Company intends to devote significant resources to securing additional
franchise agreements and municipal contracts through competitive bidding and
additional governmental certificates through the acquisition of other companies.
In bidding for franchises and municipal contracts and evaluating the acquisition
of companies holding governmental certificates, the Company's management team
draws on its experience in the waste industry and its knowledge of local service
areas in existing and target markets. The Company's district managers manage
relationships with local governmental officials within their respective service
areas, and sales representatives may be assigned to cover specific
municipalities. These personnel focus on maintaining, renewing and renegotiating
existing franchise agreements and municipal contracts and on securing additional
agreements, contracts and governmental certificates.
INTERNAL GROWTH
To generate continued internal growth, the Company will focus on increasing
market penetration in its current and adjacent markets, soliciting new
commercial, industrial, and residential customers in markets where such
customers may elect whether or not to receive waste collection services,
marketing upgraded or additional services (such as compaction or automated
collection) to existing customers and, where appropriate, raising prices. Where
possible, the Company intends to leverage its franchise-based platforms to
expand its customer base beyond its exclusive market territories. As customers
are added in existing markets, the Company's revenue per routed truck increases,
which generally increases the Company's collection efficiencies and
profitability. In markets in which it has exclusive contracts, franchises and
certificates, the Company expects internal growth to at least track population
and business growth.
The Company expects to use transfer stations as an important part of its
internal growth strategy, by extending the direct-haul reach of the Company and
linking disparate collection operations with Company-owned, operated or
contracted disposal capacity. The Company currently owns and/or operates ten
transfer stations. By operating transfer stations, the Company also engages in
direct communications with municipalities and private operators that deliver
waste to its transfer stations. This better positions the Company to gain
additional business in its markets if any municipality privatizes its solid
waste operations or rebids existing contracts, and it increases the Company's
opportunities to acquire private collection operations.
36
<PAGE> 37
OPERATING ENHANCEMENTS
The Company has developed company-wide operating standards, which are tailored
for each of its markets based on industry standards and local conditions. Using
these standards, the Company tracks collection and disposal routing efficiency
and equipment utilization. It also implements cost controls and employee
training and safety procedures, and establishes a sales and marketing plan for
each market. The Company has installed a wide area network, implemented advanced
management information systems and financial controls, and consolidated
accounting, insurance and employee benefit functions, customer service,
productivity reporting and dispatching systems. The Company believes that by
establishing operating standards, closely monitoring performance and
streamlining certain administrative functions, it can improve the profitability
of existing operations.
To improve an acquired business' operational productivity, administrative
efficiency and profitability, the Company applies the same operating standards,
information systems and financial controls to acquired businesses as the
Company's existing operations employ. Moreover, if the Company is able to
internalize the waste stream of acquired operations, it can further increase
operating efficiencies and improve capital utilization. Where not restricted by
exclusive agreements, contracts, permits or certificates, the Company also
solicits new commercial, industrial and residential customers in areas within
and surrounding the markets served by acquired collection operations, to further
improve operating efficiencies and increase the volume of solid waste collected
by the acquired operations.
ACQUISITION PROGRAM
The Company currently operates in California, Idaho, Nebraska, Oklahoma, Oregon,
South Dakota, Utah, Washington and Wyoming and believes that these and other
markets in the Western U.S. with similar characteristics offer significant
opportunities for achieving its objective. The Company focuses on markets that
are generally characterized by: (i) a geographically dispersed population, which
the Company believes deters competition from larger, established waste
management companies; (ii) a potential revenue base of at least $15 million;
(iii) the opportunity for the Company to acquire a significant market share;
(iv) the availability of adequate disposal capacity, either through acquisition
by the Company or through agreements with third parties; (v) a favorable
regulatory environment; or (vi) strong projected economic or population growth
rates. The Company believes that these market characteristics provide
significant growth opportunities for a well-capitalized market entrant and
create economic and operational barriers to entry by new competitors.
The Company believes that its experienced management, decentralized operating
strategy, financial strength and size make it an attractive buyer to certain
solid waste collection and disposal acquisition candidates. The Company has
developed a set of financial, geographic and management criteria to help
management evaluate acquisition candidates. These criteria evaluate a variety of
factors, including, but not limited to: (i) the candidate's historical and
projected financial performance; (ii) the candidate's internal rate of return,
return on assets and return on revenue; (iii) the experience and reputation of
the candidate's management and customer service providers, their relationships
with local communities and their willingness to continue as employees of the
Company; (iv) the composition and size of the candidate's customer base and
whether the customer base is served under franchise agreements, municipal
contracts, governmental certificates or other
37
<PAGE> 38
exclusive arrangements; (v) whether the geographic location of the candidate
will enhance or expand the Company's market area or ability to attract other
acquisition candidates; (vi) whether the acquisition will increase the Company's
market share or help protect the Company's existing customer base; (vii) any
potential synergies that may be gained by combining the candidate with the
Company's existing operations; and (viii) the liabilities of the candidate.
Before completing an acquisition, the Company performs extensive environmental,
operational, engineering, legal, human resources and financial due diligence.
All acquisitions must be evaluated and approved by the Company's management
before being recommended to the Executive Committee of the Board of Directors.
The Company seeks to integrate each acquired business promptly and to minimize
disruption to the ongoing operations of both the Company and the acquired
business, and generally attempts to retain the senior management of acquired
businesses. The Company believes its senior management team has a proven track
record in integrating acquisitions.
The following table sets forth the Company's acquisitions completed from its
inception in September 1997 through October 1, 1998:
<TABLE>
<CAPTION>
ACQUIRED BUSINESS MONTH ACQUIRED PRINCIPAL BUSINESS LOCATION MARKET AREA
----------------- -------------- ------------------ -------- -----------
<S> <C> <C> <C> <C>
Westlane Disposal September 1998 Collection Florence, OR Southwestern Oregon
Harrell's Septic Service September 1998 Septic Services Crescent City, CA Northwestern California
and Southwestern Oregon
Evergreen Waste Systems, Inc. September 1998 Collection Washougal, WA Southwestern Washington
and Northwestern Oregon
Wolff's Trashmasher and Haul It September 1998 Collection Stanton, NE Eastern Nebraska
All Sanitary Service
Country Garbage Services, Inc. September 1998 Collection Salt Lake City, UT Central Utah
Youngclaus Enterprises September 1998 Collection Madera, CA North Central California
Affiliated Waste LLC September 1998 Collection Norfolk, NE Eastern Nebraska
J&J Sanitation, Inc. August 1998 Collection O'Neill, NE Eastern Nebraska
Contractors Waste, Inc. August 1998 Collection Salt Lake City, UT Central Utah
Big Red Roll Off, Inc. August 1998 Collection O'Neill, NE Eastern Nebraska
ABC Waste, Inc. August 1998 Collection Salt Lake City, UT Central Utah
Miller Containers, Inc. July 1998 Collection Salt Lake City, UT Central Utah
Shrader Refuse and Recycling July 1998 Collection Papillion, NE Eastern Nebraska
Service Company
Red Carpet Landfill, Inc. June 1998 Landfill Enid, OK Western Oklahoma
B&B Sanitation, Inc. June 1998 Collection Enid, OK Western Oklahoma
Darlin Equipment, Inc. June 1998 Equipment leasing Enid, OK Western Oklahoma
Oregon Waste Technology June 1998 Collection Brookings, OR Southwestern Oregon
Curry Transfer and Recycling June 1998 Collection Brookings, OR Southwestern Oregon
Contractors' Waste Removal, L.C June 1998 Collection Orem, UT Central Utah
Arrow Sanitary Services, Inc. June 1998 Collection Portland, OR Northwestern Oregon and
Southwestern Washington
T&T Disposal, Inc. May 1998 Collection Gillette, WY Northeastern Wyoming
Sunshine Sanitation May 1998 Collection Spearfish, SD Western South Dakota
Incorporated
Sower's Sanitation, Inc. May 1998 Collection Belle Fourche, SD Western South Dakota
Jesse's Disposal April 1998 Collection Gillette, WY Northeastern Wyoming
A-1 Disposal, Inc. April 1998 Collection Gillette, WY Northeastern Wyoming
</TABLE>
38
<PAGE> 39
<TABLE>
<CAPTION>
ACQUIRED BUSINESS MONTH ACQUIRED PRINCIPAL BUSINESS LOCATION MARKET AREA
----------------- -------------- ------------------ -------- -----------
<S> <C> <C> <C> <C>
Hunter Enterprises, Inc. March 1998 Collection Shelley, ID Eastern Idaho
Madera Disposal Services Inc. February 1998 Collection and Madera, CA North Central California
Landfill
Waste Connections of Idaho, January 1998 Collection Idaho Falls, ID Eastern Idaho
Inc.
Fibres International, Inc. September 1997 Collection Issaquah, WA North Central Washington
and Central Oregon
Browning-Ferris Industries of September 1997 Collection Clark County, WA Southwestern Washington
Washington, Inc.
</TABLE>
SERVICES
COMMERCIAL, INDUSTRIAL AND RESIDENTIAL WASTE SERVICES
The Company serves more than 200,000 commercial, industrial and residential
customers. Of these, the Company serves more than 49,000 under G certificates
that grant the Company rights, which are generally perpetual and exclusive, to
provide services within specified areas, approximately 13,200 under exclusive
franchise agreements with remaining terms ranging from seven to 18 years, and
approximately 90,000 under exclusive municipal contracts with generally shorter
contract terms.
The Company's commercial and industrial services that are not performed under G
certificates, franchise agreements or municipal contracts are provided under one
to five year service agreements. Fees under these agreements are determined by
such factors as 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 in its markets for similar service.
Collection of larger volumes associated with commercial and industrial waste
streams generally helps improve the Company's operating efficiencies, and
consolidation of these volumes allows the Company to negotiate more favorable
disposal prices. The Company's commercial and industrial customers use portable
containers for storage, enabling the Company to service many customers with
fewer collection vehicles. Commercial and industrial collection vehicles
normally require one operator. The Company provides one to eight cubic yard
containers to commercial customers, 10 to 50 cubic yard containers to industrial
customers, and 30 to 95 gallon carts to residential customers. For an additional
fee, the Company installs stationary compactors that compact waste prior to
collection on the premises of a substantial number of large volume customers. No
single commercial or industrial contract is material to the Company's operating
results.
The Company's residential waste services that are not performed under G
certificates, franchise agreements or municipal contracts are provided under
contracts with homeowners' associations, apartment owners or mobile home park
operators, or on a subscription basis with individual households. Residential
contract fees 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 charged in that market for similar services.
Collection fees are paid either by the municipalities from tax revenues or
directly by the residents receiving the services.
39
<PAGE> 40
TRANSFER STATION SERVICES
The Company has an active program to acquire, develop, own and operate transfer
stations in markets proximate to its operations. Currently, the Company operates
two transfer stations in California, two transfer stations in Nebraska, one
transfer station in Washington and five transfer stations in Oregon, which
receive, compact, and transfer solid waste to be trasported by larger vehicles
to landfills. The Company believes that the transfer stations benefit the
Company by: (i) concentrating the waste stream from a wider area, which
increases the volume of disposal at Company-operated landfills and gives the
Company greater leverage in negotiating for more favorable disposal rates at
other landfills; (ii) improving utilization of collections personnel and
equipment; and (iii) building relationships with municipalities and private
operators that deliver waste, which can lead to additional growth opportunities.
LANDFILLS
The Company operates two Subtitle D landfills, the Fairmead Landfill and the Red
Carpet Landfill, and owns the Red Carpet Landfill. The Company operates the
Fairmead Landfill under an operating agreement with Madera County with a
remaining term of 11 years. In fiscal 1997, approximately 45% of the solid waste
disposed of at the Fairmead Landfill was delivered by Madera. As of October 1,
1998, the Fairmead Landfill consisted of 160 total acres, of which 20 acres were
permitted for disposal. As of that date, the Fairmead Landfill had approximately
600,000 tons of unused permitted capacity remaining, with approximately 3.5
million additional tons of capacity in various stages of permitting, and was
estimated to have a remaining life of 26 years. The Fairmead Landfill is
currently permitted to accept up to 395 tons per day of municipal solid waste.
As of October 1, 1998, the Red Carpet Landfill consisted of 82 total acres, of
which 40 acres were permitted for disposal. As of that date, the Red Carpet
Landfill had approximately 650,000 tons of unused permitted capacity remaining,
with approximately 1.7 million additional tons of capacity in various stages of
permitting, and was estimated to have a remaining life of 40 years. The Red
Carpet Landfill is currently permitted to accept up to 350 tons per day of
municipal solid waste.
The Company monitors the available permitted in-place disposal capacity of the
Fairmead and Red Carpet Landfills on an ongoing basis and evaluates whether to
seek to expand this capacity. In making this evaluation, the Company considers
various factors, including the volume of waste projected to be disposed of at
the landfill, the size of the unpermitted acreage included in the landfill, the
likelihood that the Company will be successful in obtaining the necessary
approvals and permits required for the expansion and the costs that would be
involved in developing the additional capacity. The Company also regularly
considers whether it is advisable, in light of changing market conditions and/or
regulatory requirements, to seek to expand or change the permitted waste streams
or to seek other permit modifications.
The Company seeks to identify solid waste landfill acquisition candidates to
achieve vertical integration in markets where the economic and regulatory
environment makes such acquisitions attractive. The Company believes that in
some markets, acquiring landfills would provide opportunities to vertically
integrate its collection, transfer and disposal operations while improving
operating margins. The Company evaluates landfill candidates by determining,
among other things, the amount of waste that could be diverted to the
40
<PAGE> 41
landfill in question, whether access to the landfill is economically feasible
from the Company's existing market areas either directly or through transfer
stations, the expected life of the landfill, the potential for expanding the
landfill, and current disposal costs compared to the cost of acquiring the
landfill. Where the acquisition of a landfill is not attractive, the Company
pursues long term disposal contracts with facilities located in proximity to its
markets.
RECYCLING AND OTHER SERVICES
The Company offers municipal, commercial, industrial and residential customers
recycling services for a variety of recyclable materials, including cardboard,
office paper, plastic containers, glass bottles and ferrous and aluminum metals.
The Company operates three recycling processing facilities and sells other
collected recyclable materials to third parties for processing before resale.
The profits from the Company's resale of recycled materials are often shared
between the Company and the other parties to its recycling contracts. For
example, certain of the Company's municipal recycling contracts in Washington
and Idaho, which were negotiated before the Company acquired those businesses,
specify certain benchmark resale prices for recycled commodities. To the extent
the prices the Company actually receives for the processed recycled commodities
collected under the contract exceed the prices specified in the contract, the
Company shares the excess with the municipality, after recovering any previous
shortfalls resulting from actual market prices falling below the prices
specified in the contract. In an effort to reduce its exposure to commodity
price risk with respect to recycled materials, the Company has adopted a pricing
strategy of charging collection and processing fees for recycling volume
collected from third parties. The Company believes that recycling will continue
to be an important component of local and state solid waste management plans,
due to the public's increasing environmental awareness and expanding regulations
that mandate or encourage recycling.
The Company also provides other waste management services, most of which are
project-based, including transporting and disposing of non-hazardous
contaminated soils and similar materials, transporting special waste products,
including asbestos, and arranging for the transportation of construction and
demolition waste and disposal of soil and special waste products and providing
portable toilet and septic pumping services.
OPERATIONS
The Company is managed on a decentralized basis. This places decision-making
authority close to the customer, enabling the Company to identify customers'
needs quickly and to address those needs in a cost-effective manner. The Company
believes that decentralization provides a low-overhead, highly efficient
operational structure that allows the Company to expand into geographically
contiguous markets and operate in relatively small communities that larger
competitors may not find attractive. The Company believes that this structure
gives the Company a strategic competitive advantage, given the relatively rural
nature of much of the Western U.S., and makes the Company an attractive buyer to
many potential acquisition candidates.
The Company currently delivers its services from 22 operating locations serving
ten market areas, or districts. Each district has a district manager, who has
autonomous service and decision-making authority for that district and is
responsible for maintaining service quality, promoting safety in the district's
operations, implementing marketing programs, and overseeing day-to-day
operations, including contract administration. District managers
41
<PAGE> 42
also help identify acquisition candidates. Once the Company begins an
acquisition, business development managers, under the supervision of district
and executive managers, obtain the permits and other governmental approvals
required for the Company to operate the acquired business, including those
related to zoning, environmental and land use.
The Company's financial management, accounting, management information systems,
environmental compliance, risk management and certain personnel functions are
centralized and shared among locations to improve productivity, lower operating
costs and stimulate internal growth. The Company has installed a Company-wide
management information system that assists district personnel in making
decisions based on centralized, real-time financial, productivity, maintenance
and customer information. While district management operates with a high degree
of autonomy, the Company's senior officers monitor district operations and
require adherence to the Company's accounting, purchasing, marketing and
internal control policies, particularly with respect to financial matters. The
Company's executive officers regularly review the performance of district
managers and operations.
G CERTIFICATES
The Company performs a substantial portion of its collection business in
Washington under G certificates awarded by the Washington Utilities and
Transportation Commission (the "WUTC"). G certificates apply only to
unincorporated areas of Washington and municipalities that have elected to have
their solid waste collection overseen by the WUTC. G certificates generally
grant the holder the perpetual right to provide specified solid waste collection
and transportation services in a specified territory. The WUTC has repeatedly
determined that, in enacting the statute authorizing G certificates, the
Washington Legislature intended to favor grants of exclusive, rather than
overlapping, service rights for conventional solid waste services. Accordingly,
most G certificates currently grant exclusive solid waste collection and
transportation rights for conventional solid waste services in their specified
territories.
The WUTC and the Washington Legislature have generally construed G certificates
as conferring vested property rights that may be defeated, diminished or
cancelled only upon the occurrence of specified events of default, the
demonstrated lack of fitness of the certificate holder, or municipalities'
annexation of territory covered by a certificate. Thus, a certificate holder is
entitled to due process in challenging any action that affects its rights. In
addition, legislation passed in 1997 requires a municipality that annexes
territory covered by a G certificate either to grant the certificate holder an
exclusive franchise, generally with a minimum term of seven years, to continue
to provide services in the affected area, or to negotiate with the certificate
holder some other compensation for the collection rights in the affected area.
The statute expressly permits the certificate holder to sue the annexing
municipality for measurable damages that exceed the value of a seven-year
franchise agreement to provide services in the affected area. Under one of the
contracts with a municipality in Washington acquired by a predecessor of the
Company, the predecessor purported to waive its rights to compensation or
damages under the statute in return for the right to service any current or
prospectively annexed areas formerly covered by its G certificate.
In addition to awarding G certificates, the WUTC is required by statute to
establish just, reasonable and compensatory rates to customers of regulated
solid waste collection companies. The WUTC is charged with balancing the needs
of service providers to earn
42
<PAGE> 43
fair and sufficient returns on their investments in plant and equipment against
the needs of commercial and residential customers to receive adequate and
reasonably priced services. Over the past decade, the WUTC has used a ratemaking
methodology known as the "Lurito-Gallagher" method. This method calculates rates
based on the income statements and balance sheets of each service provider, with
the goal of establishing rates that reflect the costs of providing service and
that motivate service providers to invest in equipment that improves operating
efficiency in a cost-effective manner. The Lurito-Gallagher rate-setting
methodology was adjusted in the early 1990's to better reflect the costs of
providing recycling services, by accounting for providers' increasing use of
automated equipment and adjusting for the cyclicality of the secondary
recyclables markets. This has often resulted in more frequent rate adjustments
in response to material cost shifts.
SALES AND MARKETING
In most of the Company's existing markets, waste collection, transfer and
disposal services are provided to municipalities and governmental authorities
under exclusive franchise agreements, municipal contracts and G certificates;
service providers do not contract directly with individual customers. In
addition, because the Company has grown to date primarily through acquisitions,
the Company has generally assumed existing franchise agreements, municipal
contracts and G certificates from the acquired companies, rather than obtaining
new contracts. For these reasons, the Company's sales and marketing efforts to
date have been narrowly focused. The Company expects to add sales and marketing
personnel as necessary to: (i) solicit new customers in markets where it is not
the exclusive provider of solid waste services; (ii) expand its presence into
areas adjacent to or contiguous with its existing markets; and (iii) market
additional services to existing customers.
COMPETITION
The solid waste services industry is highly competitive and fragmented and
requires substantial labor and capital resources. The industry presently
includes four large national waste companies: Allied Waste Industries, Inc.
(which has announced an impending merger with American Disposal Services, Inc.,
Browning-Ferris Industries, Inc., Republic Services Inc., and Waste Management,
Inc. (which has completed a merger with USA Waste Services, Inc. and announced
an impending merger with Eastern Environmental Services, Inc.) Several other
public companies have annual revenues in excess of $100 million, including
American Disposal Services, Inc., Casella Waste Systems, Inc., Eastern
Environmental Services, Inc., Superior Services, Inc. and Waste Industries, Inc.
Certain of the markets in which the Company competes or will likely compete are
served by one or more large, national solid waste companies, as well as by
numerous regional and local solid waste companies of varying sizes and
resources, some of which have accumulated substantial goodwill in their markets.
The Company also competes with operators of alternative disposal facilities,
including incinerators, and with counties, municipalities, and solid waste
districts that maintain their own waste collection and disposal operations.
Public sector operations may have financial advantages over the Company, because
of their access to user fees and similar charges, tax revenues and tax-exempt
financing.
The Company competes for collection, transfer and disposal volume based
primarily on the price and quality of its services. From time to time,
competitors may reduce the price of
43
<PAGE> 44
their services in an effort to expand their market shares or service areas or to
win competitively bid municipal contracts. These practices may cause the Company
to reduce the price of its services or, if it elects not to do so, to lose
business. The Company provides a substantial portion of its residential,
commercial and industrial collection services under exclusive franchise and
municipal contracts and certificates, some of which are subject to periodic
competitive bidding. The Company provides the balance of its services under
subscription agreements with individual households and one to five year service
contracts with commercial and industrial customers.
Intense competition exists not only for collection, transfer and disposal
volume, but also for acquisition candidates. The Company generally competes for
acquisition candidates with publicly owned regional and large national waste
management companies.
REGULATION
INTRODUCTION
The Company is subject to extensive and evolving federal, state and local
environmental laws and regulations, the enforcement of which has become
increasingly stringent in recent years. The environmental regulations affecting
the Company are administered by the EPA and other federal, state and local
environmental, zoning, health and safety agencies. A substantial portion of the
Company's collection business in Washington is performed under G certificates
awarded by the Washington Utilities and Transportation Commission, which
generally grant the Company perpetual and exclusive collection rights in certain
areas. The Company is currently in substantial compliance with applicable
federal, state and local environmental laws, permits, orders and regulations. It
does not currently anticipate any material environmental costs necessary to
bring its operations into compliance (although there can be no assurance in this
regard). The Company anticipates that regulation, legislation and regulatory
enforcement actions related to the solid waste services industry will continue
to increase. The Company attempts to anticipate future regulatory requirements
and to plan in advance as necessary to comply with them.
To transport solid waste, the Company must possess and comply with one or more
permits from state or local agencies. These permits also must be periodically
renewed and may be modified or revoked by the issuing agency.
The principal federal, state and local statutes and regulations that apply to
the Company's operations are described below.
THE RESOURCE CONSERVATION AND RECOVERY ACT OF 1976 ("RCRA")
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. RCRA divides solid waste into two groups,
hazardous and nonhazardous. Wastes are generally classified as hazardous if they
either (i) are specifically included on a list of hazardous wastes, or (ii)
exhibit certain characteristics defined as hazardous. Household wastes are
specifically designated as nonhazardous. Wastes classified as hazardous under
RCRA are subject to much stricter regulation than wastes classified as
nonhazardous, and businesses that deal with hazardous waste are subject to
regulatory obligations in addition to those imposed on handlers of nonhazardous
waste.
44
<PAGE> 45
The EPA regulations issued under Subtitle C of RCRA impose a comprehensive
"cradle to grave" system for tracking the generation, transportation, treatment,
storage and disposal of hazardous wastes. The Subtitle C Regulations impose
obligations on generators, transporters and disposers of hazardous wastes, and
require permits that are costly to obtain and maintain for sites where such
material is treated, stored or disposed. Subtitle C requirements include
detailed operating, inspection, training and emergency preparedness and response
standards, as well as requirements for manifesting, record keeping and
reporting, corrective action, facility closure, post-closure and financial
responsibility. Most states have promulgated regulations modeled on some or all
of the Subtitle C provisions issued by the EPA. Some state regulations impose
different, additional and more stringent obligations, and may regulate certain
materials as hazardous wastes that are not so regulated under the federal
Subtitle C Regulations. From the date of inception through October 1, 1998, the
Company did not, to its knowledge, transport hazardous wastes in volumes that
would subject the Company to hazardous waste regulations under RCRA.
In October 1991, the EPA adopted the Subtitle D Regulations governing solid
waste landfills. The Subtitle D Regulations, which generally became effective in
October 1993, include location restrictions, facility design standards,
operating criteria, closure and post-closure requirements, financial assurance
requirements, groundwater monitoring requirements, groundwater remediation
standards and corrective action requirements. In addition, the Subtitle D
Regulations require that new landfill sites meet more stringent liner design
criteria (typically, composite soil and synthetic liners or two or more
synthetic liners) intended to keep leachate out of groundwater and have
extensive collection systems to carry away leachate for treatment prior to
disposal. Groundwater monitoring wells must also be installed at virtually all
landfills to monitor groundwater quality and, indirectly, the effectiveness of
the leachate collection system. The Subtitle D Regulations also require, where
certain regulatory thresholds are exceeded, that facility owners or operators
control emissions of methane gas generated at landfills in a manner intended to
protect human health and the environment. Each state is required to revise its
landfill regulations to meet these requirements or such requirements will be
automatically imposed by the EPA on landfill owners and operators in that state.
Each state is also required to adopt and implement a permit program or other
appropriate system to ensure that landfills in the state comply with the
Subtitle D Regulations. Various states in which the Company operates or in which
it may operate in the future have adopted regulations or programs as stringent
as, or more stringent than, the Subtitle D Regulations.
THE FEDERAL WATER POLLUTION CONTROL ACT OF 1972, AS AMENDED
(THE "CLEAN WATER ACT")
The Clean Water Act regulates the discharge of pollutants from a variety of
sources, including solid waste disposal sites and transfer stations, into waters
of the United States. If run-off from the Company's transfer stations or run-off
or collected leachate from the Company's owned or operated landfills is
discharged into streams, rivers or other surface waters, the Clean Water Act
would require the Company to apply for and obtain a discharge permit, conduct
sampling and monitoring and, under certain circumstances, reduce the quantity of
pollutants in such discharge. Also, virtually all landfills are required to
comply with the EPA's storm water regulations issued in November 1990, which are
designed to prevent contaminated landfill storm water runoff from flowing into
surface waters. The Company believes that its facilities comply in all material
respects with the
45
<PAGE> 46
Clean Water Act requirements. Various states in which the Company operates or in
which it may operate in the future have been delegated authority to implement
the Clean Water Act permitting requirements, and some of these states have
adopted regulations that are more stringent than the federal requirements. For
example, states often require permits for discharges to ground water as well as
surface water.
THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION, AND
LIABILITY ACT OF 1980 ("CERCLA")
CERCLA established a regulatory and remedial program intended to provide for the
investigation and cleanup of facilities where or from which a release of any
hazardous substance into the environment has occurred or is threatened. CERCLA's
primary mechanism for remedying such problems is to impose strict joint and
several liability for cleanup of facilities on current owners and operators of
the site, former 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 the transporters who
select the disposal and treatment facilities. CERCLA also imposes liability for
the cost of evaluating and remedying any damage to natural resources. The costs
of CERCLA investigation and cleanup can be very substantial. Liability under
CERCLA does not depend on the existence or disposal of "hazardous waste" as
defined by RCRA; it can also be based on the existence of even very small
amounts of the more than 700 "hazardous substances" listed by the EPA, many of
which can be found in household waste. In addition, the definition of "hazardous
substances" in CERCLA incorporates substances designated as hazardous or toxic
under the federal Clean Water Act, Clear Air Act and Toxic Substances Control
Act. If the Company were found to be a responsible party for a CERCLA cleanup,
the enforcing agency could hold the Company, 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. CERCLA also
authorizes the imposition of a lien in favor of the United States on all real
property subject to, or affected by, a remedial action for all costs for which a
party is liable. CERCLA gives a responsible party the right to bring a
contribution action against other responsible parties for their allocable shares
of investigative and remedial costs. The Company's ability to obtain
reimbursement from others for their allocable shares of such costs would be
limited by the Company's ability to find other responsible parties and prove the
extent of their responsibility and by the financial resources of such other
parties.
THE CLEAN AIR ACT
The Clean Air Act generally, through state implementation of federal
requirements, regulates emissions of air pollutants from certain landfills based
on the date of the landfill construction and volume per year of emissions of
regulated pollutants. Larger landfills and landfills located in areas that do
not comply with certain requirements of the Clean Air Act may be subject to even
more extensive air pollution controls and emission limitations. In addition, the
EPA has issued standards regulating the disposal of asbestos-containing
materials. Air permits to construct may be required for gas collection and
flaring systems, and operating permits may be required, depending on the
estimated volume of emissions.
All of the federal statutes described above contain provisions authorizing,
under certain circumstances, the institution of lawsuits by private citizens to
enforce the provisions of the
46
<PAGE> 47
statutes. In addition to a penalty award to the United States, some of those
statutes authorize an award of attorneys' fees to parties successfully advancing
such an action.
THE OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970 (THE "OSH ACT")
The OSH Act is administered by the Occupational Safety and Health Administration
("OSHA"), and in many states by state agencies whose programs have been approved
by OSHA. The OSH Act establishes employer responsibilities for worker health and
safety, including the obligation to maintain a workplace free of recognized
hazards likely to cause death or serious injury, to comply with adopted worker
protection standards, to maintain certain records, to provide workers with
required disclosures and to implement certain health and safety training
programs. Various OSHA standards may apply to the Company's operations,
including standards concerning notices of hazards, safety in excavation and
demolition work, the handling of asbestos and asbestos-containing materials, and
worker training and emergency response programs.
FLOW CONTROL/INTERSTATE WASTE RESTRICTIONS
Certain permits and approvals, as well as certain state and local regulations,
may limit a landfill to accepting waste that originates from specified
geographic areas, restrict the importation of out-of-state waste or otherwise
discriminate against out-of-state waste. These restrictions, generally known as
flow control restrictions, are controversial, and some courts have held that
some flow control schemes violate constitutional limits on state or local
regulation of interstate commerce. From time to time, federal legislation is
proposed that would allow some local flow control restrictions. Although no such
federal legislation has been enacted to date, if such federal legislation should
be enacted in the future, states in which the Company operates landfills could
limit or prohibit the importation of out-of-state waste or direct that wastes be
handled at specified facilities. Such state actions could adversely affect the
Company's landfills. These restrictions could also result in higher disposal
costs for the Company's collection operations. If the Company were unable to
pass such higher costs through to its customers, the Company's business,
financial condition and operating results could be adversely affected.
Certain state and local jurisdictions may also seek to enforce flow control
restrictions through local legislation or contractually. In certain cases, the
Company may elect not to challenge such restrictions. These restrictions could
reduce the volume of waste going to landfills in certain areas, which may
adversely affect the Company's ability to operate its landfills at their full
capacity and/or reduce the prices that the Company can charge for landfill
disposal services. These restrictions may also result in higher disposal costs
for the Company's collection operations. If the Company were unable to pass such
higher costs through to its customers, the Company's business, financial
condition and operating results could be adversely affected.
STATE AND LOCAL REGULATION
Each state in which the Company now operates or may operate in the future has
laws and regulations governing the generation, storage, treatment, handling,
transportation and disposal of solid waste, occupational safety and health,
water and air pollution and, in most cases, the siting, design, operation,
maintenance, closure and post-closure maintenance of landfills and transfer
stations. In addition, many states have adopted statutes comparable
47
<PAGE> 48
to, and in some cases more stringent than, CERCLA. These statutes impose
requirements for investigation and cleanup of contaminated sites and liability
for costs and damages associated with such sites, and some provide for the
imposition of liens on property owned by responsible parties. Furthermore, many
municipalities also have ordinances, local laws and regulations affecting
Company operations. These include zoning and health measures that limit solid
waste management activities to specified sites or activities, flow control
provisions that direct the delivery of solid wastes to specific facilities, laws
that grant the right to establish franchises for collection services and then
put such franchises out for bid, and bans or other restrictions on the movement
of solid wastes into a municipality.
Permits or other land use approvals with respect to a landfill, as well as state
or local laws and regulations, may specify the quantity of waste that may be
accepted at the landfill during a given time period, and/or specify the types of
waste that may be accepted at the landfill. Once an operating permit for a
landfill is obtained, it must generally be renewed periodically.
There has been an increasing trend at the state and local level to mandate and
encourage waste reduction at the source and waste recycling, and to prohibit or
restrict the disposal of certain types of solid wastes, such as yard wastes,
leaves and tires, in landfills. The enactment of regulations reducing the volume
and types of wastes available for transport to and disposal in landfills could
prevent the Company from operating its facilities at their full capacity.
Some state and local authorities enforce certain federal laws in addition to
state and local laws and regulations. For example, in some states, RCRA, the OSH
Act, parts of the Clean Air Act and parts of the Clean Water Act are enforced by
local or state authorities instead of by the EPA, and in some states those laws
are enforced jointly by state or local and federal authorities.
PUBLIC UTILITY REGULATION
In many states, public authorities regulate the rates that landfill operators
may charge. The rates that the Company may charge at its Fairmead Landfill for
the disposal of municipal solid waste are regulated by the Madera County Board
of Supervisors. The adoption of rate regulation or the reduction of current
rates in states in which the Company owns or operates landfills could adversely
affect the Company's business, financial condition and operating results.
Solid waste collection services in all unincorporated areas of Washington and in
electing municipalities in Washington are provided under G certificates awarded
by the Washington Utilities and Transportation Commission. The WUTC also sets
rates for regulated solid waste collection services in Washington.
RISK MANAGEMENT, INSURANCE AND PERFORMANCE BONDS
The Company maintains an environmental and other risk management programs
appropriate for its business. The Company's environmental risk management
program includes evaluating existing facilities and potential acquisitions for
environmental law compliance. The Company does not presently expect
environmental compliance costs to increase above current levels, but the Company
cannot predict whether future acquisitions will cause such costs to increase.
The Company also maintains a worker safety program that encourages safe
practices in the workplace. Operating practices at all Company
48
<PAGE> 49
operations emphasize minimizing the possibility of environmental contamination
and litigation. The Company's facilities comply in all material respects with
applicable federal and state regulations.
The Company carries a broad range of insurance, which the Company's management
considers adequate to protect the Company's assets and operations. The coverage
includes general liability, comprehensive property damage, workers' compensation
and other coverage customary in the industry. These policies generally exclude
coverage for damages associated with environmental conditions. Because of the
limited availability and high cost of environmental impairment liability
insurance, and in light of the Company's limited landfill operations, the
Company has not obtained such coverage. If the Company were to incur liability
for environmental cleanups, corrective action or damage, its financial condition
could be materially and adversely affected. The Company will continue to
investigate the possibility of obtaining environmental impairment liability
insurance, particularly if it acquires or operates landfills other than the
Fairmead Landfill and the Red Carpet Landfill. The Company believes that most
other landfill operators do not carry such insurance.
Municipal solid waste collection contracts may require performance bonds or
other means of financial assurance to secure contractual performance. Certain
environmental regulations also require demonstrated financial assurance to meet
closure and post-closure requirements for landfills. The Company has not
experienced difficulty in obtaining performance bonds or letters of credit for
its current operations. At October 1, 1998, the Company had provided customers
and various regulatory authorities with surety bonds and letters of credit in
the aggregate amount of approximately $1.4 million to secure its obligations.
The Company's credit facility provides for the issuance of letters of credit in
an amount up to $5 million, but any letters of credit issued reduce the
availability of borrowings for acquisitions and other general corporate
purposes. If the Company were unable to obtain surety bonds or letters of credit
in sufficient amounts or at acceptable rates, it could be precluded from
entering into additional municipal solid waste collection contracts or obtaining
or retaining landfill operating permits.
PROPERTY AND EQUIPMENT
As of October 1, 1998, the Company owned and operated 22 collection operations,
five transfer stations and one Subtitle D landfill and operated an additional
five transfer stations, one Subtitle D landfill and three recycling facilities.
The Company leases various offices and facilities, including its corporate
offices in Roseville, California. The real estate owned by the Company is not
subject to material encumbrances. The Company owns various equipment, including
waste collection and transportation vehicles, related support vehicles, carts,
containers, and heavy equipment used in landfill operations. The Company
believes that its existing facilities and equipment are generally adequate for
its current operations. However, the Company expects to make substantial
investments in property and equipment for expansion and replacement of assets
and in connection with future acquisitions.
EMPLOYEES
At October 1, 1998, the Company employed approximately 550 full-time employees,
including approximately 38 persons classified as professionals or managers,
approximately
49
<PAGE> 50
461 employees involved in collection, transfer, disposal and recycling
operations, and approximately 51 sales, clerical, data processing or other
administrative employees.
Approximately 55 drivers and mechanics at the Company's Vancouver, Washington
operation are represented by the Teamsters Union, with which Browning-Ferris
Industries of Washington, Inc., the Company's predecessor in Vancouver, entered
a four-year collective bargaining agreement in January 1997. Approximately 11
drivers at Arrow are currently represented by the Teamsters Union, with which
Arrow entered a three-year collective bargaining agreement in March 1998. In
addition, in July 1997, the employees at the Company's facility in Issaquah,
Washington, adopted a measure to select a union to represent them in labor
negotiations with management. The union and management operated under a one-year
negotiating agreement that ended on July 27, 1998. Since that date, negotiations
have continued between the union and the Company, although the union is
permitted to call a strike or call for arbitration of the outstanding issues.
The Company is not aware of any other organizational efforts among its employees
and believes that its relations with its employees are good.
LEGAL PROCEEDINGS
The Company is a party to various legal proceedings in the ordinary course of
business and as a result of the extensive governmental regulation of the solid
waste industry. Management does not believe that these proceedings, either
individually or in the aggregate, are likely to have a material adverse effect
on the Company's business, financial condition, operating results or cash flows.
50
<PAGE> 51
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the Company's
executive officers and directors as of October 1, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Ronald J. 35 President, Chief Executive Officer and
Mittelstaedt(1)(2)....... Chairman
Steven F. Bouck............ 41 Executive Vice President and Chief Financial
Officer
Eugene V. Dupreau(3)....... 51 Vice President -- Madera; Director
Charles B. Youngclaus...... 58 Vice President -- Madera; Advisory Director
Darrell W. Chambliss....... 34 Vice President -- Operations; Secretary
Michael R. Foos............ 33 Vice President and Corporate Controller
Eric J. Moser.............. 31 Treasurer and Assistant Corporate Controller
David M. Hall.............. 42 Vice President -- Business Development
Michael W. 37 Director
Harlan(1)(2)(3)..........
William J. 50 Director
Razzouk(1)(2)(3).........
</TABLE>
- -------------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
Ronald J. Mittelstaedt has been President, Chief Executive Officer and a
director of the Company since it was formed, and was elected Chairman in January
1998. He also served as a consultant to the Company in August and September
1997. Mr. Mittelstaedt has more than ten years of experience in the solid waste
industry. He served as a consultant to United Waste Systems, Inc., with the
title of Executive Vice President, from January 1997 to August 1997, where he
was responsible for corporate development for all states west of Colorado. As
Regional Vice President of USA Waste Services, Inc. (including Sanifill, Inc.,
which was acquired by USA Waste Services, Inc.) from November 1993 to January
1997, he was responsible for all operations in 16 states and Canada. Mr.
Mittelstaedt held various positions at Browning-Ferris Industries, Inc. from
August 1987 to November 1993, most recently as Division Vice President in
northern California, overseeing the San Jose market. Previously he was the
District Manager responsible for BFI's operations in Sacramento and the
surrounding areas. He holds a B.S. in Finance from the University of California
at Santa Barbara.
Steven F. Bouck has been Executive Vice President and Chief Financial Officer of
the Company since February 1998. Mr. Bouck held various positions with First
Analysis Corporation from 1986 to 1998, including most recently as Managing
Director coordinating corporate finance. In that capacity, he provided merger
and acquisition advisory services to companies in the environmental industry.
Mr. Bouck was also responsible for assisting in investing venture capital funds
focussed on the environmental industry that were managed by First Analysis. In
connection with those investments, he served on the boards of directors of
several companies. While at First Analysis, Mr. Bouck also provided analytical
research coverage of a number of publicly traded environmental services
companies. Mr. Bouck holds B.S. and M.S. degrees in mechanical engineering from
Rensselaer
51
<PAGE> 52
Polytechnic Institute and an M.B.A. in Finance from the Wharton School. He has
been a Chartered Financial Analyst since 1990.
Eugene V. Dupreau has been Vice President -- Madera and a director of the
Company since February 23, 1998. Mr. Dupreau served as President and a director
of Madera Disposal Systems, Inc. beginning in 1981 and 1985, respectively, and
held both positions until the Company acquired Madera in 1998. Mr. Dupreau holds
a B.S. in Business Administration from Fresno State University and has completed
advanced coursework in waste management. He serves as a director of several
civic and charitable organizations in Madera County.
Charles B. Youngclaus has been Vice President -- Madera and an advisory director
of the Company since February 23, 1998. Mr. Youngclaus founded Madera Disposal
Systems, Inc. in 1981 and was its Chief Operating Officer and Vice President
before its acquisition by the Company in 1998. Mr. Youngclaus owned and operated
Madera's predecessor company, Madera County Disposal, from 1965 to 1981. Mr.
Youngclaus holds a B.S. from Fresno State University and has completed advanced
coursework in waste management, including certification in clay liner
construction by the University of Texas in 1992. Mr. Youngclaus is a Board
Member of the California Refuse Removal Council and is incoming Treasurer of the
Northern California chapter.
Darrell W. Chambliss has been Vice President -- Operations and Secretary of the
Company since October 1, 1997. Mr. Chambliss held various management positions
at USA Waste Services, Inc. (including Sanifill, Inc. and United Waste, Inc.,
both of which were acquired by USA Waste Services, Inc.) from April 1995 to
September 1997, including most recently Division Manager in Corning, California,
where he was responsible for the operations of 19 operating companies as well as
supervising and integrating acquisitions. From July 1989 to April 1995, he held
various management positions with Browning-Ferris Industries, Inc., including
serving as Assistant District Manager in San Jose, California, where he was
responsible for a significant hauling operation, and serving as District Manager
in Tucson, Arizona for more than three years. Mr. Chambliss holds a B.S. in
Business Administration from the University of Arkansas.
Michael R. Foos has been Vice President and Corporate Controller of the Company
since October 1, 1997. Mr. Foos served as Division Controller of USA Waste
Services, Inc. (including Sanifill, Inc., which was acquired by USA Waste
Services, Inc.) from October 1996 to September 1997, where he was responsible
for financial compilation and reporting and acquisition due diligence for a
seven-state region. Mr. Foos served as Assistant Regional Controller at USA
Waste Services, Inc. from August 1995 to September 1996, where he was
responsible for internal financial reporting for operations in six states and
Canada. Mr. Foos also served as District Controller for Waste Management, Inc.
from February 1990 to July 1995, and was a member of the audit staff of Deloitte
& Touche from 1987 to 1990. Mr. Foos holds a B.S. in Accounting from Ferris
State University.
David M. Hall has been Vice President -- Business Development since August 1,
1998. Mr. Hall has over twelve years experience in the solid waste industry with
extensive operating and marketing experience in the Western U.S. From October,
1995 to July, 1998, Mr. Hall was the Divisional Vice President of USA Waste
Services, Inc., Rocky Mountain Division (including for Sanifill, Inc. which was
acquired by USA Waste Services, Inc.). Mr. Hall was the first Sanifill employee
in the state of Colorado and in his capacity for both USA Waste Services, Inc.
and Sanifill, Inc. he oversaw all operations
52
<PAGE> 53
and business development in six Rocky Mountain states. Prior to Sanifill, Mr.
Hall held various management positions with BFI from October, 1986 to October,
1995, including Vice President of Sales for the Western United States. Prior to
the solid waste industry, Mr. Hall was employed from 1979 to 1986 in a variety
of sales and marketing management positions in the high technology sector. Mr.
Hall received a BS degree in Management and Marketing in 1979 from SW Missouri
State University.
Eric J. Moser has been the Company's Treasurer and Assistant Corporate
Controller since October 1, 1997. From August 1995 to September 1997, Mr. Moser
held various finance positions at USA Waste Services, Inc. (including Sanifill,
Inc., which was acquired by USA Waste Services, Inc.), most recently as
Controller of the Ohio Division, where he was responsible for internal financial
compilation and reporting and acquisition due diligence. Previously Mr. Moser
was Controller of the Michigan Division of USA Waste Services, Inc., where he
was responsible for internal financial reporting. Mr. Moser served as Controller
for Waste Management, Inc. from June 1993 to August 1995, where he was
responsible for internal financial reporting for a hauling company, landfill and
transfer station. Mr. Moser holds a B.S. in Accounting from Illinois State
University.
Michael W. Harlan has been a director of the Company since January 30, 1998.
From November 1997 to January 30, 1998, Mr. Harlan served as a consultant to the
Company on various financial matters. From March 1997 to August 1998, Mr. Harlan
was Vice President and Chief Financial Officer of Apple Orthodontix, Inc., a
publicly traded company that provides practice management services to
orthodontic practices in the U.S. and Canada. From April 1991 to December 1996,
Mr. Harlan held various positions in the finance and acquisition departments of
USA Waste Services, Inc. (including Sanifill, Inc., which was acquired by USA
Waste Services, Inc.), including serving as Treasurer and Assistant Secretary
beginning in September 1993. From May 1982 to April 1991, Mr. Harlan held
various positions in the tax and corporate financial consulting services
division of Arthur Andersen LLP, where he was a Manager since July 1986. Mr.
Harlan is a Certified Public Accountant and holds a B.A. from the University of
Mississippi.
William J. Razzouk has been a director of the Company since January 30, 1998.
Mr. Razzouk owns a management consulting business and an investment company that
focuses on identifying strategic acquisitions. From September 1997 until April
1998, he was also the President, Chief Operating Officer and a director of
Storage USA, Inc., a publicly traded real estate investment trust that owns and
operates more than 350 mini storage warehouses. He served as the President and
Chief Operating Officer of America Online from February 1996 to June 1996. From
1983 to 1996, Mr. Razzouk held various management positions at Federal Express
Corporation, most recently as Executive Vice President, World Wide Customer
Operations, with full worldwide profit and loss responsibility. Mr. Razzouk
previously held management positions at ROLM Corporation, Philips Electronics
and Xerox Corporation. He is a member of the Board of Directors of Fritz
Companies, Inc. and previously was a director of Sanifill, Inc., Cordis Corp.
and La Quinta Motor Inns. He holds a Bachelor of Journalism degree from the
University of Georgia.
CLASSIFICATION OF BOARD OF DIRECTORS
The Board of Directors is divided into three classes. The term of office of the
first class (currently comprised of Eugene V. Dupreau) will expire at the annual
meeting of stockholders following the fiscal year ending December 31, 1998. The
term of office of the
53
<PAGE> 54
second class (currently comprised of Michael W. Harlan and William J. Razzouk)
will expire at the annual meeting of stockholders following the fiscal year
ending December 31, 1999. The term of office of the third class (currently
comprised of Ronald J. Mittelstaedt) will expire at the annual meeting of
stockholders following the fiscal year ending December 31, 2000. At each annual
meeting, stockholders will elect successors to the directors of the class whose
term expires at such meeting, to serve for three-year terms and until their
successors are elected and qualified. See "Description of Capital Stock --
Certain Charter and By-Law Provisions -- Classified Board of Directors."
COMMITTEES OF THE BOARD
The Board of Directors has established an Executive Committee and has authorized
an Audit Committee and a Compensation Committee. A majority of the members of
the Executive Committee are, and both members of each of the Audit and
Compensation Committees are, independent directors who are not employees of the
Company or one of its subsidiaries.
COMPENSATION OF DIRECTORS
Directors do not currently receive any compensation for attending meetings of
the Board of Directors. Each independent director receives a fee of $1,500 for
attending each Board meeting and each committee meeting (unless held on the same
day as the full Board meeting), in addition to reimbursement of reasonable
expenses.
Each independent director who has not been an employee of the Company at any
time during the 12 months preceding his initial election and appointment to the
Board is granted an option to purchase 15,000 shares of the Company's Common
Stock at the time of his or her initial election or appointment. The Company has
granted to each of Messrs. Harlan and Razzouk options to purchase 15,000 shares
of Common Stock at $3.00 per share, exercisable on October 1, 1998.
Beginning in 1999, the Company will grant each independent director, on February
1 of each year during which such person serves on the Board, an option to
purchase 7,500 shares of the Company's Common Stock. All such options will have
an exercise price equal to the fair market value of the Common Stock on the
grant date, will vest in full on the grant date, and will expire upon the
earlier to occur of ten years after the grant date or one year after the
director ceases to be a member of the Board.
54
<PAGE> 55
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
The Company was incorporated in September 1997. The following table contains
information about the annual and long-term compensation earned in 1997 by the
Chief Executive Officer. The Chief Executive Officer has been compensated in
accordance with the terms of his Employment Agreement described below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-----------------------------
SHARES
ANNUAL COMPENSATION UNDERLYING
---------------------------- RESTRICTED OPTIONS/WARRANTS ALL OTHER
SALARY(1) BONUS(1) OTHER STOCK GRANTED(2) COMPENSATION(3)
--------- -------- ----- ---------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Ronald J.
Mittelstaedt....... $39,903 $25,000 -- $0 200,000 $10,000
</TABLE>
- -------------------------
(1) Salary and bonus figures reflect employment from October 1, 1997 through
December 31, 1997. Bonus figure reflects portion earned during 1997; such
bonus is payable in 1998.
(2) See "Option and Warrant Grants" below.
(3) Consists of consulting fees for services rendered prior to the Company's
formation.
STOCK OPTIONS AND WARRANTS
Option and Warrant Grants. The following table contains information concerning
the grant of options and warrants to purchase shares of the Company's Common
Stock to the Company's Chief Executive Officer during the period from inception
(September 9, 1997) through December 31, 1997:
1997 OPTION AND WARRANT GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SHARES % OF TOTAL STOCK PRICE
UNDERLYING OPTIONS AND APPRECIATION FOR
OPTIONS WARRANT OPTION/WARRANT
AND GRANTED TO TERM(2)
NAME OF WARRANT EMPLOYEES IN EXERCISE PRICE EXPIRATION -----------------------
BENEFICIAL OWNER GRANTED 1997 PER SHARE(1) DATE 5% 10%
---------------- ---------- ------------ -------------- ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ronald J.
Mittelstaedt....... 100,000(3) 15.9% $2.80 Dec. 14, 2007 $1,675,000 $2,832,000
100,000(4) 15.9% $2.80 Dec. 14, 2002 $1,252,000 $1,653,000
</TABLE>
- -------------------------
(1) The options and warrant were granted at or above fair market value as
determined by the Board of Directors on the date of grant.
(2) Amounts reported in these columns represent amounts that the Chief Executive
Officer could realize on exercise of options and warrant immediately before
they expire, assuming that the Company's Common Stock appreciates at 5% or
10% annually. These amounts do not take into account taxes and expenses that
may be payable on such exercise. The amount actually realized will depend on
the price of the Common Stock when the options or warrants are exercised,
which may be before the term expires. The Commission requires the table to
reflect 5% and 10% annualized rates of stock price appreciation; the Company
does not project those rates. The Common Stock may not appreciate at those
rates.
55
<PAGE> 56
(3) Warrant vested immediately on date of grant.
(4) Options vested 33% on October 1, 1998, and will vest an additional 33% on
October 1, 1999, and 34% on October 1, 2000.
Option and Warrant Values. The following table shows information about the value
of the Chief Executive Officer's unexercised options and warrants outstanding as
of December 31, 1997. The Chief Executive Officer did not exercise any options
or warrants during 1997.
1997 OPTION AND WARRANT VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AND IN-THE-MONEY OPTIONS AND
WARRANT AT WARRANT AT
DECEMBER 31, 1997 DECEMBER 31, 1997(1)
---------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Ronald J. Mittelstaedt......... 100,000 100,000 -- --
</TABLE>
- -------------------------
(1) There was no public trading market for the Company's Common Stock at
December 31, 1997. Accordingly, as permitted by the rules of the Commission,
the Company calculated these values based on the fair market value of the
Company's Common Stock as of December 31, 1997, of $2.02 per share, as
determined by the Board of Directors based on an independent valuation, less
the aggregate exercise price.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Steven F. Bouck, Eugene
V. Dupreau, Charles B. Youngclaus, Darrell W. Chambliss, Michael R. Foos, Eric
J. Moser and David M. Hall. Each agreement has a three-year term.
The Company entered into an employment agreement with Ronald J. Mittelstaedt,
the President and the Chief Executive Officer, on October 1, 1997. The initial
annual base salary is $170,000. Mr. Mittelstaedt's base salary will be adjusted
to at least $250,000 on October 1, 1998. The agreement provides for a minimum
bonus of $125,000 for the 15-month period ending December 31, 1998, if the
Company achieves certain acquisition and financial targets.
The agreement has an initial five-year term, and then automatically renews for
additional successive one-year terms unless terminated earlier upon written
notice of either Mr. Mittelstaedt or the Company or extended further by the
Board. The Company or Mr. Mittelstaedt may terminate the agreement with or
without cause at any time. If the Company terminates the agreement without cause
(as defined in the agreement) or if Mr. Mittelstaedt terminates the agreement
for good reason (as defined in the agreement), the Company is required to make
certain severance payments, and all of Mr. Mittelstaedt's unvested options,
warrants and rights relating to capital stock of the Company will immediately
vest. A change of control of the Company (as defined in the agreement) is
generally treated as a termination of Mr. Mittelstaedt without cause.
Under the employment agreement, the Company sold Mr. Mittelstaedt 617,500 shares
of the Company's Common Stock for $0.01 per share and 357,143 shares of the
Company's Series A Preferred Stock for $1,000,000. Mr. Mittelstaedt may
recommend nominees for
56
<PAGE> 57
election to the Company's Board of Directors. If the Board has five or fewer
members, Mr. Mittelstaedt may recommend two nominees, and if it consists of more
than five members, he may recommend three nominees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The full Board of Directors served as the compensation committee of the Board
during 1997. When the employment agreement with Mr. Mittelstaedt was approved by
the Board of Directors, Mr. Mittelstaedt was one of three members of the Board
of Directors. No executive officer of the Company served as a director or member
of the compensation committee of another entity, one of whose executive officers
served as a director or member of the Compensation Committee of the Company.
1997 STOCK OPTION PLAN
The 1997 Stock Option Plan (the "Stock Option Plan") was adopted by the Board of
Directors effective as of October 1, 1997, and was approved by the stockholders
on March 12, 1998. The Stock Option Plan is intended to provide employees,
consultants and directors with additional incentives by increasing their
proprietary interests in the Company. Under the Stock Option Plan, the Company
may grant options with respect to a maximum of 1,200,000 shares of Common Stock.
As of October 1, 1998, the Company had granted options to purchase 1,038,050
shares of Common Stock at a weighted average exercise price of $7.25 per share.
The Compensation Committee of the Board of Directors currently administers the
Stock Option Plan. The administrator of the Stock Option Plan determines the
employees, consultants and directors to whom options are granted (the
"Optionees"), the type, size and term of the options, the grant date, the
expiration date, the vesting schedule and other terms and conditions of the
options.
The Stock Option Plan provides for the grant of incentive stock options ("ISOs")
as defined in section 422 of the Internal Revenue Code, as amended, and
nonqualified stock options. Only employees of the Company may receive ISOs. The
aggregate fair market value, as of the grant date, of the Common Stock subject
to ISOs that become exercisable by any employee during any calendar year may not
exceed $100,000. Options generally become exercisable in installments pursuant
to a vesting schedule set forth in the option agreement. No option may be
granted after September 30, 2007. No option will remain exercisable later than
10 years after the grant date (or five years in the case of ISOs granted to
Optionees owning more than 10% of the total combined voting power of all classes
of the Company's outstanding capital stock (a "Ten Percent Stockholder")). The
exercise price of ISOs granted under the Stock Option Plan must be at least the
fair market value of a share of Common Stock on the grant date (or 110% of such
fair market value, in the case of ISOs granted to Ten Percent Stockholders).
If an Optionee with outstanding options retires or becomes disabled and does not
die within the three months after retirement or disability, the Optionee may
exercise his or her options, but generally only within the period ending on the
earlier of: (i) six months after retirement or disability; or (ii) the
expiration of the option set forth in the option agreement. If the Optionee does
not exercise his or her options within that time period, the options terminate,
and the shares of Common Stock subject to the options become available for
issuance under the Stock Option Plan. If the Optionee ceases to be an
57
<PAGE> 58
employee, consultant or director of the Company other than because of
retirement, death or disability, his or her options generally terminate on the
date such relationship terminates, and the shares of Common Stock subject to the
options become available for issuance under the Stock Option Plan. Each option
agreement may give the Company the right to repurchase shares acquired by an
Optionee under the Stock Option Plan upon termination of the Optionee.
58
<PAGE> 59
CERTAIN TRANSACTIONS
INITIAL FUNDING
In September and October 1997, the Company sold 2,300,000 shares of Common Stock
at $0.01 per share and 2,499,998 shares of Series A Preferred Stock at $2.80 per
share to 19 accredited investors, including certain officers and directors of
the Company, in a private placement. The sales were made in accordance with
Regulation D under the Securities Act of 1933, as amended (the "Securities
Act"). The investors included the following officers and directors of the
Company, their immediate family members, and entities controlled by them:
Mittelstaedt Family Trust dated 6/18/97 (trustee is Ronald J. Mittelstaedt,
President, Chief Executive Officer and Chairman): 357,143 shares of Series A
Preferred for $1,000,000 and 617,500 shares of Common Stock for $6,175;
J. Bradford Bishop (former director; resigned January 30, 1998): 678,750 shares
of Common Stock for $6,787.50;
James N. Cutler, Jr. (former director; resigned January 30, 1998): 678,750
shares of Common Stock for $6,787.50;
Bishop-Cutler L.L.C. (controlled by former directors J. Bradford Bishop and
James N. Cutler, Jr.): 339,285 shares of Series A Preferred Stock for $950,000;
Frank W. Cutler (brother of former director James N. Cutler, Jr.): 142,857
shares of Series A Preferred Stock for $400,000 and 275,000 shares of Common
Stock for $2,750;
Darrell W. Chambliss (Vice President -- Operations): 20,000 shares of Common
Stock for $200;
Michael R. Foos (Vice President and Corporate Controller): 20,000 shares of
Common Stock for $200;
Eric J. Moser (Treasurer and Assistant Corporate Controller): 10,000 shares of
Common Stock for $100.
OPTIONS AND WARRANTS TO MANAGEMENT GROUP
On October 1, 1997, Darrell W. Chambliss, Michael R. Foos and Eric J. Moser were
granted options to purchase 150,000, 150,000 and 85,000 shares, respectively, of
Common Stock, pursuant to their respective employment agreements with the
Company.
On December 15, 1997, each of then directors James N. Cutler and J. Bradford
Bishop and Board consultant Frank W. Cutler was granted a warrant to purchase
247,000 shares of Common Stock at an exercise price of $2.80 per share. Messrs.
Cutler and Bishop resigned as directors on January 30, 1998, and Frank W.
Cutler's consulting relationship with the Board terminated on that date. On
December 15, 1997, Ronald J. Mittelstaedt was granted a warrant to purchase
100,000 shares of Common Stock at an exercise price of $2.80 per share and an
option to purchase 100,000 shares of Common Stock at an exercise price of $2.80
per share. All of the above warrants and options are currently exercisable,
except for the option to purchase 100,000 shares granted to Mr. Mittelstaedt,
one-third of which becomes exercisable on each of October 1, 1998, October 1,
1999, and October 1, 2000.
59
<PAGE> 60
On December 15, 1997, Michael W. Harlan was granted a warrant to purchase 5,000
shares of Common Stock at an exercise price of $2.80 per share, exercisable on
October 1, 1998. On January 30, 1998, Mr. Harlan and William J. Razzouk were
each granted an option to purchase 15,000 shares of Common Stock at an exercise
price of $3.00 per share, exercisable on October 1, 1998.
On February 1, 1998, Steven F. Bouck was granted options to purchase 200,000
shares of Common Stock, pursuant to his employment agreement with the Company.
These options include an option to purchase 100,000 shares at an exercise price
of $2.80 per share, of which one-third is exercisable on each of October 1,
1998, October 1, 1999, and October 1, 2000. Of Mr. Bouck's remaining options, an
option to purchase 50,000 shares has an exercise price of $9.50 per share, and
an option to purchase 50,000 shares has an exercise price of $12.50 per share;
one-third of each of these options vests on each of October 1, 1998, October 1,
1999, and October 1, 2000. On February 1, 1998, Mr. Bouck was granted an
immediately exercisable warrant to purchase 50,000 shares of Common Stock at an
exercise price of $2.80 per share, which he exercised in March 1998.
On February 23, 1998, Eugene V. Dupreau and Charles B. Youngclaus were granted
warrants in connection with the Company's acquisition of Madera. See "Purchase
of Madera Disposal Systems, Inc." below.
On July 7, 1998, David M. Hall was granted options to purchase 50,000 shares of
Common Stock at an exercise price of $18.125 per share, one third of which
become exercisable on each of October 1, 1998, October 1, 1999, and October 1,
2000.
PURCHASE OF WASTE CONNECTIONS OF IDAHO, INC.
On January 30, 1998, the Company purchased all of the outstanding stock of Waste
Connections of Idaho, Inc. ("Waste Connections Idaho") from Ronald J.
Mittelstaedt, J. Bradford Bishop and James N. Cutler, Jr., the sole shareholders
of Waste Connections Idaho. The purchase price was $3,000, which was the
aggregate price that Messrs. Mittelstaedt, Bishop and Cutler had paid initially
for the shares. Messrs. Mittelstaedt, Bishop and Cutler formed Waste Connections
Idaho in September 1997 for the purpose of acquiring certain assets from
Browning-Ferris Industries of Idaho, Inc.
PURCHASE OF MADERA DISPOSAL SYSTEMS, INC.
Eugene V. Dupreau was President and a 16.7% shareholder of Madera Disposal
Systems, Inc. before it was acquired by the Company on February 23, 1998.
Charles B. Youngclaus was Chief Operating Officer and a 16.7% shareholder of
Madera before it was acquired by the Company. For their shares of Madera's
common stock, each of Messrs. Dupreau and Youngclaus received $630,662 in cash,
333,333 shares of the Company's Common Stock and warrants to purchase 66,667
shares of the Company's Common Stock at an exercise price of $4.00 per share.
Each of Messrs. Dupreau and Youngclaus has been engaged by the Company as Vice
President -- Madera. Mr. Dupreau was appointed a director of the Company,
effective February 23, 1998.
The Company is required to pay contingent consideration to certain former Madera
shareholders, if they participate in the events that give rise to the
consideration, if the Company enters into certain specified business
transactions by February 3, 2001. These shareholders may include Messrs. Dupreau
and Youngclaus.
60
<PAGE> 61
PURCHASE OF YOUNGCLAUS ENTERPRISES.
On September 9, 1998, the Company purchased the business assets of Youngclaus
Enterprises, a proprietorship, from Charles B. Youngclaus. The aggregate
purchase price was $139,000, which was paid through the issuance of Common
Stock.
OTHER TRANSACTIONS.
The Company has entered into certain transactions with Continental Paper, LLC,
an Oregon limited liability company doing business as Fibres International
("Fibres"). J. Bradford Bishop and James N. Cutler, Jr. own 60% of the
membership interests in Fibres, were directors of the Company when some of these
transactions occurred and may be deemed promoters of the Company. In markets
where Fibres has processing facilities (which include three of the Company's
current markets), the Company delivers to Fibres' processing facilities all of
the Company's collected recyclable materials for which Fibres pays the market
rate (adjusted to reflect the Company's costs of transporting the materials to
Fibres or another processor) otherwise obtainable by the Company for such
materials. The Company received approximately $222,701 in gross revenues from
Fibres from the Company's inception through December 31, 1997. After deducting
the fees the Company paid to Fibres for the right to collect the recyclables,
the Company retained approximately $10,860. The Company made net payments of
$65,163 to Fibres for the six-month period ending June 30, 1998.
61
<PAGE> 62
PRINCIPAL STOCKHOLDERS
The following table shows the amount of the Company's Common Stock beneficially
owned, as of October 1, 1998, by: (i) each person or entity that the Company
knows owns more than 5% of the Company's Common Stock; (ii) Mr. Mittelstaedt and
each director of the Company; and (iii) all current directors and executive
officers of the Company as a group.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENTAGE
--------------------------- --------- ----------
<S> <C> <C>
James N. Cutler, Jr.(2)(3).............................. 977,322 10.6%
J. Bradford Bishop(2)(3)................................ 916,607 9.9
Ronald J. Mittelstaedt(2)(4)............................ 1,058,376 11.4
Frank W. Cutler(2)(3)................................... 672,246 7.3
Eugene V. Dupreau(2)(5)................................. 402,000 4.3
Kieckhefer Partnership 84-1(2).......................... 562,104 6.1
Michael W. Harlan(2)(6)................................. 20,000 0.2
William J. Razzouk(2)(7)................................ 15,000 0.2
Eugene P. Polk(2)(8).................................... 749,470 8.1
All executive officers and directors as a group (10
persons).............................................. 2,225,092 24.0
</TABLE>
- ---------------
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In general, a person who has voting power and/or investment
power with respect to securities is treated as the beneficial owner of those
securities. Shares of Common Stock subject to options and/or warrants
currently exercisable or exercisable within 60 days of the date of this
Prospectus count as outstanding for computing the percentage beneficially
owned by the person holding such options. Except as otherwise indicated by
footnote, the Company believes that the persons named in this table have
sole voting and investment power with respect to the shares of Common Stock
shown.
(2) The address of Mr. Mittelstaedt is 2260 Douglas Boulevard, Suite 280,
Roseville, California 95661. The address of J. Bradford Bishop and James N.
Cutler, Jr. is 6950 S.W. Hampton Street, Suite 200, Portland, Oregon 97223.
The address of Kieckhefer Partnership 84-1 and Eugene P. Polk is P.O. Box
1151, Prescott, Arizona 86302. The address of Frank W. Cutler is 711 North
Bayfront, Newport Beach, California 92662. The address of Eugene V. Dupreau
is Madera Disposal Systems, Inc., 21739 Road 19, Chowchilla, California
93610. The address of Michael W. Harlan is 2777 Allen Parkway, Suite 700,
Houston, Texas 77019. The address of William J. Razzouk is 5915 River Oaks
Road, Memphis, Tennessee 38120.
(3) Includes 247,000 shares purchasable under currently exercisable warrants.
(4) Includes 100,000 shares purchasable under currently exercisable warrants and
33,333 shares purchasable under currently exercisable options. Also includes
567,900 shares held by the Mittelstaedt Family Trust dated 6/18/97, of which
Mr. Mittelstaedt is the Trustee.
(5) Includes 66,667 shares purchasable under immediately exercisable warrants
and 5,000 shares purchasable under immediately exercisable options.
(6) Includes 5,000 shares purchasable under immediately exercisable warrants and
15,000 shares purchasable under immediately exercisable options
(7) Includes 15,000 shares purchasable under immediately exercisable options.
62
<PAGE> 63
(8) Includes 285,713 shares beneficially owned through three trusts for which
Eugene Polk serves as a trustee (190,562 shares -- Eugene P. Polk and
Barbara J. Polk Revocable Trust U/A 11/18/68; 53,571 shares -- Margaret T.
Morris Trust U/A 5/1/67; and 53,571 shares -- Margaret T. Morris Trust U/A
4/19/69); and 170,714 shares held by the Polk Investment Partnership 93-1,
for which Eugene Polk serves as a Manager; and 281,052 shares held by
Kieckhefer Trust Partnership, for which Eugene Polk serves as Manager.
63
<PAGE> 64
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, par value $0.01 per share, and 10,000,000 shares of Preferred
Stock, par value $0.01 per share (the "Preferred Stock"). As of October 1, 1998,
there were 9,256,378 shares of Common Stock outstanding and no shares of
Preferred Stock outstanding.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote per share held on
all matters submitted to a vote at a meeting of stockholders. Cumulative voting
for the election of directors is not permitted. Subject to any preferences to
which holders of Preferred Stock are entitled, the holders of outstanding shares
of Common Stock are entitled to receive ratably any dividends that the Board of
Directors declares. If the Company liquidates, dissolves or winds up, the
holders of shares of Common Stock are entitled to receive pro rata all assets of
the Company that are available for distribution to stockholders. The holders of
shares of Common Stock do not have any preemptive, subscription, redemption,
conversion or sinking fund rights. The outstanding shares of Common Stock, and
the shares of Common Stock to be issued pursuant to this Prospectus and any
Prospectus Supplement, are fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized by its Amended and Restated Certificate of
Incorporation to issue a maximum of 10,000,000 shares of Preferred Stock, in one
or more series. The Board determines the rights, privileges and limitations of
Preferred Stock, including dividend rights, voting rights, conversion
privileges, redemption rights, liquidation rights and/or sinking fund rights.
Preferred Stock may be issued in the future in connection with acquisitions,
financings or such other matters as the Board of Directors believes appropriate.
There are no shares of Preferred Stock outstanding, and the Company has no
current plans to issue Preferred Stock.
One effect of having Preferred Stock authorized is that the Company's Board of
Directors alone may be able to authorize the issuance of Preferred Stock in ways
that render more difficult or discourage an attempt to obtain control of the
Company by a tender offer, proxy contest, merger or otherwise, and thereby
protect the continuity of the Company's management. The issuance of shares of
Preferred Stock may adversely affect the voting and other rights of holders of
Common Stock. For example, Preferred Stock may rank prior to the Common Stock as
to dividend rights, liquidation preferences or both, may have full or limited
voting rights and may be convertible into Common Stock. Accordingly, the
issuance of Preferred Stock may discourage bids for the Common Stock or
otherwise adversely affect the market price of the Common Stock.
CERTAIN STATUTORY, CHARTER AND BY-LAW PROVISIONS
Classified Board of Directors. The Company's Amended and Restated Certificate of
Incorporation (the "Restated Certificate") provides that the Board will be
divided into three classes serving staggered terms, and that the number of
directors in each class will be as nearly equal as is possible based on the
number of directors constituting the entire
64
<PAGE> 65
Board. At each annual meeting of stockholders, successors to directors of the
class whose term expires at such meeting will be elected to serve for three-year
terms.
The classification of directors makes it more difficult for stockholders to
change the composition of the Board. At least two annual meetings of
stockholders, instead of one, will generally be required to change the majority
of the Board. This delay may help ensure that the Company's directors, if
confronted by a third party attempting to force a proxy contest, a tender or
exchange offer or other extraordinary corporate transaction, would have
sufficient time to review the proposal and available alternatives and to act in
what they believe to be the best interests of the stockholders. However, such
classification could also discourage a third party from initiating a proxy
contest, making a tender offer or otherwise attempting to obtain control of the
Company, even though such an attempt might benefit the Company and its
stockholders. The classification of the Board could thus make it more likely
that incumbent directors will retain their positions.
Number of Directors; Removal; Filling Vacancies. The Restated Certificate
provides that the number of directors will be fixed from time to time by a
majority of the directors then in office. In no event may there be less than
three or more than nine directors, unless approved by at least two-thirds of the
directors then in office. In addition, the Restated Certificate provides that
newly created directorships resulting from an increase in the authorized number
of directors, vacancies on the Board resulting from death, resignation,
retirement, disqualification or removal of directors or any other cause may be
filled only by the Board (and not by the stockholders unless there are no
directors in office), if a quorum is then in office and present, or by a
majority of the directors then in office, if less than a quorum is then in
office, or by the sole remaining director. Accordingly, the Board could prevent
any stockholder from enlarging the Board and filling the new directorships with
such stockholder's own nominees.
The Restated Certificate allows directors to be removed only for cause and only
on the affirmative vote of holders of at least 66 2/3% of the voting power of
all the then outstanding shares of stock entitled to vote generally in the
election of directors ("Voting Stock"), voting together as a single class.
The provisions of the Restated Certificate governing the number of directors,
their removal and the filling of vacancies may discourage a third party from
initiating a proxy contest, making a tender offer or otherwise attempting to
gain control of the Company, or attempting to change the composition or policies
of the Board, even though such attempts might benefit the Company or its
stockholders. These provisions of the Restated Certificate could thus increase
the likelihood that incumbent directors retain their positions.
Limitation on Special Meetings; No Stockholder Action by Written Consent. The
Restated Certificate and the Amended and Restated By-laws (the "Restated
By-laws") provide that: (i) only a majority of the Board of Directors or the
President or Chairman of the Board may call a special meeting of stockholders;
(ii) only matters stated in the notice of meeting or properly brought before the
meeting by or at the direction of the Board of Directors may be transacted at
the meeting; and (iii) stockholder action may be taken only at a duly called and
convened annual or special meeting of stockholders and may not be taken by
written consent. These provisions, taken together, prevent stockholders from
forcing consideration of stockholder proposals over the opposition of the Board,
except at an annual meeting.
65
<PAGE> 66
Advance Notice Provisions for Stockholder Nominations and Stockholder
Proposals. The Restated By-laws establish an advance notice procedure for
stockholders to make nominations of candidates for election as director, or to
bring other business before an annual meeting of stockholders of the Company
(the "Stockholder Notice Procedure"). In general, only persons who are nominated
by or at the direction of the Board, any committee appointed by the Board, or by
a stockholder who has given timely written notice to the Secretary of the
Company, may be elected as directors. At an annual meeting, only business that
has been brought before the meeting by, or at the direction of, the Board, any
committee appointed by the Board, or by a stockholder who has given timely
written notice to the Secretary of the Company, may be conducted. To be timely,
notice of stockholder nominations or proposals to be made at an annual or
special meeting must be received by the Company not less than 60 days nor more
than 90 days before the scheduled date of the meeting (or, if less than 70 days'
notice or prior public disclosure of the date of the meeting is given, then the
15th day following the earlier of the day such notice was mailed or the day such
public disclosure was made).
By requiring advance notice of nominations by stockholders, the Stockholder
Notice Procedure gives the Board an opportunity to consider the qualifications
of the proposed nominees and inform stockholders about such qualifications. By
requiring advance notice of other proposed business, the Stockholder Notice
Procedure provides a more orderly procedure for conducting annual meetings of
stockholders. It also gives the Board an opportunity to inform stockholders in
advance of any business proposed to be conducted at such meetings, together with
the Board's recommendations regarding action to be taken with respect to such
business, so that stockholders can better decide whether to attend such a
meeting or to grant a proxy regarding the disposition of any such business.
Although the Restated By-laws do not give the Board any power to approve or
disapprove stockholder nominations for the election of directors or proposals
for action, the Stockholder Notice Procedure may preclude a contest for the
election of directors or the consideration of stockholder proposals. It may also
discourage or deter a third party from soliciting proxies to elect its own slate
of directors or to approve its own proposal, even though consideration of such
nominees or proposals might benefit the Company and its stockholders.
Certain Provisions Relating to Potential Change of Control. The Restated
Certificate authorizes the Board and any committee of the Board to take such
action as it determines to be reasonably necessary or desirable to encourage any
person or entity to enter into negotiations with the Board and management about
transactions that may result in a change of control of the Company. The Board
and its committees may also contest or oppose any such transaction that the
Board determines to be unfair, abusive or otherwise undesirable to the Company,
its business, assets, properties or stockholders. The Board or any Board
committee may adopt plans or to issue securities of the Company, and to
determine the terms and conditions on which such securities may be exchangeable
or convertible into cash or other securities. In addition, the Board or Board
committee may treat any holder or class of holders of such designated securities
differently than all other security holders in respect of the terms, conditions,
provisions and rights of such securities.
This authority is intended to give the Board flexibility to act in the best
interests of stockholders in the event of a potential change of control. Such
provisions may, however,
66
<PAGE> 67
deter potential acquirors from proposing unsolicited transactions not approved
by the Board and might enable the Board to hinder or frustrate such a
transaction if proposed.
Limitation of Liability of Directors. The Restated Certificate provides that a
director will not be personally liable to the Company or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except for
liability: (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) under
Section 174 of the Delaware General Corporation Law (the "Delaware Law"), which
concerns unlawful payments of dividends, stock purchases or redemptions; or (iv)
for any transaction from which the director derived an improper personal
benefit. If the Delaware Law is subsequently amended to permit further
limitation of the personal liability of directors, the liability of a director
of the Company will be eliminated or limited to the fullest extent permitted by
the Delaware Law as so amended.
Amendment of the Certificate of Incorporation and By-laws. The Restated
Certificate contains provisions requiring the affirmative vote of the holders of
at least 66 2/3% of the voting power of the Voting Stock to amend certain
provisions of the Restated Certificate (including the provisions discussed above
relating to the size and classification of the Board, replacement and/or removal
of Board members, action by written consent, special stockholder meetings, the
authorization for the Board to take steps to encourage or oppose, as the case
may be, transactions which may result in a change of control of the Company, and
limitation of the liability of directors) or to amend any provision of the
Restated By-laws by action of stockholders. These provisions make it more
difficult for stockholders to make changes in the Restated Certificate and the
Restated By-laws, including changes designed to facilitate the exercise of
control over the Company.
Business Combination Provisions of Delaware Law. The Company is a Delaware
corporation and is subject to section 203 of the Delaware Law. Section 203
generally prevents a person who, together with affiliates and associates, owns,
or within the past three years did own, 15% or more of the outstanding voting
stock of a corporation (an "Interested Stockholder") from engaging in certain
business combinations with the corporations for three years after the date such
person became an Interested Stockholder, subject to certain exceptions. Business
combinations covered by section 203 include a wide variety of transactions with
or caused by an Interested Stockholder, including mergers, asset sales and other
transactions in which the Interested Stockholder receives or could receive a
benefit on other than a pro rata basis with other stockholders.
TRANSFER AGENT AND REGISTRAR
BankBoston, N.A., c/o Boston EquiServe, L.P., serves as transfer agent and
registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
As of October 12, 1998, the Company had 9,256,380 shares of Common Stock
outstanding. Of those shares, the 2,300,000 sold in the Company's initial public
offering are freely saleable in the public market, unless acquired by affiliates
of the Company. All of the 5,932,724 shares outstanding prior to completion of
the initial public offering are subject to contractual restrictions that
prohibit the stockholder from selling or otherwise disposing of shares before
November 17, 1998, without the prior written consent of BT
67
<PAGE> 68
Alex. Brown Incorporated. After that date, 4,749,998 of the currently
outstanding shares will be eligible for resale in the public market under Rule
144 promulgated under the Securities Act, an additional 1,000,000 of the
currently outstanding shares will become eligible for resale in the public
market in February 1999, an additional 671,753 of the currently outstanding
shares will become eligible for resale in the public market later in 1999, and
an additional 50,000 of the currently outstanding shares will become eligible
for resale in the public market ratably over three years, in each case subject
to the restrictions of Rule 144. Shares of Common Stock held by affiliates of
the Company are subject to certain volume and other limitations discussed below
under Rule 144.
The Company has agreed not to sell, contract to sell or otherwise dispose of any
shares of Common Stock before November 17, 1998, except as consideration for
business acquisitions, on exercise of currently outstanding stock options or
warrants or on the issuance of options to employees, consultants and directors
under the Company's 1997 Stock Option Plan, and the exercise of such options,
without the prior written consent of BT Alex. Brown Incorporated.
In general, under Rule 144, a person (or persons whose shares are aggregated),
including persons who may be deemed affiliates of the Company, who has
beneficially owned his or her shares for at least one year may sell in any
three-month period a number of shares equal to the greater of 1% of the
outstanding shares of the Common Stock (92,563 shares as of October 12, 1998) or
the average weekly trading volume during the four calendar weeks preceding each
such sale. Sales under Rule 144 also are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. Under Rule 144(k), a person (or persons whose
shares are aggregated) who is not or has not been deemed an "affiliate" of the
Company for at least three months and who has beneficially owned his or her
shares for at least two years may sell such shares under Rule 144 without regard
to the limitations discussed above.
The Common Stock has been publicly traded only since May 22, 1998, and it is
possible that no active public market for the Common stock will develop or be
sustained. Sales of substantial amounts of the Common Stock, or the perception
that such sales could occur, could cause the market price of the Common Stock to
decline and impair the Company's ability to raise capital or fund acquisitions
by issuing Common Stock.
In July 1998, the Company filed a registration statement on Form S-4 under the
Securities Act to register up to 3,000,000 shares issuable from time to time in
connection with the Company's acquisitions of solid waste services businesses.
In October 1998, the Company filed an additional registration statement on Form
S-4 under the Securities Act to increase by 20% the number of shares covered by
the previous registration statement. As of October 12, 1998, the Company had
issued 521,143 shares under the original registration statement on Form S-4, and
an additional 3,123,033 shares were issuable under the two Form S-4 registration
statements.
In September 1998, the Company filed a registration statement under the
Securities Act to register 309,700 shares issuable on exercise of stock options
or other awards granted or to be granted under its Stock Option Plan. Subject to
certain restrictions under Rule 144, those shares will be freely saleable in the
public market immediately following exercise of such options.
68
<PAGE> 69
OUTSTANDING SECURITIES COVERED BY THIS PROSPECTUS
Persons who receive shares of Common Stock covered by the Registration Statement
in acquisitions of businesses by the Company, or their transferees ("Selling
Stockholders"), may use this Prospectus and Post-Effective Amendments and
Prospectus Supplements to sell such shares.
The Company will not receive any of the proceeds from any such sales. Any
commissions paid or concessions allowed to any broker-dealer and, if any
broker-dealer purchases such shares as principal, any profits received on the
resale of such shares, may be deemed to be underwriting discounts and
commissions under the Securities Act. The Company will pay printing, certain
legal, filing and other similar expenses of this offering. Selling Stockholders
will bear all other expenses of this offering, including any brokerage fees,
underwriting discounts or commissions.
If a Selling Stockholder notifies the Company of an arrangement with a
broker-dealer to sell shares through a block trade, special offering, exchange
distribution or secondary distribution, the Company will file a Prospectus
Supplement pursuant to Rule 424 under the Securities Act. The Prospectus
Supplement will set forth (i) the name of such Selling Stockholder and the
participating broker-dealer, (ii) the number of shares involved, (iii) the price
at which such shares were sold, (iv) the commissions paid or discounts or
concessions allowed to such broker-dealer, where applicable, (v) that such
broker-dealer did not conduct any investigation to verify the information set
out in this Prospectus, and (vi) other facts material to the transaction.
Selling Stockholders may sell the shares being offered through this Prospectus
in transactions on the Nasdaq National Market or on a securities exchange on
which the Company's Common Stock may then be listed, in negotiated transactions
or otherwise, at market prices or at negotiated prices. Selling Stockholders may
sell the shares in transactions involving broker-dealers, who may act as agents
and/or acquire shares as principals. Broker-dealers who participate in such
transactions as agents may receive commissions from Selling Stockholders (and,
if they act as agents for the purchasers of such shares, from such purchasers).
Participating broker-dealers may agree with Selling Stockholders to sell a
specified number of shares at a stipulated price per share and, to the extent
they are unable to do so acting as agents for the Selling Stockholders, to
purchase as principals any unsold shares at the price required to fulfill their
commitments to the Selling Stockholders.
The Selling Stockholders may also sell shares by or through other broker-dealers
in special offerings, exchange distributions or secondary distributions pursuant
to the rules of the Nasdaq National Market or on a securities exchange on which
the Company's Common Stock may then be listed. They may pay commissions in
excess of the customary commission prescribed by the rules of such securities
exchange to participating broker-dealers. In certain secondary distributions, a
discount or concession from the offering price may be allowed to participating
broker-dealers in excess of such customary commission. Broker-dealers who
acquire shares as principals may subsequently resell such shares in transactions
(which may involve crosses and block transactions and which may involve sales to
and through other broker-dealers) on the Nasdaq National Market or on a
securities exchange on which the Company's Common Stock may then be listed, in
negotiated transactions or otherwise, at market prices or at negotiated prices.
In connection
69
<PAGE> 70
with such resales, the broker-dealers may pay to or receive commissions from the
purchasers of such shares.
Each Selling Stockholder may indemnify any broker-dealer that participates in
transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Securities Act.
LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby will
be passed upon for the Company by Shartsis, Friese & Ginsburg LLP, San
Francisco, California. The statements pertaining to the Company's G certificates
awarded by the WUTC under "Risk Factors -- Highly Competitive Industry,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General," "Business -- Industry Overview," and "Business -- G
Certificates" will be passed upon for the Company by Williams, Kastner & Gibbs
PLLC, Seattle, Washington.
EXPERTS
The following financial statements appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports appearing elsewhere in this Prospectus and Registration
Statement:
(a) financial statements of Waste Connections, Inc. and Predecessors as of
December 31, 1996 and 1997, and for each of the three years in the period
ended December 31, 1997;
(b) financial statements of Madera Disposal Systems, Inc. as of December
31, 1996 and 1997, and for each of the three years in the period ended
December 31, 1997; and
(c) financial statements of Arrow Sanitary Service, Inc. as of September
30, 1997, and for the year then ended.
Such financial statements have been included in this Prospectus in reliance upon
such reports given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of Shrader Refuse and Recycling Service Company at
September 30, 1996 and 1997, and for the years then ended, appearing in this
Prospectus and Registration Statement have been audited by Grant Thornton LLP,
independent auditors, as set forth in their report appearing elsewhere in this
Prospectus and Registration Statement. Such financial statements have been
included in this Prospectus in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
70
<PAGE> 71
------------------------------------------------------
------------------------------------------------------
PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION IN THIS PROSPECTUS.
NEITHER THE COMPANY NOR ANY SELLING STOCKHOLDER HAS AUTHORIZED ANYONE TO PROVIDE
PROSPECTIVE INVESTORS WITH INFORMATION DIFFERENT FROM THAT IN THIS PROSPECTUS.
THIS PROSPECTUS IS NOT AN OFFER TO SELL, AND IT DOES NOT SEEK AN OFFER TO BUY,
THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
THE INFORMATION IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF WHEN THIS PROSPECTUS IS DELIVERED OR THESE SECURITIES
ARE SOLD.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information............... 2
Prospectus Summary.................. 3
Risk Factors........................ 7
Dividend Policy..................... 16
Price Range of Common Stock......... 16
Selected Historical and Pro Forma
Financial and Operating Data...... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 21
Business............................ 33
Management.......................... 51
Certain Transactions................ 59
Principal Stockholders.............. 62
Description of Capital Stock........ 64
Shares Eligible for Future Sale..... 67
Outstanding Securities Covered by
this Prospectus................... 69
Legal Matters....................... 70
Experts............................. 70
Index to Financial Statements....... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
3,000,000 SHARES
[LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
OCTOBER 20, 1998
------------------------------------------------------
------------------------------------------------------
<PAGE> 72
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WASTE CONNECTIONS, INC. UNAUDITED PRO FORMA FINANCIAL
STATEMENTS
Introduction to Unaudited Pro Forma Consolidated Financial
Statements............................................. F-3
Unaudited Pro Forma Consolidated Statement of Operations
for the year ended
December 31, 1997...................................... F-4
Unaudited Pro Forma Consolidated Statement of Operations
for the six months ended
June 30, 1998.......................................... F-5
Notes to Unaudited Pro Forma Consolidated Statements of
Operations............................................. F-6
Unaudited Pro Forma Consolidated Balance Sheet as of June
30, 1998............................................... F-10
Notes to Unaudited Pro Forma Consolidated Balance Sheet... F-11
WASTE CONNECTIONS, INC. AND PREDECESSORS
Report of Ernst & Young LLP, Independent Auditors......... F-12
Combined Balance Sheet of Predecessors as of December 31,
1996................................................... F-13
Consolidated Balance Sheet of Waste Connections, Inc. as
of December 31, 1997 (Audited) and June 30, 1998
(Unaudited)............................................ F-13
Combined Statement of Operations of Predecessors for the
nine months ended
September 30, 1997..................................... F-14
Consolidated Statement of Operations of Waste Connections,
Inc. for the period from
inception (September 9, 1997) through December 31, 1997
(Audited) and the six months ended June 30, 1997 and
1998 (Unaudited)....................................... F-14
Combined Statement of Operations of The Disposal Group for
the period from
January 1, 1996 through July 31, 1996.................. F-15
Combined Statement of Operations of Predecessors for the
period ended December 31, 1996......................... F-15
Combined Statement of Operations of The Disposal Group for
the year ended
December 31, 1995...................................... F-16
Statement of Operations of Fibres International, Inc. for
the period from January 1, 1995 through November 30,
1995................................................... F-16
Statement of Operations of Predecessors for the one month
ended December 31, 1995................................ F-16
Consolidated Statement of Redeemable Stock and
Stockholders' Equity (Deficit) of
Waste Connections, Inc. for the period from inception
(September 9, 1997) through
December 31, 1997 (Audited) and the six months ended
June 30, 1998 (Unaudited).............................. F-17
Combined Statement of Cash Flows of Predecessors for the
nine months ended
September 30, 1997 and the six months ended June 30,
1997................................................... F-18
Consolidated Statement of Cash Flows of Waste Connections,
Inc. for the period from
inception (September 9, 1997) through December 31, 1997
(Audited) and the six months ended June 30, 1998
(Unaudited)............................................ F-18
Combined Statement of Cash Flows of The Disposal Group for
the period from
January 1, 1996 through July 31, 1996.................. F-19
Combined Statement of Cash Flows of Predecessors for the
period ended December 31, 1996......................... F-19
Combined Statement of Cash Flows of The Disposal Group for
the year ended December 31, 1995....................... F-20
Statement of Cash Flows of Fibres International, Inc. for
the period from
January 1, 1995 through November 30, 1995.............. F-20
Statement of Cash Flows of Predecessors for the one month
ended December 31, 1995................................ F-20
Notes to Financial Statements............................. F-21
</TABLE>
F-1
<PAGE> 73
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MADERA DISPOSAL SYSTEMS, INC.
Report of Ernst & Young LLP, Independent Auditors......... F-40
Balance Sheets as of December 31, 1996 and 1997........... F-41
Statements of Income and Retained Earnings for the years
ended
December 31, 1995, 1996 and 1997....................... F-42
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997.................................... F-43
Notes to Financial Statements............................. F-44
ARROW SANITARY SERVICE, INC.
Report of Ernst & Young LLP, Independent Auditors......... F-50
Balance Sheets as of September 30, 1997 (Audited) and
March 31, 1998 (Unaudited)............................. F-51
Statements of Income and Retained Earnings for the year
ended September 30, 1997 (Audited) and the six months
ended March 31, 1997 and 1998 (Unaudited).............. F-52
Statements of Cash Flows for the year ended September 30,
1997 (Audited) and
the six months ended March 31, 1997 and 1998
(Unaudited)............................................ F-53
Notes to Financial Statements............................. F-54
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
Report of Grant Thornton LLP, Independent Auditors........ F-60
Balance Sheets as of September 30, 1996 and 1997 (Audited)
and June 30, 1998 (Unaudited).......................... F-61
Statements of Income for the years ended September 30,
1996 and 1997 (Audited) and
the nine months ended June 30, 1997 and 1998
(Unaudited)............................................ F-62
Statement of Stockholders Equity for the years ended
September 30, 1996 and 1997 (Audited) and the nine
months ended June 30, 1998 (Unaudited)................. F-63
Statements of Cash Flows for the years ended September 30,
1996 and 1997 (Audited) and the nine months ended June
30, 1997 and 1998 (Unaudited).......................... F-64
Notes to Financial Statements............................. F-65
</TABLE>
F-2
<PAGE> 74
WASTE CONNECTIONS, INC.
INTRODUCTION TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Consolidated Balance Sheet as of June 30,
1998 assumes the Company's acquisition of Shrader Refuse and Recycling Service
Company ("Shrader") occurred on that date. The Unaudited Pro Forma Consolidated
Statements of Operations for the year ended December 31, 1997 and the six months
ended June 30, 1998, give effect to the business combinations involving Waste
Connections, Inc., (the "Company"), its predecessors, Madera Disposal Systems,
Inc. ("Madera"), Arrow Sanitary Service, Inc. ("Arrow") and Shrader as if such
business combinations occurred on January 1, 1997. Such combinations were
accounted for using the purchase method of accounting.
The Company has preliminarily analyzed the savings that it expects to be
realized by consolidating certain operational and general and administrative
functions. The Company has not and cannot quantify all of these savings due to
the short period of time since the predecessor, Madera, Arrow and Shrader
acquisitions occurred. It is anticipated that these savings will be partially
offset by the costs of being a publicly held company and the incremental
increase in costs related to the Company's corporate management. However, these
costs, like the savings they offset, cannot be quantified accurately. Neither
the anticipated savings nor the anticipated costs have been included in the
Unaudited Pro Forma Consolidated Financial Statements.
The Unaudited Pro Forma Consolidated Financial Statements include certain
adjustments to the historical financial statements, including adjusting
depreciation expense to reflect purchase price allocations, adjusting interest
expense to reflect acquisition-related debt and the related income tax effects
of these adjustments.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions and may be revised as additional information
becomes available. The Unaudited Pro Forma Consolidated Financial Statements do
not purport to represent what the Company's financial position or results of
operations would actually have been if such transactions in fact had occurred on
those dates or to project the Company's financial position or results of
operations for any future period. Because the Company, its predecessors, Madera,
Arrow and Shrader were not under common control or management for all periods,
historical combined results may not be comparable to, or indicative of, future
performance. The Unaudited Pro Forma Consolidated Financial Statements should be
read in conjunction with the other financial statements and notes thereto
included elsewhere in this Prospectus, as well as information included under the
headings "Selected Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Risk Factors" included
elsewhere herein.
F-3
<PAGE> 75
WASTE CONNECTIONS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
WASTE PRO FORMA
CONNECTIONS, WASTE
INC. CONNECTIONS,
PERIOD FROM PRO FORMA INC. AND MADERA
INCEPTION PREDECESSORS ADJUSTMENTS PREDECESSORS DISPOSAL
(SEPTEMBER 9, COMBINED NINE TO COMBINE WASTE COMBINED SYSTEMS, INC.
1997) TO MONTHS ENDED CONNECTIONS, YEAR ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30, INC. AND DECEMBER 31, DECEMBER 31,
1997 1997 PREDECESSORS 1997 1997
------------- ------------- ---------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues........................ $ 6,237 $18,114 $ -- $24,351 $7,845
Operating expenses:
Cost of operations............. 4,703 14,753 (146)(a) 19,015 5,289
(195)(b)
(100)(c)
Selling, general and
administrative............... 619 3,009 (570)(d) 2,926 1,041
(132)(e)
Depreciation and
amortization................. 354 1,083 81(f) 1,416 627
(102)(g)
Start-up and integration....... 493 -- -- 493 --
Stock compensation............. 4,395 -- -- 4,395 --
--------- ------- ------ ------- ------
Income (loss) from operations... (4,327) (731) 1,164 (3,894) 888
Interest expense................ (1,035) (456) 456(h) (1,253) (280)
(218)(h)
Other income (expense), net..... (36) 14 -- (22) 173
--------- ------- ------ ------- ------
Income (loss) before (provision)
benefit for income taxes....... (5,398) (1,173) 1,402 (5,169) 781
(Provision) benefit for income
taxes.......................... 332 -- (561)(i) 240 --
469(j)
--------- ------- ------ ------- ------
Net income (loss)............... $ (5,066) $(1,173) $1,310 $(4,929) $ 781
========= ======= ====== ======= ======
Redeemable convertible preferred
stock accretion................ $ (531)
---------
Net loss applicable to common
stockholders................... $ (5,597)
=========
Basic net loss per common
share.......................... $ (2.99)
=========
Shares used in the per share
calculation.................... 1,872,567
=========
<CAPTION>
SHRADER
ARROW REFUSE
SANITARY SERVICE
SERVICE, INC. COMPANY
YEAR YEAR
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, PRO FORMA
1997 1997 ADJUSTMENTS PRO FORMA
-------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues........................ $6,209 6,896 -- $ 45,301
Operating expenses:
Cost of operations............. 4,970 4,601 -- 33,875
Selling, general and
administrative............... 776 567 (83)(k) 5,043
(184)(v)
Depreciation and
amortization................. 143 770 (377)(l) 2,984
364(m)
(78)(q)
265(r)
(585)(w)
439(x)
Start-up and integration....... -- -- -- 493
Stock compensation............. -- -- -- 4,395
------ ------- ------- ---------
Income (loss) from operations... 320 958 239 (1,489)
Interest expense................ (72) (292) 280(n) (3,527)
(897)(o)
72(s)
(606)(t)
(771)(z)
292(y)
Other income (expense), net..... (2) 59 -- 208
------ ------- ------- ---------
Income (loss) before (provision)
benefit for income taxes....... 246 725 (1,391) (4,808)
(Provision) benefit for income
taxes.......................... (117) (297)(p) 20
198(i)
226(u)
(290)(aa)
60(ab)
------ ------- ------- ---------
Net income (loss)............... $ 129 725 $(1,494) $ (4,788)
====== ======= ======= =========
Redeemable convertible preferred
stock accretion................ $ (531)
---------
Net loss applicable to common
stockholders................... $ (5,319)
=========
Basic net loss per common
share.......................... $ (2.03)
=========
Shares used in the per share
calculation.................... 2,623,883
=========
</TABLE>
See accompanying notes.
F-4
<PAGE> 76
WASTE CONNECTIONS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
WASTE
CONNECTIONS, MADERA SHRADER
INC. DISPOSAL ARROW SANITARY REFUSE SERVICE
CONSOLIDATED SYSTEMS, INC. SERVICE, INC. COMPANY
SIX MONTHS ONE MONTH FIVE MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED PRO FORMA PRO FORMA
JUNE 30, 1998 JANUARY 31, 1998 MAY 31, 1998 JUNE 30, 1998 ADJUSTMENTS COMBINED
------------- ---------------- -------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues...................... $ 18,520 $ 611 $2,508 $3,505 $ -- $ 25,144
Operating expenses:
Cost of operations.......... 12,830 412 1,836 2,264 -- 17,342
Selling, general and
administrative............ 1,868 112 385 310 (19)(k) 2,564
(92)(v)
Depreciation and
amortization.............. 1,359 69 67 471 (19)(l)(m) 1,877
90(q)(r)
(160)(w)(x)
Stock compensation.......... 441 -- -- -- -- 441
--------- ----- ------ ------ ----- ---------
Income (loss) from
operations.................. 2,022 18 220 460 200 2,920
Interest expense.............. (731) (289) (14) (191) 14(s) (1,631)
(239)(t)
191(y)
(372)(z)
Other income (expense), net... -- 16 2 11 -- 29
--------- ----- ------ ------ ----- ---------
Income (loss) before
(provision) benefit for
income taxes................ 1,291 (255) 208 280 (206) 1,318
(Provision) benefit for income
taxes....................... (717) -- (89) -- 83(p)(i) (669)
(64)(aa)(ab)
118(u)
--------- ----- ------ ------ ----- ---------
Net income (loss) before
extraordinary item.......... $ 573 $(255) $ 119 $ 280 $ (69) $ 649
========= ===== ====== ====== ===== =========
Extraordinary Item -- early
extinguishment of debt, net
of tax benefit of $165...... (815) (815)
--------- ---------
Net loss...................... $ (242) $ (166)
========= =========
Redeemable convertible
preferred stock accretion... $ (917) $ (917)
--------- ---------
Net loss applicable to common
stockholders................ $ (1,159) $ (1,083)
========= =========
Basic and diluted earnings per
common share
Income (loss) before
extraordinary item.......... $ (0.09) $ (0.06)
Extraordinary item............ (0.20) (0.18)
--------- ---------
Net loss per common share..... $ (0.31) $ (0.24)
========= =========
Shares used in the per share
calculations:
Basic and diluted........... 3,714,027 4,449,905
========= =========
</TABLE>
See accompanying notes.
F-5
<PAGE> 77
WASTE CONNECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
ASSUMPTIONS. The unaudited pro forma consolidated statements of operations
for the year ended December 31, 1997, and for the six months ended June 30, 1998
are presented as if the acquisitions of the Company's predecessors, Madera,
Arrow and Shrader had occurred on January 1, 1997.
ACQUISITIONS. The acquisitions are being accounted for under the purchase
method of accounting for business combinations. Certain items affecting the
purchase prices and their allocations are preliminary. The preliminary purchase
prices of Madera, Arrow and Shrader consist of the following:
<TABLE>
<CAPTION>
MADERA ARROW SHRADER
------- ------- -------
<S> <C> <C> <C>
Cash paid to shareholders........................... $6,949 $ 7,537 $ 8,106
Common stock issued................................. 7,500 3,045 9,997
Liabilities assumed................................. 4,256 769 2,102
Sellers note........................................ -- -- 378
Acquisition costs................................... 180 125 225
Common stock warrants issued........................ 954 -- --
------- ------- -------
$19,839 $11,476 $20,808
======= ======= =======
</TABLE>
The Company has preliminarily allocated the purchase prices as follows:
<TABLE>
<CAPTION>
MADERA ARROW SHRADER
------- ------- -------
<S> <C> <C> <C>
Tangible assets purchased........................... $4,534 $ 898 $ 4,378
Goodwill............................................ 14,580 10,528 16,300
Covenant not to compete............................. -- 50 130
Long-term franchise agreements and contracts........ 725 -- --
------- ------- -------
$19,839 $11,476 $20,808
======= ======= =======
</TABLE>
PRO FORMA ADJUSTMENTS. The following adjustments have been made to the
unaudited pro forma consolidated statements of operations:
(a) To eliminate BFI corporate environmental expense allocation related to
BFI landfill closure costs which do not exist for the Company.
(b) To record amortization of the loss contract accrual that was recorded
in connection with the acquisitions of the predecessor operations. The
loss contract accrual is being amortized to operating expenses over
the related terms of the loss contracts which range from 6 to 65
months. The loss contract accrual represents the estimated incremental
losses to the Company related to certain unfavorable contracts the
Company acquired in connection with the acquisition of the predecessor
operations.
(c) To reduce facilities lease expense to the amounts provided for in the
sublease agreement entered into with BFI in connection with the
acquisitions of the predecessor operations. The sublease agreement was
directly attributable to, a required element of, and a condition to
the closing of the acquisition.
(d) To reduce BFI corporate overhead expense allocations to the amount of
corporate overhead currently being incurred by the Company.
(e) To eliminate consulting expenses incurred by BFI related to the
acquisition of The Disposal Group which the Company did not assume in
connection with the acquisitions of the predecessors. The
non-assumption of the consulting agreement was directly attributable
to, a required element of, and a condition to the closing of the
acquisition.
F-6
<PAGE> 78
WASTE CONNECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(f) To increase depreciation for the increase in the property and
equipment's carrying value to fair value related to the Madera
acquisition.
(g) To decrease goodwill amortization for the lower goodwill amount
recorded by the Company in connection with its acquisition of the
predecessor operations.
(h) To eliminate the predecessor's interest expense and record interest
expense on the debt obligations incurred by the Company in connection
with the acquisitions of the predecessors.
(i) To record the estimated tax provision associated with the pro forma
adjustments for the Madera acquisition using the Company's estimated
effective tax rate of 40%.
(j) To record an income tax benefit for the net operating loss incurred by
the Company's predecessors for the nine months ended September 30,
1997 using the Company's effective tax rate of 40%.
(k) To adjust officers' salaries to levels provided for in the new
employment agreements which were directly attributable to, required
elements of, and a condition to the closing of the Madera acquisition.
(l) To reduce depreciation for the reduction in the property and
equipment's carrying value to fair value related to the Madera
acquisition.
(m) To increase goodwill amortization for the increase in goodwill
resulting from the Madera acquisition. Goodwill is being amortized
over a term of 40 years.
(n) To eliminate interest expense associated with the outstanding debt
obligations of Madera which were paid-off in connection with the
acquisition.
(o) To record interest expense on the additional long-term debt
obligations incurred by the Company in connection with the Madera
acquisition.
(p) To record income taxes for Madera, which was a subchapter S
corporation for income tax purposes for all periods prior to its
acquisition by the Company. The effective income tax rate used was
38%.
(q) To reduce depreciation for the reduction in property and equipment's
carrying value to fair value related to the Arrow acquisition.
(r) To increase goodwill and covenant not to compete amortization for the
increases resulting from the Arrow acquisition. Goodwill is amortized
over a term of 40 years and the covenant not to compete is amortized
over a term of five years.
(s) To eliminate interest expense associated with the debt obligations of
Arrow which were paid off in connection with the acquisition.
(t) To record interest expense on the additional long-term debt
obligations incurred by the Company in connection with the Arrow
acquisition.
(u) To record the estimated tax provision associated with the pro forma
adjustments for the Arrow acquisition at an estimated effective tax
rate of 38%.
(v) To adjust officers salaries to levels provided for in the new
employment agreements which were directly attributable to, required
elements of, and a condition of closing of the Shrader acquisition.
(w) To reduce depreciation for the reduction in property and equipment's
carrying value to fair value related to the Shrader acquisition.
F-7
<PAGE> 79
WASTE CONNECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(x) To increase goodwill and covenant not to compete amortization for the
increases resulting from the Shrader acquisition. Goodwill is
amortized over a term of 40 years and the covenant not to compete is
amortized over a term of five years.
(y) To eliminate interest expense associated with debt obligations of
Shrader which were paid off in connection with the Shrader
acquisition.
(z) To record interest expense on the additional long-term debt
obligations incurred by the Company in connection with the Shrader
acquisition.
(aa) To record income taxes for Shrader, which was a subchapter S
corporation for income tax purposes for all periods prior to its
acquisition by the Company. The effective income tax rate used was
40%.
(ab) To record the estimated tax provisions associated with the pro forma
adjustments for Shrader using the Company's estimated effective tax
rate of 40%.
F-8
<PAGE> 80
WASTE CONNECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PRO FORMA PER SHARE DATA. The shares used in computing the unaudited pro
forma net loss per share for the year ended December 31, 1997, and the six
months ended June 30, 1998 are based upon the pro forma number of common shares
as summarized in the table below. See Note 1 of the Company's Notes to Financial
Statements included elsewhere herein for information concerning the computation
of basic and diluted net income (loss) per share.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------ ------------
<S> <C> <C>
Company weighted average shares outstanding....... 1,872,567 3,714,027
Shares issued in connection with the acquisition
of Arrow........................................ 213,750 198,312(1)
Shares issued in connection with the acquisition
of Shrader...................................... 537,566 537,566
---------- -----------
Shares used in calculating pro forma basic net
loss per share.................................. 2,623,883 4,449,905
========== ===========
</TABLE>
- ---------------
(1) Includes only incremental shares issued for acquisition of Arrow because
15,438 shares are already included in the Company's weighted average shares
outstanding for the six months ended June 30, 1998.
ACQUISITION COSTS. The Company incurred costs of $180 related to the Madera
acquisition, which have been factored into the purchase price. Costs incurred by
Madera were expensed as incurred. The Company incurred costs of $95 related to
the Arrow acquisition, which have been factored into the purchase price. Costs
incurred by Arrow were expensed as incurred. The Company incurred costs of $225
related to the Shrader acquisition, which were factored into the purchase price.
Costs incurred by Shrader were expensed as incurred.
CONTINGENT PAYMENTS. In connection with the Madera and Shrader acquisitions
the Company is required to pay contingent consideration to certain former
shareholders of the respective companies, subject to their involvement in
specified events that give rise to the consideration. No amounts related to
these contingent payments have been included in the pro forma financial
statements as the events which would give rise to such payments have not yet
occurred nor are probable.
OTHER. The Professional Cleaning business of Madera ceased operations in
July 1997. This business had revenues of $193 and an operating loss of $215
during the year ended December 31, 1997.
Shortly before the acquisition of the predecessor operations by the
Company, BFI amended a franchise agreement with a municipality which provided
for a reduction in the franchise fees. Had this amended franchise agreement been
in effect as of January 1, 1997, pro forma cost of operations would have been
approximately $135 lower during the year ended December 31, 1997.
F-9
<PAGE> 81
WASTE CONNECTIONS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SHRADER
WASTE REFUSE
CONNECTIONS, INC. SERVICE PRO FORMA
CONSOLIDATED COMPANY ADJUSTMENTS PRO FORMA
------------------ ------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash................................... $ 3,243 $ 342 $(8,331)(1) $ 3,585
(1,662)(4)
9,993(5)
Marketable securities.................. -- 576 -- 576
Accounts receivable, net............... 6,430 808 -- 7,238
Prepaid expenses and other current
assets.............................. 650 79 -- 729
------- ------ ------- --------
Total current assets........... 10,323 1,805 -- 12,128
Property and equipment, net.............. 14,595 5,112 (2,747)(2) 16,960
Goodwill, net............................ 50,970 209 16,091(3) 67,270
Other assets............................. 3,560 208 130(3) 3,898
------- ------ ------- --------
$79,448 $7,334 $13,474 $100,256
======= ====== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 5,119 $ 323 $ -- $ 5,442
Deferred revenue....................... 1,405 -- -- 1,405
Accrued liabilities.................... 2,129 117 -- 2,246
Current portion of long term debt...... -- 703 (703)(4) --
Current portion of notes payable....... 465 -- 124(8) 589
Current portion of capital leases...... 97 (97)(4) --
Current portion of accrued losses on
acquired contracts.................. 323 -- -- 323
------- ------ ------- --------
Total current liabilities...... 9,441 1,240 (676) 10,005
Accrued losses on acquired contracts..... 1,076 -- 1,076
Long-term debt, net...................... 23,152 959 254(8) 33,399
(959)(4)
9,993(5)
Long-term portion of capital lease
obligations............................ 1,511 (1,511)(4) --
Deferred income taxes.................... 379 -- -- 379
Redeemable convertible preferred stock... -- -- --
Redeemable common stock.................. -- -- --
Stockholders' equity:
Common stock........................... 85 9 (9)(7) 90
5(6)
Additional paid-in capital............. 52,774 9,992(6) 62,766
Stockholder notes receivable........... (82) -- -- (82)
Deferred stock compensation............ (619) -- -- (619)
Unrealized gain on Marketable
Securities.......................... -- 150 (150)(7) --
Retained earnings (deficit)............ (6,758) 3,465 (3,465)(7) (6,758)
------- ------ ------- --------
Total stockholders' equity..... 45,400 3,624 6,373 55,397
------- ------ ------- --------
$79,448 $7,334 $13,474 $100,256
======= ====== ======= ========
</TABLE>
See accompanying notes.
F-10
<PAGE> 82
WASTE CONNECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSUMPTIONS. The unaudited pro forma consolidated balance sheet as of June
30, 1998 is presented as if the acquisition of Shrader had occurred on June 30,
1998.
PRO FORMA ADJUSTMENTS. The following adjustments have been made to the
unaudited pro forma consolidated balance sheet to reflect the acquisition of
Shrader.
(1) Cash payments to former shareholders of Shrader ($8,106) and payment of
acquisition costs ($225).
(2) To reduce plant, property and equipment ($2,747) to its estimated fair
value.
(3) To record excess of the purchase price over the net assets acquired
from Shrader for goodwill and intangible assets of $16,300 and $130,
respectively.
(4) Pay off outstanding debt obligations of Shrader ($1,662) and eliminate
related party capital lease ($1,608).
(5) To record additional long term debt associated with the acquisition of
Shrader.
(6) To record the common stock issued in connection with the acquisition of
Shrader.
(7) To eliminate the equity accounts of Shrader.
(8) To record Seller Notes Payable issued in connection with the
acquisition of Shrader.
F-11
<PAGE> 83
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Waste Connections, Inc.
We have audited the accompanying financial statements of Waste Connections,
Inc. and Predecessors as of December 31, 1996 and 1997, and for each of the
three years in the period ended December 31, 1997 which appear on pages F-13
through F-20 herein as listed in the accompanying Index to Financial Statements.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Waste Connections, Inc. and
Predecessors at December 31, 1996 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Sacramento, California
March 6, 1998
F-12
<PAGE> 84
WASTE CONNECTIONS, INC. AND PREDECESSORS
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
WASTE CONNECTIONS, INC.
CONSOLIDATED
PREDECESSORS --------------------------
COMBINED
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 (NOTE 1) 1997 1998
------------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 102 $ 820 $ 3,243
Accounts receivable, less allowance for doubtful accounts
of $96 at June 30, 1998 and $19 at December 31, 1997
($81 in 1996)........................................... 2,650 3,940 6,430
Prepaid expenses and other current assets................. 339 358 650
------- ------- --------
Total current assets................................ 3,091 5,118 10,323
Property and equipment, net................................. 5,069 4,185 14,595
Goodwill, net............................................... 6,762 9,408 50,970
Other assets................................................ 369 169 3,560
------- ------- --------
$15,291 $18,880 $ 79,448
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,025 $ 2,609 $ 5,119
Deferred revenue.......................................... 564 597 1,405
Accrued liabilities....................................... 634 825 2,129
Current portion of accrued losses on acquired contracts... 119 251 323
Current portion of notes payable.......................... -- -- 465
Current portion of long-term debt......................... 54 -- --
------- ------- --------
Total current liabilities........................... 2,396 4,282 9,441
Accrued losses on acquired contracts........................ -- 702 1,076
Long-term debt.............................................. 89 6,762 23,152
Deferred income taxes....................................... -- 162 379
Commitments and contingencies (Note 7)
Redeemable convertible preferred stock: $.01 par value;
2,500,000 shares authorized; 2,499,998 shares issued and
outstanding at December 31, 1997 and March 31, 1998; no
shares issued and outstanding pro forma (aggregate
liquidation preference of $10,500 at December 31, 1997)... -- 7,523 --
Net intercompany balance.................................... 12,806 -- --
Stockholders' equity (deficit):
Preferred stock: $.01 par value; 7,500,000 shares
authorized; none issued and outstanding actual and pro
forma................................................... -- -- --
Common stock: $.01 par value; 50,000,000 shares
authorized; 2,300,000 shares issued and outstanding at
December 31, 1997; 8,523,397 shares issued and
outstanding at June 30, 1998; 11,023,397 shares issued
and outstanding pro forma............................... -- 23 85
Additional paid-in capital................................ -- 5,105 52,774
Stockholder notes receivable.............................. -- (82) (82)
Deferred stock compensation............................... -- -- (619)
Accumulated deficit....................................... -- (5,597) (6,758)
------- ------- --------
Total stockholders' equity (deficit)................ -- (551) 45,400
------- ------- --------
$15,291 $18,880 $ 79,448
======= ======= ========
</TABLE>
See accompanying notes.
F-13
<PAGE> 85
WASTE CONNECTIONS, INC. AND PREDECESSORS
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 (AUDITED)
AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
WASTE
CONNECTIONS, INC.
PREDECESSORS CONSOLIDATED
COMBINED PERIOD FROM WASTE
NINE MONTHS INCEPTION PREDECESSORS CONNECTIONS, INC.
ENDED (SEPTEMBER 9, 1997) COMBINED SIX CONSOLIDATED SIX
SEPTEMBER 30, THROUGH MONTHS ENDED MONTHS ENDED
1997 (NOTE 1) DECEMBER 31, 1997 JUNE 30, 1997 JUNE 30, 1998
------------- ------------------- ------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
- -------------------------------------------------
Revenues......................................... $18,114 $ 6,237 $11,784 $ 18,520
Operating expenses:
Cost of operations............................. 14,753 4,703 9,784 12,830
Selling, general and administrative............ 3,009 619 1,305 1,868
Depreciation and amortization.................. 1,083 354 745 1,359
Start-up and integration....................... -- 493 -- --
Stock compensation............................. -- 4,395 -- 441
------- ---------- ------- ----------
Income (loss) from operations.................... (731) (4,327) (50) 2,022
Interest expense................................. (456) (1,035) (304) (731)
Other income (expense), net...................... 14 (36) 4 --
------- ---------- ------- ----------
Income (loss) before income taxes................ (1,173) (5,398) (350) 1,291
Income tax (provision) benefit................... -- 332 -- (717)
------- ---------- ------- ----------
Net income (loss) before extraordinary item...... $(1,173) (5,066) $ (350) 573
======= =======
Extraordinary item -- early extinguishment
of debt, net of tax benefit of $165............ -- (815)
---------- ----------
Net loss......................................... $ (5,066) $ (242)
========== ==========
Redeemable convertible preferred stock
accretion...................................... (531) (917)
---------- ----------
Net loss applicable to common stockholders....... $ (5,597) $ (1,159)
========== ==========
Basic loss per common share:
Loss before extraordinary item................. $ (2.99) $ (0.09)
Extraordinary item............................. -- (0.22)
---------- ----------
Net loss per common share...................... $ (2.99) $ (0.31)
========== ==========
Shares used in calculating basic net loss per
share.......................................... 1,872,567 3,714,027
========== ==========
Pro forma basic net loss per share............... $ (1.16) $ (0.04)
========== ==========
Shares used in calculating pro forma basic net
loss per share................................. 4,372,565 6,397,359
========== ==========
Pro forma diluted net loss per share............. $ (0.03)
==========
Shares used in calculating pro forma diluted net
loss per share................................. 7,749,050
==========
- -------------------------------------------------
</TABLE>
See accompanying notes.
F-14
<PAGE> 86
WASTE CONNECTIONS, INC. AND PREDECESSORS
STATEMENTS OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSORS
------------------------------------
THE DISPOSAL
GROUP
COMBINED PREDECESSORS
PERIOD FROM COMBINED PERIOD
JANUARY 1, 1996 ENDED
THROUGH DECEMBER 31, 1996
JULY 31, 1996 (NOTE 1)
--------------- -----------------
<S> <C> <C>
Revenues.................................................... $8,738 $13,422
Operating expenses:
Cost of operations........................................ 6,174 11,420
Selling, general and administrative....................... 2,126 1,649
Depreciation and amortization............................. 324 962
------ -------
Income (loss) from operations............................... 114 (609)
Interest expense............................................ (12) (225)
Other income (expense), net................................. 2,661 (147)
------ -------
Income (loss) before income taxes........................... 2,763 (981)
Income tax (provision) benefit.............................. (505) --
------ -------
Net income (loss)........................................... $2,258 $ (981)
====== =======
</TABLE>
See accompanying notes.
F-15
<PAGE> 87
WASTE CONNECTIONS, INC. AND PREDECESSORS
STATEMENTS OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSORS
----------------------------------------------------
THE DISPOSAL FIBRES
GROUP INTERNATIONAL, INC. PREDECESSORS
COMBINED PERIOD FROM ONE MONTH
YEAR ENDED JANUARY 1, 1995 ENDED
DECEMBER 31, THROUGH DECEMBER 31,
1995 NOVEMBER 30, 1995 1995(NOTE 1)
------------ -------------------- ------------
<S> <C> <C> <C>
Revenues.................................. $19,660 $7,340 $595
Operating expenses:
Cost of operations...................... 16,393 5,653 527
Selling, general and administrative..... 3,312 823 72
Depreciation and amortization........... 628 715 74
------- ------ ----
Income (loss) from operations............. (673) 149 (78)
Interest expense.......................... (206) (162) (1)
Other income, net......................... -- 98 5
------- ------ ----
Income (loss) before income taxes......... (879) 85 (74)
Income tax (provision) benefit............ 298 (29) --
------- ------ ----
Net income (loss)......................... $ (581) $ 56 $(74)
======= ====== ====
</TABLE>
See accompanying notes.
F-16
<PAGE> 88
WASTE CONNECTIONS, INC. AND PREDECESSORS
CONSOLIDATED STATEMENT OF REDEEMABLE STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM INCEPTION (SEPTEMBER 9, 1997) THROUGH DECEMBER 31, 1997 (AUDITED)
AND SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
WASTE CONNECTIONS, INC. CONSOLIDATED
---------------------------------------------
REDEEMABLE STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE REDEEMABLE ---------------------------------------------
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL STOCKHOLDER
-------------------- -------------------- ------------------ PAID-IN NOTES
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE
---------- ------- ---------- ------- --------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at inception............. -- $ -- -- $ -- -- -- $ -- $ --
Sale of redeemable convertible
preferred stock.................. 2,499,998 6,992 -- -- -- -- -- --
Sale of common stock.............. -- -- -- -- 2,300,000 23 4,395 --
Issuance of common stock
warrants......................... -- -- -- -- -- -- 710 --
Issuance of stockholder notes
receivable....................... -- -- -- -- -- -- -- (82)
Accretion of redeemable
convertible preferred stock...... -- 531 -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
---------- ------- ---------- ------- --------- --- ------- ----
Balances at December 31, 1997..... 2,499,998 7,523 -- -- 2,300,000 23 5,105 (82)
Exercise of warrants
(unaudited)...................... -- -- -- -- 50,000 1 139 --
Issuance of redeemable common
stock (unaudited)................ -- -- 1,000,000 7,500 -- -- -- --
Issuance of common stock warrants
(unaudited)...................... -- -- -- -- -- -- 2,049 --
Accretion of redeemable
convertible preferred stock
(unaudited)...................... -- 917 -- -- -- -- -- --
Deferred stock compensation
associated with stock options
(unaudited)...................... -- -- -- -- -- -- 821 --
Amortization of deferred stock
compensation (unaudited)......... -- -- -- -- -- -- -- --
Common stock sold in connection
with IPO (unaudited)............. -- -- -- -- 2,300,000 23 23,963 --
Issuance of common stock
(unaudited)...................... -- -- -- -- 373,399 3 4,953 --
Preferred stock dividend
(unaudited)...................... -- (161) -- -- -- -- -- --
Conversion of redeemable preferred
stock (unaudited)................ (2,499,998) (8,279) -- -- 2,499,998 25 8,254 --
Conversion of redeemable common
stock (unaudited)................ (1,000,000) (7,500) 1,000,000 10 7,490 --
Net income (unaudited)............ -- -- -- -- -- -- -- --
---------- ------- ---------- ------- --------- --- ------- ----
Balances at June 30, 1998
(unaudited)...................... -- $ -- -- $ -- 8,523,397 $85 $52,774 $(82)
========== ======= ========== ======= ========= === ======= ====
<CAPTION>
WASTE CONNECTIONS, INC. CONSOLIDATED
------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
------------------------------------
DEFERRED
STOCK ACCUMULATED
COMPENSATION DEFICIT TOTAL
------------ ----------- -------
<S> <C> <C> <C>
Balances at inception............. $ -- $ -- $ --
Sale of redeemable convertible
preferred stock.................. -- -- --
Sale of common stock.............. -- -- 4,418
Issuance of common stock
warrants......................... -- -- 710
Issuance of stockholder notes
receivable....................... -- -- (82)
Accretion of redeemable
convertible preferred stock...... -- (531) (531)
Net loss.......................... -- (5,066) (5,066)
----- ------- -------
Balances at December 31, 1997..... -- (5,597) (551)
Exercise of warrants
(unaudited)...................... -- -- 140
Issuance of redeemable common
stock (unaudited)................ -- -- --
Issuance of common stock warrants
(unaudited)...................... -- -- 2,049
Accretion of redeemable
convertible preferred stock
(unaudited)...................... -- (917) (917)
Deferred stock compensation
associated with stock options
(unaudited)...................... (821) -- --
Amortization of deferred stock
compensation (unaudited)......... 201 -- 201
Common stock sold in connection
with IPO (unaudited)............. -- -- 23,986
Issuance of common stock
(unaudited)...................... -- -- 4,956
Preferred stock dividend
(unaudited)...................... -- -- --
Conversion of redeemable preferred
stock (unaudited)................ -- -- 8,279
Conversion of redeemable common
stock (unaudited)................ -- -- 7,500
Net income (unaudited)............ -- (243) (243)
----- ------- -------
Balances at June 30, 1998
(unaudited)...................... $(620) $(6,757) $45,400
===== ======= =======
</TABLE>
See accompanying notes.
F-17
<PAGE> 89
WASTE CONNECTIONS, INC. AND PREDECESSORS
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 (AUDITED)
AND SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
WASTE CONNECTIONS, INC.
PREDECESSORS CONSOLIDATED
COMBINED PERIOD FROM WASTE CONNECTIONS, INC.
NINE MONTHS INCEPTION PREDECESSORS CONSOLIDATED
ENDED (SEPTEMBER 9, 1997) COMBINED SIX SIX MONTHS
SEPTEMBER 30, THROUGH MONTHS ENDED ENDED
1997 (NOTE 1) DECEMBER 31, 1997 JUNE 30, 1997 JUNE 30, 1998
------------- ----------------------- ------------- -----------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
- ----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $(1,173) $ (5,066) $(350) $ (243)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Gain on sale of assets.................... (4) -- -- --
Depreciation and amortization............. 1,083 354 745 1,358
Deferred income taxes..................... -- (369) -- --
Amortization of debt issuance costs, debt
guarantee fees and accretion of discount
on long-term debt....................... -- 860 -- 134
Stock compensation........................ -- 4,395 -- 441
Extraordinary item -- extinguishment of
debt.................................... -- -- -- 981
Changes in operating assets and
liabilities, net of effects from
acquisitions:
Accounts receivable, net................ (604) (1,021) (440) (361)
Prepaid expenses and other current
assets................................ (74) (51) 224 (656)
Accounts payable........................ (221) 2,607 52 119
Deferred revenue........................ (137) 169 (44) 292
Accrued liabilities..................... (450) 801 334 (23)
Accrued losses on acquired contracts.... -- (65) (91) (151)
------- ---------- ----- --------
Net cash provided by (used in) operating
activities................................ (1,580) 2,614 430 1,891
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment................................. 188 -- -- 89
Payments for acquisitions, net of cash
acquired.................................. -- (11,493) -- (30,281)
Prepaid acquisition costs................... -- (20) -- --
Capital expenditures for property and
equipment................................. (735) (264) (726) (934)
Decrease (increase) in other assets......... 22 (19) 66 --
Issuance of stockholder notes receivable.... -- (82) -- --
------- ---------- ----- --------
Net cash used in investing activities......... (525) (11,878) (660) (31,126)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net intercompany balance.................... 2,142 -- 221 --
Proceeds from short-term borrowings......... -- 600 -- --
Proceeds from long-term debt................ -- 5,500 -- 40,862
Principal payments on notes payable......... (38) (2,724) -- (258)
Principal payments on long-term debt........ -- (157) (70) (32,327)
Proceeds from sale of redeemable convertible
preferred stock........................... -- 6,992 -- --
Proceeds from sale of common stock.......... -- 23 -- 24,126
Payment of preferred stock dividend......... -- -- -- (161)
Debt issuance costs......................... -- (150) -- (584)
------- ---------- ----- --------
Net cash provided by financing activities..... 2,104 10,084 151 31,658
------- ---------- ----- --------
Net increase (decrease) in cash............... (1) 820 (79) 2,423
Cash at beginning of period................... 102 -- 102 820
------- ---------- ----- --------
Cash at end of period......................... $ 101 $ 820 $ 23 $ 3,243
======= ========== ===== ========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION AND NON-CASH TRANSACTIONS:
Cash paid for income taxes.................. $ -- $ -- $ 879
======= ========== ========
Cash paid for interest...................... $ -- $ 183 $ 564
======= ========== ========
Redeemable convertible preferred stock
accretion................................. $ 531 $ 917
========== ========
In connection with the BFI related
acquisitions (Note 2), the Company assumed
liabilities as follows:
Fair value of assets acquired............. $ 17,040 $ 50,283
Cash paid for acquisitions (including
acquisition costs)...................... (11,493) (30,281)
---------- --------
Liabilities assumed, stock and notes
payable to seller....................... $ 5,547 $ 20,002
========== ========
</TABLE>
See accompanying notes.
F-18
<PAGE> 90
WASTE CONNECTIONS, INC. AND PREDECESSORS
STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSORS
-------------------------------
THE DISPOSAL
GROUP COMBINED PREDECESSORS
PERIOD FROM COMBINED
JANUARY 1, PERIOD ENDED
1996 THROUGH DECEMBER 31,
JULY 31, 1996 1996 (NOTE 1)
--------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $2,258 $ (981)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 324 962
Deferred income taxes.................................. 298 --
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable, net............................. 1,201 (1,992)
Prepaid expenses and other current assets............ (2) (104)
Accounts payable..................................... (45) 713
Deferred revenue..................................... (522) 421
Accrued liabilities.................................. (987) 428
------ ------
Net cash provided by (used in) operating activities....... 2,525 (553)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.............. -- 117
Capital expenditures for property and equipment........... (7) (282)
Decrease in other assets.................................. -- 33
------ ------
Net cash used in investing activities....................... (7) (132)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net intercompany balance.................................. -- 642
Proceeds from long-term debt.............................. 142 --
Principal payments on long-term debt...................... (427) --
Principal payments on notes payable....................... -- (39)
------ ------
Net cash provided by (used in) financing activities......... (285) 603
------ ------
Net increase (decrease) in cash............................. 2,233 (82)
Cash at beginning of period................................. 961 184
------ ------
Cash at end of period....................................... $3,194 $ 102
====== ======
</TABLE>
See accompanying notes.
F-19
<PAGE> 91
WASTE CONNECTIONS, INC. AND PREDECESSORS
STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSORS
-----------------------------------
THE DISPOSAL FIBRES
GROUP INTERNATIONAL, INC. PREDECESSORS
COMBINED PERIOD FROM ONE MONTH
YEAR ENDED JANUARY 1, 1995 ENDED
DECEMBER 31, THROUGH DECEMBER 31,
1995 NOVEMBER 30, 1995 1995 (NOTE 1)
------------ ------------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ (581) $ 56 $ (74)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Loss on sale of assets...................... 18 -- --
Depreciation and amortization............... 628 778 74
Deferred income taxes....................... (298) -- --
Changes in operating assets and liabilities,
net of effects from acquisitions:
Accounts receivable, net.................. 592 59 10
Prepaid expenses and other current
assets................................. (18) -- (30)
Accounts payable.......................... (49) 53 (30)
Deferred revenue.......................... 65 30 (26)
Accrued liabilities....................... 2,218 47 20
------- ----- -----
Net cash provided by (used in) operating
activities.................................. 2,575 1,023 (56)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and
equipment................................... (87) (827) --
Decrease in other assets....................... -- 3 10
------- ----- -----
Net cash provided by (used in) investing
activities..................................... (87) (824) 10
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt................... 306 -- --
Principal payments on long-term debt........... (2,037) (288) --
Principal payments on notes payable............ -- -- (2)
------- ----- -----
Net cash used in financing activities.......... (1,731) (288) (2)
------- ----- -----
Net increase (decrease) in cash.................. 757 (89) (48)
Cash at beginning of period...................... 204 321 232
------- ----- -----
Cash at end of period............................ $ 961 $ 232 $ 184
======= ===== =====
</TABLE>
See accompanying notes.
F-20
<PAGE> 92
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
Waste Connections, Inc. ("WCI" or "the Company") was incorporated in
Delaware on September 9, 1997 and commenced its operations on October 1, 1997
through the purchase of certain solid waste operations in Washington, as more
fully described below and in Note 2. The Company is a regional, integrated, non-
hazardous solid waste services company that provides collection, transfer,
disposal and recycling services to commercial, industrial and residential
customers.
Basis of Presentation
The consolidated financial statements of the Company include the accounts
of WCI and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
The entities the Company acquired in September 1997 from Browning-Ferris
Industries, Inc. ("BFI") are collectively referred to herein as the Company's
predecessors. BFI acquired the predecessor operations at various times during
1995 and 1996, and prior to being acquired by BFI, the predecessors operated as
separate stand-alone businesses.
During the periods in which the Company's predecessors operated as wholly
owned subsidiaries of BFI, they maintained intercompany accounts with BFI for
recording intercompany charges for costs and expenses, intercompany purchases of
equipment and additions under capital leases and intercompany transfers of cash,
among other transactions. It is not feasible to ascertain the amount of related
interest expense that would have been recorded in the historical financial
statements had the predecessors been operated as stand-alone entities. Charges
for interest expense were allocated to the Company's predecessors by BFI as
disclosed in the accompanying Statement of Operations. The interest expense
allocations from BFI are based on formulas that do not necessarily correspond
with the balances in the related intercompany accounts. Moreover, the financial
position and results of operations of the predecessors during this period may
not necessarily be indicative of the financial position or results of operations
that would have been realized had the predecessors been operated as stand-alone
entities. For the periods in which the predecessors operated as wholly owned
subsidiaries of BFI, the statements of operations include amounts allocated by
BFI to the predecessors for selling, general and administrative expenses based
on certain allocation methodologies.
During the periods prior to their acquisition by BFI, the Company's
predecessors operated as separate stand-alone businesses. The acquisitions of
the predecessors by BFI were accounted for using the purchase method of
accounting, and the respective purchase prices were allocated to the fair values
of the assets acquired and liabilities assumed. Similarly, the Company's
acquisitions of the predecessors from BFI in September 1997 were accounted for
using the purchase method of accounting, and the purchase price was allocated to
the fair value of the assets acquired and liabilities assumed. Consequently, the
amounts of depreciation and amortization included in the statements of
operations for the periods presented reflect the changes in basis of the
underlying assets that were made as a result of the changes in ownership that
occurred during the periods presented. In addition, because the predecessor
companies operated independently and were not under common control or management
during these periods, and because different tax strategies may have influenced
their results of operations, the data may not be comparable to or indicative of
their operating results after their acquisition by BFI.
Due to the manner in which BFI intercompany transactions were recorded as
described above, it is not feasible to present a detailed analysis of
transactions reflected in the net intercompany balance with BFI. The change in
the predecessors' combined intercompany balance with BFI (net of income (loss)
and initial
F-21
<PAGE> 93
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
investment in the acquired companies) was $642 and $2,142 during the period
ended December 31, 1996 and the nine months ended September 30, 1997,
respectively.
The accompanying statements of operations and cash flows for the Company
and its predecessors for the years ended December 31, 1995, 1996 and 1997 are
comprised of the following entities for the periods indicated:
<TABLE>
<S> <C>
YEAR ENDED DECEMBER 31, 1995:
The Disposal Group Combined Year ended December 31, 1995
Fibres International, Inc. January 1, 1995 through November 30, 1995
(BFI acquisition date)
Predecessors One month ended December 31, 1995 (represents the
results of operations of Fibres International,
Inc. subsequent to the BFI acquisition date)
YEAR ENDED DECEMBER 31, 1996:
The Disposal Group Combined January 1, 1996 through July 31, 1996
(BFI acquisition date)
Predecessors Combined Period ended December 31, 1996 (represents the
combined results of operations of The Disposal
Group subsequent to the BFI acquisition date and
the operations for the year ended December 31,
1996 of Fibres International, Inc. which was
acquired by BFI in 1995)
YEAR ENDED DECEMBER 31, 1997:
Predecessors Combined Nine months ended September 30, 1997 (represents the
combined results of operations for the nine month
period of the entities acquired by BFI in 1995 and
1996 described above)
Waste Connections, Inc. Period from inception (September 9, 1997) through
December 31, 1997
</TABLE>
The Disposal Group Combined consists of three entities that were under
common control prior to their acquisition by BFI: Diamond Fab and Welding
Service, Inc., Buchmann Sanitary Service, Inc., and The Disposal Group.
Interim Financial Information
The unaudited interim consolidated financial statements as of June 30, 1998
and for the six months ended June 30, 1997 and 1998 have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the six months ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1998.
F-22
<PAGE> 94
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
\ Common Stock Valuation
In connection with the Company's organization and initial capitalization in
September 1997, the Company sold 2.3 million shares of common stock for $.01 per
share to certain directors, consultants, and management. As a result, the
Company recorded a non-recurring, non-cash stock compensation charge of $4,395
in the accompanying consolidated statement of operations, representing the
difference between the amount paid for the shares and the estimated fair value
of the shares of $1.92 per share on the date of sale. The estimated fair value
of the common shares was determined by the Company based on an independent
valuation of the common stock.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risks consist primarily of accounts receivable. Credit
risk on accounts receivable is minimized as a result of the large and diverse
nature of the Company's customer base. The Company maintains an allowance for
losses based on the expected collectibility of accounts receivable. Credit
losses have been within management's expectations.
Property and Equipment
Property and equipment are stated at cost. Improvements or betterments
which significantly extend the life of an asset are capitalized. Expenditures
for maintenance and repair costs are charged to operations as incurred. The cost
of assets retired or otherwise disposed of and the related accumulated
depreciation are eliminated from the accounts in the year of disposal. Gains and
losses resulting from property disposals are included in other income (expense).
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets.
The estimated useful lives are as follows:
<TABLE>
<S> <C>
Machinery and equipment........ 3 - 10 years
Rolling stock.................. 10 years
Containers..................... 5 - 12 years
Furniture and fixtures......... 3 - 6 years
</TABLE>
In connection with the BFI acquisitions (Note 2) the Company acquired
certain used property and equipment. This used property and equipment is being
depreciated using the straight-line method over its estimated remaining useful
lives, which range from one to nine years.
Capitalized landfill costs include expenditures for land and related
airspace, permitting costs and preparation costs. Landfill permitting and
preparation costs represent only direct costs related to those activities,
including legal, engineering and construction. Interest is capitalized on
landfill permitting and construction projects and other projects under
development while the assets are undergoing activities to ready them for their
intended use. The interest capitalization rate is based on the Company's
weighted average cost of indebtedness. No interest was capitalized during the
six months ended June 30, 1998. Landfill permitting, acquisition and preparation
costs, excluding the estimated residual value of land, are amortized as
permitted
F-23
<PAGE> 95
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
airspace of the landfill is consumed. Landfill preparation costs include the
costs of construction associated with excavation, liners, site berms and the
installation of leak detection and leachate collection systems. In determining
the amortization rate for a landfill, preparation costs include the total
estimated costs to complete construction of the landfills' permitted capacity.
Units-of-production amortization rates are determined annually for the Company's
operating landfill. The rates are based on estimates provided by the Company's
outside engineers and consider the information provided by surveys which are
performed at least annually.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
the net assets of the acquired entities (Note 2), and is amortized on a
straight-line basis over the period of expected benefit of 40 years. Accumulated
amortization amounted to $279 and $64 as of December 31, 1996 and 1997,
respectively.
The Company continually evaluates the value and future benefits of its
intangibles. The Company assesses recoverability from future operations using
income from operations of the related acquired business as a measure. Under this
approach, the carrying value would be reduced if it becomes probable that the
Company's best estimate for expected future cash flows of the related business
would be less than the carrying amount of the intangible over the remaining
amortization period. For the period ending December 31, 1997, there were no
adjustments to the carrying amounts of intangibles resulting from these
evaluations.
Fair Value of Financial Instruments
The carrying values of the line of credit (Note 5) and other long-term debt
(Note 6) approximate their fair values as of December 31, 1997 and June 30,
1998, based on current incremental borrowing rates for similar types of
borrowing arrangements.
Income Taxes
The Company, The Disposal Group, and Fibres International, Inc., use the
liability method to account for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
During the periods in which the predecessors were owned by BFI, their
operations were included in the consolidated income tax returns of BFI, and no
allocations of income taxes were reflected in the historical statements of
operations. For purposes of the combined predecessor financial statements,
current and deferred income taxes have been provided on a separate income tax
return basis.
Revenue Recognition
Revenues are recognized as services are provided. Certain customers are
billed in advance and, accordingly, recognition of the related revenues is
deferred until the services are provided.
Start-Up and Integration Expenses
During the period from inception (September 9, 1997) through December 31,
1997, the Company incurred certain start-up expenses relating to the formation
of the Company, primarily for legal and other professional services, and the
costs associated with recruiting the Company's initial management team. In
addition, the Company incurred certain integration expenses relating to the
Acquisitions (Note 2). These start-up and integration expenses have been charged
to operations as incurred.
F-24
<PAGE> 96
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
As described in Note 9, the Company issued warrants during the period from
inception (September 9, 1997) through December 31, 1997 to a bank in connection
with a line of credit and term loan payable, and to certain directors and
stockholders of the Company in connection with their guarantee of certain of the
Company's debt obligations. The fair value of these warrants is being amortized
into interest expense. During the period from inception (September 9, 1997)
through December 31, 1997, $710 relating to these warrants is included in
interest expense in the accompanying statement of operations of the Company.
Stock-Based Compensation
As permitted under the provisions of Financial Accounting Standards No. 123
"Accounting for Stock Based Compensation" ("SFAS 123"), the Company has elected
to account for stock-based compensation using the intrinsic value method
prescribed by Accounting Principles Board's Opinion No. 25 "Accounting for Stock
Issued to Employees" ("APB 25"). Under the intrinsic value method, compensation
cost is the excess, if any, of the quoted market price or fair value of the
stock at the grant date or other measurement date over the amount an employee
must pay to acquire the stock. None of the predecessor entities awarded
stock-based compensation to employees. Consequently, the related disclosures in
the accompanying financial statements and notes relate solely to the Company.
Per Share Information
In 1997, the Financial Accounting Standards Board ("FASB")issued Statement
No. 128, Earnings per Share. Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts have been presented on the
basis set forth in Statement 128 (Note 11). Earnings per share data have not
been presented for the predecessor operations because such data is not
meaningful.
Pro-forma basic net income (loss) per share is computed by dividing the net
income (loss) by the sum of the weighted average number of shares of common
stock outstanding and common shares issuable upon the conversion of all
outstanding shares of Redeemable Convertible Preferred Stock (Note 8) as though
such conversion occurred at the beginning of the period.
Pro-forma diluted net income per share is computed by dividing net income
by the sum of the weighted average number of shares of common stock outstanding,
common shares issuable upon conversion of all outstanding shares of Redeemable
Convertible Preferred Stock (Note 8) as though such conversion occurred at the
beginning of the period, and common shares issuable upon the exercise of
outstanding common stock options and warrants (calculated using the treasury
stock method.)
Closure and Post-Closure Costs
The Company does not accrue for closure and post-closure costs related to
the Farimead Landfill it operated in Madera County, California. Madera County as
required by state law, has established a special fund to pay such liabilities.
On June 5, 1998, the Company acquired the stock of Red Carpet Landfill, Inc. in
Oklahoma. Red Carpet is engaged in landfilling of municipal solid waste and
other acceptable waste streams in the county of Major, Oklahoma. As a result of
the acquisition, the Company is required to accrue for closure and post-closure
costs related to the landfill. Accrued closure and post-closure costs include
the current and non-current portion of accruals associated with obligations for
closure and post-closure of the landfill. The Company, based as input from its
outside engineers, estimates its future closure and post-closure
F-25
<PAGE> 97
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
monitoring and maintenance costs for solid waste landfills based on its
interpretation of the technical standards of the U.S. Environmental Protection
Agency's Subtitle D regulations and the air emissions standards under the Clean
Air Act as they are being applied on a state-by-state basis. Closure and
post-closure monitoring and maintenance costs represent the costs related to
cash expenditures yet to be incurred when a landfill facility ceases to accept
waste and closes. Accruals for closure and post-closure monitoring and
maintenance requirements in the U.S. consider final capping of the site, site
inspection, groundwater monitoring, leachate management, methane gas control and
recovery, and operating and maintenance costs to be incurred during the period
after the facility closes. Certain of these environmental costs, principally
capping and methane gas control costs, are also incurred during the operating
life of the site in accordance with the landfill operation requirements of
Subtitle D and the air emissions standards. Reviews of the future requirements
for closure and post-closure monitoring and maintenance costs for the Company's
operating landfills are performed by the Company's consulting engineers at least
annually and are the basis upon which the Company's estimates of these future
costs and the related accrual rates are revised. The Company provides accruals
for these estimated costs as the remaining permitted airspace of such facilities
is consumed. The states in which the Company operates its landfills require a
specified portion of these accrued closure and post-closure obligations to be
funded at any point in time.
New Accounting Pronouncements
In February 1997, the FASB issued Statement No. 129, Disclosure of
Information about Capital Structure, which is effective for financial statements
for periods ending after December 15, 1997. This statement establishes standards
for disclosing information about an entity's capital structure. Adoption of
Statement 129 will have no impact on the Company's existing disclosures.
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income. Statement 130 establishes standards for reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. Statement 130, which is
effective for fiscal years beginning after December 15, 1997, requires
reclassification of financial statements for earlier periods to be provided for
comparative purposes. The Company anticipates that implementing the provisions
of Statement 130 will not have a significant impact on the Company's existing
disclosures.
In June 1997, the FASB issued Statement No. 131, Disclosure About Segments
of an Enterprise and Related Information. Statement 131 establishes standards
for the way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and services, geographic areas and major customers. Statement 131 is effective
for fiscal years beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years must be restated. The
Company anticipates that implementing the provisions of Statement 131 will not
have a significant impact on the Company's existing disclosures.
2. ACQUISITIONS
Browning-Ferris Industries Related
On September 29, 1997, the Company purchased all of the outstanding stock
of Browning-Ferris Industries of Washington, Inc. and Fibres International, Inc.
from BFI (collectively the "Acquisitions"). The total purchase price for the
Acquisitions was approximately $15,036, comprised principally of $11,493 in cash
and promissory notes payable to BFI totaling $3,543. Of the combined $15,036
purchase price, $9,578 was recorded as goodwill and $150 was assigned to a
non-competition agreement. The Acquisitions were accounted for in accordance
with the purchase method of accounting and, accordingly, the net assets acquired
F-26
<PAGE> 98
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
were included in the Company's consolidated balance sheet based upon their
estimated fair values on the date of the Acquisitions. The Company's
consolidated statement of operations includes the revenues and expenses of the
acquired businesses after the effective date of the transaction.
Certain items affecting the purchase price and the allocation are
preliminary. A summary of the preliminary purchase price allocation as of
December 31, 1997 for the Acquisitions is as follows:
<TABLE>
<S> <C>
Acquired assets:
Accounts receivable.................................... $ 2,919
Prepaid expenses and other current assets.............. 287
Property and equipment................................. 4,106
Goodwill............................................... 9,578
Non-competition agreement.............................. 150
Assumed liabilities:
Deferred revenue....................................... (428)
Accounts payable and accrued liabilities............... (26)
Accrued losses on acquired contracts................... (1,018)
Deferred income taxes.................................. (532)
-------
$15,036
=======
</TABLE>
During the six months ended June 30, 1998, the Company increased the
accrual for losses on acquired contracts and goodwill by approximately $291 to
reflect revised estimates of additional losses on the acquired contracts that
are expected to be incurred.
Madera Disposal Systems, Inc.
On February 23, 1998, the Company purchased all of the outstanding stock of
Madera Disposal Systems, Inc. ("Madera") effective February 1, 1998, pursuant to
a Stock Purchase Agreement (the "Agreement"). The Agreement requires the Company
to pay to the shareholders of Madera $9,579 in cash (a portion of which was used
to repay Madera outstanding debt on the date of acquisition and which is subject
to other adjustments as specified in the Agreement), 1,000,000 shares of the
Company's common stock with a fair market value of $7,500 (the "Stock"),
warrants to purchase 200,000 shares of the Company's common stock at $4.00 per
share with a fair market value of $954 (the "Warrants") and other contingent
consideration. The Agreement provides that in the event the Company does not
complete an initial public offering ("IPO") of its stock by March 31, 1999, with
aggregate gross proceeds of at least $5,000, the Company may be required to
repurchase the Stock and the Warrants from the former shareholders of Madera for
$2,800 in cash if certain other conditions are also met.
The Madera acquisition has been accounted for in accordance with the
purchase method of accounting. The total purchase price and the excess of the
purchase price over the fair value of the net assets acquired in the Madera
acquisition were approximately $18,213 and $14,580, respectively.
F-27
<PAGE> 99
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
Certain items affecting the purchase price and the allocation are
preliminary. A summary of the preliminary purchase price allocation for the
Madera acquisition is as follows:
<TABLE>
<S> <C>
Acquired assets:
Cash...................................................... $ 1,388
Accounts receivable....................................... 905
Prepaid expenses and other current assets................. 141
Property and equipment.................................... 2,100
Long-term franchise agreements and contracts.............. 725
Goodwill.................................................. 14,580
Assumed liabilities:
Accounts payable and accrued liabilities.................. (1,120)
Accrued losses on acquired contracts...................... (306)
Notes payable............................................. (200)
-------
$18,213
=======
</TABLE>
Arrow Sanitary Service, Inc.
On June 17, 1998, the Company purchased all of the outstanding stock of
Arrow Sanitary Service, Inc. ("Arrow") effective June 1, 1998, pursuant to a
Stock Purchase Agreement (the "Arrow Agreement"). The Arrow Agreement required
the Company to pay the shareholders of Arrow $7,944 in cash (a portion of which
was used to repay the Arrow outstanding debt on the date of the acquisition and
a portion of which is subject to other adjustments as specified in the Arrow
Agreement), 213,750 shares of the Company's common stock with an estimated fair
market value of $3,045.
The Arrow acquisition has been accounted for in accordance with the
purchase method of accounting. The total purchase price and the excess of the
purchase price over the fair value of the net assets acquired in the Arrow
acquisition were approximately $11,255 and $10,528, respectively.
Certain items affecting the purchase price and the allocation are
preliminary. A summary of the preliminary purchase price allocation for the
Arrow acquisition is as follows:
<TABLE>
<S> <C>
Acquired assets:
Accounts receivable....................................... $ 575
Prepaid expenses and other current assets................. 10
Property and equipment.................................... 313
Covenant not to compete................................... 50
Goodwill.................................................. 10,528
Assumed liabilities:
Accounts payable and accrued liabilities.................. (221)
-------
$11,255
=======
</TABLE>
Predecessor Acquisitions
As described in Note 1, BFI acquired for cash and debt Fibres
International, Inc. on November 30, 1995 and The Disposal Group Combined on July
31, 1996 in transactions that were accounted for as purchases.
F-28
<PAGE> 100
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
Accordingly, the respective purchase prices were allocated to the fair values of
the assets acquired and liabilities assumed. The following presents purchase
price information for these acquisitions:
<TABLE>
<CAPTION>
THE
FIBRES DISPOSAL
INTERNATIONAL, GROUP
INC. COMBINED
-------------- ---------
<S> <C> <C>
Tangible assets acquired...................... $5,076 $2,076
Goodwill...................................... 4,187 2,671
Assumed liabilities........................... (969) (33)
------ ------
$8,294 $4,714
====== ======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1996 and 1997 and June 30, 1998
consists of the following:
<TABLE>
<CAPTION>
PREDECESSORS COMPANY
COMBINED --------------------------
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Land and buildings................. $2,314 $ -- $ 2,963
Machinery and equipment............ 146 60 1,742
Rolling stock...................... 2,068 2,353 5,691
Containers......................... 1,084 1,995 5,248
Furniture and fixtures............. 137 67 353
------ ------ -------
5,749 4,475 15,997
Less accumulated depreciation...... (680) (290) (1,402)
------ ------ -------
$5,069 $4,185 $14,595
====== ====== =======
</TABLE>
Combined depreciation expense for the predecessor operations was $1,304,
$1,101, and $789 for the years ended December 31, 1995 and 1996, and the nine
months ended September 30, 1997, respectively. The Company's depreciation
expense for the period from inception (September 9, 1997) through December 31,
1997 was $290.
4. OTHER ASSETS
Other assets as of December 31, 1996 and 1997 and June 30, 1998 consist of
the following:
<TABLE>
<CAPTION>
PREDECESSORS COMPANY
COMBINED --------------------------
DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Long-term franchise agreements and
contracts................................ $ -- $ -- $1,056
Non-competition agreement, net............. -- 142 351
Restricted Cash -- Madera Bond Fund........ -- -- 1,800
Other...................................... 369 27 353
---- ---- ------
$369 $169 $3,560
==== ==== ======
</TABLE>
Related to certain of the Acquisitions (Note 2), the Company acquired
certain long-term franchise agreements and contracts and entered into a
non-competition agreement. The estimated fair value of the
F-29
<PAGE> 101
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
acquired long-term franchise agreements and contracts was determined by
management based on the discounted net cash flows associated with the agreements
and contracts. The amounts assigned to the franchise agreements and contracts is
being amortized on a straight-line method over the remaining term of the related
agreements (11 years). Accumulated amortization amounted to $19 as of June 30,
1998. The estimated fair value of the non-competition agreement was determined
by management based on the discounted adjusted operating income stream that
would have otherwise been subject to competition. The amount assigned to the
non-competition agreement is being amortized on a straight-line method over the
term of the agreement (five years). Accumulated amortization amounted to $8 as
of December 31, 1997 and $24 as of June 30, 1998.
5. LINE OF CREDIT
On September 30, 1997, the Company obtained a revolving line of credit (the
"Line") from a bank (the "Bank"). The maximum amount available under the terms
of the Line was $2,000 and borrowings bore interest based on the prime rate plus
1.5% (aggregating 10.0% at December 31, 1997). Interest was payable monthly and
the Line was to expire on September 29, 1998. Borrowings under the Line were
secured by substantially all of the Company's assets and were subordinate to the
notes payable to BFI (Note 6) with respect to certain specified assets. The Line
was personally guaranteed by certain officers and stockholders of the Company
(Note 9). As of December 31, 1997, $600 was outstanding under the Line.
Management used borrowings from a new credit facility obtained in January
1998 (Note 12) to pay off amounts outstanding under the Line, and as such, these
amounts have been included in long-term debt as of December 31, 1997.
6. OTHER LONG-TERM DEBT
Other long-term debt consists of the following as of December 31, 1997:
<TABLE>
<S> <C>
Term loan payable to the Bank bearing interest at the Bank's
prime rate plus 2.0% (aggregating 10.5% as of December 31,
1997); monthly principal payments of $76 plus interest
beginning October 1997 through August 2002; all
outstanding principal and interest are due September 2002;
secured by substantially all of the Company's assets;
subordinate to the notes payable to BFI with respect to
certain specified assets.................................. $5,343
Note payable to BFI bearing interest at 6.0%; all
outstanding principal and interest are due December 1997;
secured by substantially all of the Company's accounts
receivable................................................ 319
Note payable to BFI bearing interest at 10.0%; quarterly
payments of interest beginning December 1997; all
outstanding principal and interest are due March 1998;
secured by substantially all of WCII's assets............. 500
------
$6,162
======
</TABLE>
The term loan payable to the Bank and the notes payable to BFI were
personally guaranteed by certain officers and stockholders of the Company (Note
9).
F-30
<PAGE> 102
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
As of December 31, 1997, aggregate contractual future principal payments by
calendar year on long-term debt are due as follows:
<TABLE>
<S> <C>
1998................................ $1,736
1999................................ 917
2000................................ 917
2001................................ 917
2002................................ 917
Thereafter.......................... 758
------
$6,162
======
</TABLE>
Management used borrowings from a new credit facility obtained in January
1998 (Note 12) to pay off all amounts outstanding under the term loan payable to
the Bank and all notes payable to BFI, and as such, these amounts have been
classified as long-term debt as of December 31, 1997.
On June 16, 1998, the Company completed a $1.8 million tax-exempt bond
financing for its Madera subsidiary. These funds will be used for specified
capital expenditures and improvements, including installation of a landfill gas
recovery system. The bonds issued mature on May 1, 2016 and bear interest at
variable rates based on market conditions for California tax exempt bonds. The
bonds are backed by a letter of credit issued by BankBoston under the Credit
Facility for $1.8 million. Funds from the bond offering are held by a trustee
until the capital expenditures are completed. The unused funds are classified as
restricted cash and included in other assets on the accompanying consolidated
balance sheet. The capital expenditures funded by the bonds are expected to be
substantially completed by December 31, 1998.
7. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Leases
The Company leases its facilities and certain equipment under
non-cancelable operating leases for periods ranging from one to five years.
Combined rent expense for the predecessor operations was $398, $412, and $441
for the years ended December 31, 1995 and 1996, and the nine months ended
September 30, 1997, respectively. The Company's rent expense under operating
leases during the period from inception (September 9, 1997) through December 31,
1997 amounted to $52.
As of December 31, 1997, future minimum lease payments under these leases,
by calendar year, are as follows:
<TABLE>
<S> <C>
1998.................................. $206
1999.................................. 196
2000.................................. 192
2001.................................. 140
2002.................................. 10
----
$744
====
</TABLE>
Performance Bonds and Letters of Credit
Municipal solid waste collection contracts may require performance bonds or
other means of financial assurance to secure contractual performance. As of
December 31, 1997, the Company had provided customers
F-31
<PAGE> 103
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
and various regulatory authorities with bonds and letters of credit of
approximately $800 to secure its obligations. The Company's new credit facility
(Note 12) provides for the issuance of letters of credit in an amount up to
$5,000, but any letters of credit issued reduce the availability of borrowings
for acquisitions or other general corporate purposes. If the Company were unable
to obtain surety bonds or letters of credit in sufficient amounts or at
acceptable rates, it could be precluded from entering into additional municipal
solid waste collection contracts or obtaining or retaining landfill operating
permits.
CONTINGENCIES
Environmental Risks
The Company is subject to liability for any environmental damage that its
solid waste facilities may cause to neighboring landowners or residents,
particularly as a result of the contamination of soil, groundwater or surface
water, and especially drinking water, including damage resulting from conditions
existing prior to the acquisition of such facilities by the Company. The Company
may also be subject to liability for any off-site environmental contamination
caused by pollutants or hazardous substances whose transportation, treatment or
disposal was arranged by the Company or its predecessors. Any substantial
liability for environmental damage incurred by the Company could have a material
adverse effect on the Company's financial condition, results of operations or
cash flows. As of December 31, 1997 and June 30, 1998, the Company is not aware
of any such environmental liabilities.
Legal Proceedings
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, the Company may
periodically become subject to various judicial and administrative proceedings
involving federal, state or local agencies. In these proceedings, an agency may
seek to impose fines on the Company or to revoke or deny renewal of an operating
permit held by the Company. From time to time the Company may also be subject to
actions brought by citizens' groups or adjacent landowners or residents in
connection with the permitting and licensing of landfills and transfer stations,
or alleging environmental damage or violations of the permits and licenses
pursuant to which the Company operates.
In addition, the Company may become party to various claims and suits
pending for alleged damages to persons and property, alleged violations of
certain laws and alleged liabilities arising out of matters occurring during the
normal operation of the waste management business. However, as of December 31,
1997 and June 30, 1998 there is no current proceeding or litigation involving
the Company that the Company believes will have a material adverse impact on the
Company's business, financial condition, results of operations or cash flows.
During the period from January 1, 1996 through July 31, 1996, The Disposal
Group won a lawsuit against the city of Vancouver, Washington relating to the
city's annexation of certain territories served by The Disposal Group. The
Disposal Group received approximately $2.6 million from the lawsuit, which is
included in other income in the accompanying statement of operations.
Employees
Approximately 55 drivers and mechanics at the Company's Vancouver,
Washington operation are represented by the Teamsters Union, with which
Browning-Ferris Industries of Washington, Inc., the Company's predecessor in
Vancouver, entered a four-year collective bargaining agreement in January 1997.
Approximately 11 drivers at Arrow Sanitary Services, Inc. ("Arrow"), a wholly
owned subsidiary of the
F-32
<PAGE> 104
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
are represented by the Teamsters Union, with which Arrow entered into a
three-year collective bargaining agreement in March 1998. In addition, in July
1997, the employees at the Company's facility in Issaquah, Washington, adopted a
measure to select a union to represent them in labor negotiations with
management. The union and management operated under a one-year negotiating
agreement, that ended July 27, 1998.
Since July 27, 1998, negotiations have continued between the Union and the
Company, although the Union is permitted to call a strike or call for
arbitration of the outstanding issues. The Company is not aware of any other
organizational efforts among its employees and believes that its relations with
its employees are good.
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In September 1997, the Company received net proceeds of $6,992 from the
sale of 2,499,998 shares of redeemable convertible preferred stock (the
"Preferred Stock"). The Preferred Stock accrues cumulative dividends at the rate
of $.098 per share annually. Accumulated and unpaid dividends on Preferred Stock
amounted to $61 as of December 31, 1997. The Preferred Stock and any accumulated
and unpaid dividends are convertible at the holder's option into shares of the
Company's common stock at the calculated rate of $2.80 per share divided by the
"Conversion Price" subject to certain anti-dilution adjustments. Each share was
automatically converted into common stock immediately upon the closing of the
Company's initial public offering of common stock at a Conversion Price of $2.80
per share.
Each share of Preferred Stock is redeemable, at the holder's option, during
the period from April 1, 1999 through October 1, 1999 for $4.20 per share plus
any accumulated and unpaid dividends. The difference between the carrying value
of the Preferred Stock and the redemption value (including accumulated
dividends) is being accreted using the interest method through the earliest
redemption date. The redemption of the Preferred Stock is not mandatory if it
would cause the Company to incur additional indebtedness or if it is prohibited
under any of the Company's then existing debt agreements.
The preferred stockholders are entitled to one vote for each share of
common stock into which such shares can be converted, and are also entitled to
liquidation preferences equal to the greater of the initial purchase price per
share ($2.80) plus any accumulated and unpaid dividends, plus the greater of
$4.20 per share or an amount which equals an internal rate of return of 50% to
the investor. After receiving such preference, the holders of the preferred
stock share remaining proceeds with the common stockholders on an as converted
basis.
9. STOCKHOLDERS' EQUITY
Common Stock
Of the 47,700,000 shares of common stock authorized but unissued as of
December 31, 1997, the following shares were reserved for issuance:
<TABLE>
<S> <C>
Preferred Stock................................... 2,521,874
Madera acquisition (Note 2)....................... 1,200,000
Stock option plan................................. 1,200,000
Stock purchase warrants........................... 1,056,000
---------
5,977,874
=========
</TABLE>
F-33
<PAGE> 105
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
Stockholder Notes Receivable
In December 1997, the Company provided loans in the aggregate amount of $82
to certain employees, who are also common stockholders, for the purchase of
shares of the Company's Preferred Stock. The notes bear interest at 8%, are due
on January 1, 1999 and are secured by the Preferred Stock purchased and common
stock owned by the employees.
Stock Options
In November 1997, the Company's Board of Directors adopted a stock option
plan in which all officers, employees, directors and consultants may participate
(the "Option Plan"). Options granted under the Option Plan may either be
incentive stock options or nonqualified stock options (the "Options") and they
will generally have a term of 10 years from the date of grant and will vest over
periods determined at the date of grant. The exercise prices of the options are
determined by the Company's Board of Directors and will be at least 100% or 110%
of the fair market value of the Company's common stock on the date of grant as
provided for in the Option Plan.
In connection with the Option Plan, the Company's Board of Directors
approved the reservation of 1,200,000 shares of common stock for issuance
thereunder. As of December 31, 1997 and June 30, 1998, no options to purchase
common stock were exercisable under the Option Plan. In addition, as of December
31, 1997 and June 30, 1998, options for 671,500 and 324,700 shares, respectively
of common stock were available for future grants under the Option Plan.
A summary of the Company's stock option activity and related information
during the period from inception (September 9, 1997) through December 31, 1997
and the three months ended June 30, 1998 is presented below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES (OPTIONS) EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Outstanding at inception.............. -- $ --
Granted............................... 528,500 4.92
Forfeited............................. -- --
Exercised............................. -- --
-------
Outstanding as of December 31, 1997... 528,500 4.92
Granted (unaudited)................... 409,300 7.23
Forfeited (unaudited)................. -- --
Exercised (unaudited)................. -- --
-------
Outstanding as of June 30, 1998
(unaudited)......................... 937,800 5.93
=======
</TABLE>
F-34
<PAGE> 106
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
The following table summarizes information about stock options outstanding
as of December 31, 1997 and June 30, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 JUNE 30, 1998
------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
EXERCISE RANGE SHARES PRICE SHARES PRICE
-------------- ------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
$ 2.80 to 5.00................. 385,500 2.85 589,800 2.91
$ 6.00 to 9.50................. -- -- 72,500 8.54
$10.50 to 12.50................ 143,000 10.50 245,000 11.07
$15.19 to 16.75................ -- -- 30,500 16.72
------- ----- ------- -----
528,500 4.92 937,800 5.93
======= ===== ======= =====
</TABLE>
The weighted average remaining contractual life of stock options
outstanding as of December 31, 1997, was 9.4 years.
Pro Forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the period from inception (September 9, 1997) through December
31, 1997: risk-free interest rate of 6%; dividend yield of zero; volatility
factor of the expected market price of the Company's common stock of .40; and a
weighted-average expected life of the option of 4 years.
The Black-Scholes option valuation model was developed for us in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma net loss and pro forma basic net loss per share for the period from
inception (September 9, 1997) through December 31, 1997 were $(5,070) and
$(2.99) per share, respectively.
During the six months ended June 30, 1998, the Company recorded deferred
stock compensation of $821 relating to stock options granted during the period
with exercise prices less than the estimated fair value of the Company's common
stock on the date of grant. The deferred stock compensation is being amortized
into expense over the vesting periods of the stock options which generally range
from 1 to 3 years. Compensation expense of $201 was recorded during the six
months ended June 30, 1998 relating to these options, and the remaining $619
will be amortized into expense in future periods.
Stock Purchase Warrants
In September 1997, the Company issued a warrant to purchase 200,000 shares
of the Company's common stock to the Bank that provided the Line and term loan
payable (Notes 5 and 6). The exercise price
F-35
<PAGE> 107
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
of the warrant is $.01 per share. The warrant was valued at $382 on its date of
issuance using the Black-Scholes pricing model with an assumed stock price
volatility of .40, risk-free interest rate of 6.0%, estimated fair value of the
common stock of $1.92 per share and an expected life of 7 years. The value
assigned to the warrant was reflected as a discount on long-term debt. The
discount was fully accreted to interest expense using the straight-line method
over the expected term of the debt agreements (approximately three months).
In connection with their guarantee of certain of the Company's debt
obligations (Notes 5 and 6), the Company issued warrants to purchase 841,000
shares of the Company's common stock to certain directors and stockholders of
the Company. The exercise price of the warrants is $2.80 per share. The warrants
were valued at $328 on their date of issuance using the Black-Scholes pricing
model with an assumed stock price volatility of .40, risk-free interest rate of
6.0%, estimated fair value of the common stock of $1.92 per share and expected
lives of 3 years. The value assigned to these warrants was fully amortized to
interest expense over the expected term of the debt agreements (approximately
three months).
In December 1997, the Company issued to consultants warrants to purchase
15,000 shares of the Company's common stock. Warrants to purchase 10,000 and
5,000 shares of common stock had exercise prices of $5.00 per share and $2.80
per share, respectively.
In February 1998, the Company granted warrants to an employee to purchase
50,000 shares of the Company's common stock at $2.80 per share. The Company
recorded stock compensation expense of approximately $235 relating to these
warrants.
Initial Public Offering
In May 1998, the Company sold in its initial public offering, a total of
2,300,000 shares of common stock at $12.00 per share. The net proceeds after
underwriters' commissions and fees and other costs associated with the offering
were approximately $23,986. In connection with the offering, the redeemable
convertible preferred stock was converted into common stock, and the redemption
provisions of the common stock issued in connection with the Madera acquisition
(Note 2) expired.
10. INCOME TAXES
The provision (benefit) for income taxes for the periods ended December 31,
1995 and 1996, the nine months ended September 30, 1997 and for the period from
inception (September 9, 1997) through December 31, 1997 consists of the
following:
<TABLE>
<CAPTION>
PREDECESSORS
-------------------------------------------------------------
FIBRES THE DISPOSAL GROUP WASTE CONNECTIONS, INC.
INTERNATIONAL, INC. COMBINED CONSOLIDATED
THE DISPOSAL GROUP PERIOD FROM PERIOD FROM PERIOD FROM INCEPTION
COMBINED JANUARY 1, 1995 JANUARY 1, 1996 (SEPTEMBER 9, 1997)
YEAR ENDED THROUGH THROUGH THROUGH
DECEMBER 31, 1995 NOVEMBER 30, 1995 JULY 31, 1996 DECEMBER 31, 1997
------------------ ------------------- ------------------ -----------------------
<S> <C> <C> <C> <C>
Current:
Federal............ $ -- $ 29 $207 $ 38
State.............. -- -- -- --
Deferred:
Federal............ (298) -- 298 (370)
State.............. -- -- -- --
----- ---- ---- -----
$(298) $ 29 $505 $(332)
===== ==== ==== =====
</TABLE>
F-36
<PAGE> 108
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
Significant components of the Company's deferred income tax assets and
liability were as follows as of December 31, 1996 and 1997:
<TABLE>
<CAPTION>
PREDECESSORS
COMBINED COMPANY
1996 1997
------------ -------
<S> <C> <C>
Deferred income tax assets:
Accounts receivable reserves......................... $ 32 $ 8
Amortization......................................... -- 290
Accrued expenses..................................... 4 --
Vacation accrual..................................... 2 15
Net operating losses................................. 208 54
------ ------
Total deferred income tax assets....................... 246 367
Deferred income tax liability:
Depreciation......................................... -- (529)
------ ------
Net deferred income tax asset (liability).............. 246 (162)
Less valuation allowance............................... (246) --
------ ------
$ -- $ (162)
====== ======
</TABLE>
The differences between the Company's provision (benefit) for income taxes
as presented in the accompanying statements of operations and benefit for income
taxes computed at the federal statutory rate is comprised of the items shown in
the following table as a percentage of pre-tax income (loss):
<TABLE>
<CAPTION>
PREDECESSORS
-------------------------------------------------------------------------------
THE DISPOSAL
FIBRES GROUP
THE DISPOSAL INTERNATIONAL, INC. COMBINED
GROUP PERIOD FROM PERIOD FROM
COMBINED JANUARY 1, 1995 PREDECESSORS JANUARY 1, 1996
YEAR ENDED THROUGH ONE MONTH ENDED THROUGH
DECEMBER 31, 1995 NOVEMBER 30, 1995 DECEMBER 31, 1995 JULY 31, 1996
----------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Income tax provision (benefit)
at the statutory rate........ (34.0%) 34.0% 34.0% 34.0%
Effect of valuation
allowance.................... -- -- (34.0%) (16.0%)
------- ------- ------- --------
(34.0%) 34.0% -- 18.0%
======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
PREDECESSORS
-------------------------------------
PREDECESSORS WASTE CONNECTIONS, INC.
COMBINED CONSOLIDATED
PREDECESSORS NINE MONTHS PERIOD FROM INCEPTION
COMBINED ENDED (SEPTEMBER 9, 1997)
PERIOD ENDED SEPTEMBER 30, THROUGH
DECEMBER 31, 1996 1997 DECEMBER 31, 1997
----------------- ----------------- -----------------------
<S> <C> <C> <C>
Income tax benefit at the statutory rate... (34.0%) (34.0%) (34.0%)
Effect of valuation allowance.............. 34.0% 34.0% --
Stock compensation expense................. -- -- 28.0%
-------- -------- --------
-- -- (6.0%)
======== ======== ========
</TABLE>
F-37
<PAGE> 109
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
11. NET LOSS PER SHARE INFORMATION
The following table sets forth the calculation of the numerator and
denominator used in the computation of basic net loss per share and pro forma
basic and diluted net loss per share for the period from inception (September 9,
1997) through December 31, 1997 and the six months ended June 30, 1998. The pro
forma basic net income (loss) per share calculations assume the conversion of
all outstanding shares of redeemable convertible preferred stock for the period
from inception (September 9, 1997) through December 31, 1997, and the conversion
of all outstanding shares of redeemable convertible preferred stock and
redeemable common stock for the six months ended June 30, 1998, as if such
conversions occurred as of the first day of each period presented.
<TABLE>
<CAPTION>
JUNE 30, 1998
DECEMBER 31, 1997 -----------------------------------
--------------------- (UNAUDITED)
PRO FORMA PRO FORMA PRO FORMA
BASIC BASIC BASIC BASIC DILUTED
NET LOSS NET LOSS NET LOSS NET LOSS NET LOSS
PER SHARE PER SHARE PER SHARE PER SHARE PER SHARE
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Numerator:
Income (loss) before extraordinary $ 573
item................................. $ (5,066) $ (4,788) $ 573 $ 573
Redeemable convertible preferred stock --
accretion............................ (531) -- (917) --
--------- --------- --------- --------- ---------
Income (loss) applicable to common $ 573
stockholders before extraordinary
item................................. $ (5,597) $ (4,788) $ (344) $ 573
========= ========= ========= ========= =========
Extraordinary item...................... -- -- (815) (815) (815)
--------- --------- --------- --------- ---------
Net loss applicable to common $ (242)
stockholders......................... $ (5,597) $ (4,788) $ (1,159) $ (242)
========= ========= ========= ========= =========
Denominator:
Weighted average common shares 4,480,694
outstanding.......................... 1,872,567 1,872,567 3,714,027 4,480,694
Dilutive effect of stock options and 1,351,691
warrants outstanding................. -- -- -- --
Incremental common shares issuable upon 1,916,665
conversion of preferred stock........ -- 2,499,998 -- 1,916,665
--------- --------- --------- --------- ---------
1,872,567 4,372,565 3,714,027 6,397,359 7,749,050
========= ========= ========= ========= =========
</TABLE>
As of December 31, 1997, outstanding options to purchase 528,500 shares of
common stock (with exercise prices ranging from $2.80 to $10.50), outstanding
warrants to purchase 1,056,000 shares of common stock (with exercise prices from
$0.01 to $5.00), and the outstanding Redeemable Convertible Preferred Stock
could potentially dilute basic earnings per share in the future and have not
been included in the computation of diluted net loss per share because to do so
would have been antidilutive for the period presented.
12. NEW CREDIT FACILITY
On January 30, 1998, the Company obtained a new revolving credit facility
from BankBoston (the "Credit Facility"). The maximum amount available under the
Credit Facility is $25,000 including stand-by letters-of-credit and the
borrowings will bear interest at various fixed and/or variable rates at the
Company's option. The Credit Facility allows for the Company to issue up to
$5,000 in stand-by letters-of-credit. The Credit Facility requires quarterly
payments of interest and it matures in January 2001. Borrowings under the
F-38
<PAGE> 110
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997
AND 1998 IS UNAUDITED)
Credit Facility are secured by all of the Company's assets. The borrowings are
further secured by the shares of the Company's common and preferred stock owned
by the Company's President and Chief Executive Officer. The Credit Facility
requires the Company to pay an annual commitment fee equal to 0.5% of the unused
portion of the Credit Facility. The Credit Facility places certain business,
financial and operating restrictions on the Company and it's subsidiaries
including among other things, the incurrence of additional indebtedness,
investments, acquisitions, asset sales, mergers, dividends, distributions and
repurchases and redemptions of capital stock. The Credit Facility also requires
that specified financial ratios and balances be maintained. In connection with
the Credit Facility the Company granted to an affiliate of BankBoston a warrant
to purchase 140,000 shares of the Company's common stock with an exercise price
of $2.80 per share and an expiration date of January 29, 2008.
On May 28, 1998, the Company entered into a new revolving credit facility
with a syndicate of banks for which BankBoston N.A. acts as agent (the "Credit
Facility"). The maximum amount available under the Credit Facility is $60
million (including stand-by letters of credit) and the borrowings bear interest
at various fixed and/or variable rates at the Company's option (approximately
7.44% as of June 30, 1998). The Credit Facility replaced an existing revolving
credit facility. The Credit Facility allows for the Company to issue up to $5
million in stand-by letters-of-credit. The Credit Facility requires quarterly
payments of interest and it matures in May 2001. Borrowings under the Credit
Facility are secured by virtually all of the Company's assets. The Credit
Facility requires the Company to pay an annual commitment fee equal to 0.375% of
the unused portion of the Credit Facility. The Credit Facility places certain
business, financial and operating restrictions on the Company relating to, among
other things the incurrence of additional indebtedness, investments,
acquisitions, asset sales, mergers, dividends, distributions and repurchase and
redemption of capital stock. The Credit Facility also requires that specified
financial ratios and balances be maintained.
13. RELATED PARTY TRANSACTIONS
The Company has entered into certain transactions with Continental Paper,
LLC ("Continental"), in which the Company delivers to Continental all of the
Company's collected recyclable materials in areas in which Continental has
processing facilities and Continental pays the Company market rates for the
recyclable materials. Certain of the Company's stockholders are the majority
owners of Continental. During the period from inception (September 9, 1997)
through December 31, 1997, the Company received approximately $223 from
Continental in these transactions.
F-39
<PAGE> 111
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Madera Disposal Systems, Inc.
We have audited the accompanying balance sheets of Madera Disposal Systems,
Inc. as of December 31, 1996 and 1997, and the related statements of income and
retained earnings, and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Madera Disposal Systems,
Inc. at December 31, 1996 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Sacramento, California
February 20, 1998
F-40
<PAGE> 112
MADERA DISPOSAL SYSTEMS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents................................... $1,064 $1,527
Accounts receivable, less allowance for doubtful
accounts of $111 ($90 in 1996)........................ 788 691
Receivables from shareholders.......................... 100 113
Prepaid expenses and other current assets.............. 216 214
------ ------
Total current assets................................... 2,168 2,545
Property and equipment, net................................. 3,800 3,636
Assets held for sale........................................ -- 77
Other assets................................................ 36 39
------ ------
$6,004 $6,297
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable....................................... $ 750 $ 644
Deferred revenue....................................... 208 219
Accrued liabilities.................................... 193 178
Current portion of capital lease obligations........... 218 274
Current portion of long-term debt...................... 177 288
------ ------
Total current liabilities................................... 1,546 1,603
Long-term portion of capital lease obligations.............. 1,557 1,565
Long-term debt.............................................. 637 329
Commitments and contingencies (Note 4)
Shareholders' equity:
Common stock: $100 par value; 1,000,000 shares
authorized; 500 shares issued and outstanding......... 50 50
Retained earnings...................................... 2,214 2,750
------ ------
Total shareholders' equity.................................. 2,264 2,800
------ ------
$6,004 $6,297
====== ======
</TABLE>
See accompanying notes.
F-41
<PAGE> 113
MADERA DISPOSAL SYSTEMS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Revenues.................................................... $7,008 $7,770 $7,845
Operating expenses:
Cost of operations..................................... 5,288 5,512 5,289
Selling, general and administrative.................... 996 969 1,041
Depreciation and amortization.......................... 467 585 627
------ ------ ------
Income from operations...................................... 257 704 888
Interest expense............................................ (237) (259) (280)
Other income, net........................................... 68 113 173
------ ------ ------
Net income.................................................. 88 558 781
Retained earnings, beginning of year........................ 1,863 1,656 2,214
Distributions to shareholders............................... (295) -- (245)
------ ------ ------
Retained earnings, end of year.............................. $1,656 $2,214 $2,750
====== ====== ======
Pro forma income taxes (unaudited -- Note 7)................ $ (30) $ (208) $ (295)
------ ------ ------
Pro forma net income (unaudited -- Note 7).................. $ 58 $ 350 $ 486
====== ====== ======
</TABLE>
See accompanying notes.
F-42
<PAGE> 114
MADERA DISPOSAL SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996 1997
----- ------ ------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 88 $ 558 $ 781
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 467 585 627
Gain on sale of property & equipment................... (13) (37) (71)
Changes in operating assets and liabilities:
Accounts receivable, net............................. (252) (23) 97
Receivables from shareholders........................ (21) (33) (13)
Prepaid expenses and other assets.................... -- (52) 2
Other assets......................................... (2) (9) (3)
Accounts payable..................................... 265 (29) (106)
Deferred revenue..................................... 4 16 11
Accrued liabilities.................................. 105 44 (15)
----- ------ ------
Net cash provided by operating activities:.................. 641 1,020 1,310
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment........... (274) (902) (183)
Proceeds from sale of assets.............................. 13 97 140
----- ------ ------
Net cash used in investing activities....................... (261) (805) (43)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 265 591 --
Principal payments on long-term debt and capital lease
obligations............................................ (576) (351) (559)
Cash distributions made to shareholders................... (295) -- (245)
----- ------ ------
Net cash provided by (used in) financing activities......... (606) 240 (804)
----- ------ ------
Net increase (decrease) in cash and equivalents............. (226) 455 463
Cash and equivalents:
Beginning of year......................................... 835 609 1,064
----- ------ ------
End of year............................................... $ 609 $1,064 $1,527
===== ====== ======
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND
NON-CASH TRANSACTIONS:
Cash paid for interest...................................... $ 237 $ 237 $ 279
===== ====== ======
Capital lease obligations and long-term debt incurred for
the purchase of property and equipment.................... $ 854 $ -- $ 426
===== ====== ======
</TABLE>
See accompanying notes.
F-43
<PAGE> 115
MADERA DISPOSAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Madera Disposal Systems, Inc. ("Madera") is a regional, integrated,
non-hazardous solid waste services company that provides collection, transfer
disposal and recycling services to residential, commercial and industrial
customers. Madera Landfill is contracted by the County of Madera to operate the
Fairmead, the North Fork Transfer Station and the materials recovery facility
(aka, Mammoth Recycling Facility), all of which are located in the County of
Madera, State of California. Madera also holds an exclusive contract with the
County of Madera to collect solid waste within the unincorporated areas of the
County of Madera. The contracts continue in force and effect until August 2004,
and will automatically be extended for one five year period unless Madera is
then in material breach or default of its obligations under the materials
recovery facility contract. All contracts may be extended for additional periods
and upon terms as the County of Madera and Madera may mutually agree upon.
On November 9, 1993, Madera entered into an agreement with the County of
Madera, whereby Madera was to design, permit, finance, construct, equip, staff,
operate and maintain a materials recovery facility (the "Facility") at the
County's Fairmead Landfill for the purpose of providing the County of Madera
with a guaranteed reduction in the quantity of municipal solid waste requiring
landfill disposal. The Facility was to be designed, constructed and operated to
receive all municipal solid waste from the Cities of Madera and Chowchilla and
the unincorporated areas of the County of Madera. It was also to meet the
twenty-five percent (25%) waste reduction requirements of Assembly Bill 939
(Chapter 1095 of the Statutes of 1989) for the Cities of Madera and Chowchilla
and the County of Madera by January 11, 1995, through the recycling of recovered
material, and work toward the waste reduction requirements of fifty percent
(50%) that each jurisdiction must achieve by January 1, 2000. The Facility
became operational on August 15, 1994.
The County of Madera will compensate Madera for its capital costs incurred
in designing, permitting, financing, constructing and equipping the Facility.
These costs were $1,661 and are included in property and equipment in the
accompanying balance sheets. The County of Madera will reimburse Madera for the
equipment and interest costs over a ten year operational period. The County of
Madera will also reimburse Madera for its other operational costs incurred in
connection with the staffing, maintaining and operating of the materials
recovery facility. All of the aforementioned costs are reimbursed to Madera
through receipt of a specified portion of waste disposal fees collected by
Madera on behalf of the County of Madera for landfill operations.
At the termination of the contracts described above, the improvements made
by Madera become the sole and exclusive property of the County of Madera,
subject only to the County of Madera's continuing obligation to pay or reimburse
the Company for any remaining unamortized capital costs of the Facility.
In 1995, Madera started a new line of business which provided clean-up and
waste removal services to residential and commercial construction businesses.
Due to continued losses, in July 1997 Madera ceased operations in this line of
business. The estimated fair value of the remaining assets of the business is
reflected in the accompanying balance sheets as assets held for sale at December
31, 1997. For the years ended December 31, 1995, 1996, and 1997, this business
had revenues of $531, $785 and $193, respectively, and had operating losses of
$290, $397, and $215, respectively.
Madera entered into an exclusive franchise agreement with the City of
Chowchilla on April 8, 1996, whereby Madera was granted the exclusive right and
franchise to collect, haul, and dispose of all solid waste, recyclable solid
waste, and green waste within the city limits of the City of Chowchilla. The
term of this franchise shall continue in force and effect for a period of seven
years, and the City of Chowchilla may renew and extend the franchise for an
additional period of five years or more.
F-44
<PAGE> 116
MADERA DISPOSAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
SALE OF THE COMPANY
Effective February 1, 1998, Madera's shareholders entered into an agreement
to sell their stock to Waste Connections, Inc. ("WCI") for cash and stock in
WCI.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
Madera considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject Madera to concentrations of
credit risks consist primarily of accounts receivable. Credit risk on accounts
receivable is minimized as a result of the large and diverse nature of Madera's
customer base. Madera maintains an allowance for losses based on the expected
collectibility of accounts receivable. Credit losses have been within
management's expectations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Improvements or betterments
which significantly extend the life of an asset are capitalized. Expenditures
for maintenance and repair costs are charged to operations as incurred. The cost
of assets retired or otherwise disposed of and the related accumulated
depreciation are eliminated from the accounts in the year of disposal. Gains and
losses resulting from property disposals are included in other income (expense).
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets or lease term, whichever is shorter.
The estimated useful lives are as follows:
<TABLE>
<S> <C>
Machinery and equipment................................ 6 - 10 years
Leasehold improvements................................. 10 - 40 years
Furniture and fixtures................................. 6 - 10 years
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and equivalents approximate their fair values
as of December 31, 1996 and 1997. The carrying values of the long-term debt and
capital lease obligations (Notes 3 and 4) approximate their fair values as of
December 31, 1996 and 1997, based on current incremental borrowing rates for
similar types of borrowing arrangements.
REVENUE RECOGNITION
Madera recognizes revenues as services are provided. Certain customers are
billed in advance and, accordingly, recognition of the related revenues is
deferred until the services are provided.
F-45
<PAGE> 117
MADERA DISPOSAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
INCOME TAXES
Madera operates under Subchapter S of the Internal Revenue Code for federal
and state income tax reporting purposes. Consequently, all of the income tax
attributes and liabilities of the Madera's operations flow through to the
individual shareholders.
CLOSURE AND POST-CLOSURE COSTS
Under regulations pursuant to which the permit for the Fairmead Landfill
was issued, Madera and Madera County, as operator and owner, respectively, are
jointly liable for closure and post-closure liabilities with respect to the
landfill. Madera has not accrued for such liabilities because Madera County, as
required by state law, has established a special fund, into which a designated
portion of tipping fee surcharges are deposited, to pay such liabilities.
Consequently, management of Madera does not believe Madera has any financial
obligation for closure and post-closure costs for the Fairmead Landfill as of
December 31, 1997.
2. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1996 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Machinery and equipment..................................... $5,480 $5,777
Leasehold improvements...................................... 498 500
Furniture and fixtures...................................... 137 133
------ ------
6,115 6,410
Less accumulated depreciation and amortization.............. 2,315 2,774
------ ------
$3,800 $3,636
====== ======
</TABLE>
3. LONG-TERM DEBT
Long-term debt as of December 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Equipment financing notes payable bearing interest at
various fixed and variable rates (ranging from 6.0% to 12.9%
at December 31, 1997); monthly payments of principal and
interest aggregating $16; maturing at various dates through
August 31, 2001; secured by equipment with net book values
aggregating $522 as of December 31, 1997.................... $664 $467
Notes payable to related parties bearing interest at 10.0%;
monthly payments of interest; maturing December 1, 1998..... 150 150
---- ----
814 617
Less: Current portion....................................... 177 288
---- ----
Long-term debt.............................................. $637 $329
==== ====
</TABLE>
One of the equipment financing notes, with an outstanding balance of $236
as of December 31, 1997, contains certain restrictive covenants, which among
other things require that specified financial balances and ratios be maintained,
restrict the payment of dividends and prohibit the incurrence of additional
indebtedness. As of December 31, 1997, Madera was in compliance with the
covenants.
F-46
<PAGE> 118
MADERA DISPOSAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
As of December 31, 1997, aggregate contractual future principal payments by
calendar year on long-term debt are due as follows:
<TABLE>
<S> <C>
1998........................................................ $288
1999........................................................ 149
2000........................................................ 122
2001........................................................ 58
----
$617
====
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Capital Leases
Madera leases certain equipment under capital leases. As of December 31,
1996 and 1997, the following amounts are included in property and equipment as
assets under these capital leases:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Cost....................................................... $2,235 $2,605
Less: accumulated amortization............................. 527 780
------ ------
Net assets under capital leases............................ $1,708 $1,825
====== ======
</TABLE>
The future minimum lease payments under these capital leases along with the
present value of the minimum lease payments as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
MINIMUM LEASE PAYMENTS
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1998.............................................. $ 448
1999.............................................. 489
2000.............................................. 427
2001.............................................. 352
2002.............................................. 294
Thereafter........................................ 494
------
Total minimum lease payments................................ 2,504
Less amount representing interest........................... 665
------
Present value of minimum lease payments..................... 1,839
Less current portion........................................ 274
------
Long-term portion........................................... $1,565
======
</TABLE>
OPERATING LEASES
Madera leases its facilities and certain equipment under cancelable
operating leases for periods of one year or less. Rent expense under all
operating leases during the years ended December 31, 1995, 1996 and 1997
amounted to $47, $41 and $33, respectively.
PERFORMANCE BONDS AND LETTERS OF CREDIT
Municipal solid waste collection contracts may require performance bonds to
secure contractual performance. As of December 31, 1997, Madera had provided
customers and various regulatory authorities with bonds of approximately $200 to
secure its obligations. If Madera were unable to obtain surety bonds in
sufficient amounts or at acceptable rates, it could be precluded from entering
into additional municipal solid waste collection contracts or obtaining or
retaining landfill operating permits.
F-47
<PAGE> 119
MADERA DISPOSAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
ENVIRONMENTAL RISKS
Madera is subject to liability for any environmental damage that its solid
waste facilities may cause to neighboring landowners, particularly as a result
of the contamination of drinking water sources or soil, including damage
resulting from conditions existing prior to the acquisition of such facilities
by Madera. Madera may also be subject to liability for any off-site
environmental contamination caused by pollutants or hazardous substances whose
transportation, treatment or disposal was arranged by Madera or its
predecessors. Any substantial liability for environmental damage incurred by
Madera could have a material adverse effect on Madera's financial condition,
results of operations or cash flows.
LEGAL PROCEEDINGS
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, Madera may periodically
become subject to various judicial and administrative proceeding involving
federal, state or local agencies. In these proceedings, an agency may seek to
impose fines on Madera or to revoke or deny renewal of an operating permit held
by Madera. From time to time Madera may also be subject to actions brought by
citizens' groups or adjacent landowners in connection with the permitting and
licensing of landfills and transfer stations, or alleging environmental damage
or violations of the permits and licenses pursuant to which Madera operates.
In addition, Madera may become party to various claims and suits pending
for alleged damages to persons and property, alleged violations of certain laws
and alleged liabilities arising out of matters occurring during the normal
operation of the waste management business. However, as of December 31, 1997,
there is no current proceeding or litigation involving Madera that Madera
believes will have a material adverse impact on Madera's business, financial
condition, results of operations or cash flows.
5. RELATED PARTY TRANSACTIONS
Madera performs repair services on equipment owned and operated by
shareholders of Madera. Revenues relating to these activities were $41, $60 and
$51 for the years ended December 31, 1995, 1996 and 1997, respectively. As of
December 31, 1996 and 1997, Madera has receivables of $100 and $113,
respectively, relating to these activities.
6. 401(K) PLAN
Madera has a voluntary savings and investment plan (the "401(k) Plan"). The
401(k) Plan is available to all eligible employees of Madera. Under the 401(k)
Plan Madera is required to match 100% of employees' contributions up to a
maximum of 3% of the employees' wages. During the years ended December 31, 1995,
1996 and 1997, Madera's 401(k) Plan expenses were approximately $78, $107 and
$108, respectively.
F-48
<PAGE> 120
MADERA DISPOSAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
7. PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
The following unaudited pro forma information reflects income tax expense
(benefit) as if Madera had been subject to federal and state income taxes:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal............................................. $(16) $(19) $197
State............................................... -- 12 57
Deferred:
Federal............................................. 32 188 33
State............................................... 14 27 8
---- ---- ----
Pro forma income taxes................................ $ 30 $208 $295
==== ==== ====
</TABLE>
The pro forma provisions for income taxes for the years ended December 31,
1995, 1996 and 1997 differ from the amounts computed by applying the applicable
statutory federal income tax rate (34%) to income before income taxes due to
state franchise taxes, certain non-deductible expenses and refundable tax
credits.
Madera's pro forma deferred income tax asset of approximately $20 and $54
at December 31, 1996 and 1997, respectively, relates principally to differences
in the recognition of bad debt expenses, state franchise taxes and certain other
temporary differences. Madera also has pro forma deferred tax liabilities at
December 31, 1996 and 1997 of approximately $534 and $570, respectively, which
relate to differences between tax and financial methods of depreciation.
8. SUBSEQUENT EVENTS
On January 12, 1998, Madera distributed $131 to its shareholders.
F-49
<PAGE> 121
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Arrow Sanitary Service, Inc.
We have audited the accompanying balance sheet of Arrow Sanitary Service,
Inc. as of September 30, 1997, and the related statement of income and retained
earnings, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Arrow Sanitary Service, Inc.
at September 30, 1997, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Sacramento, California
July 8, 1998
F-50
<PAGE> 122
ARROW SANITARY SERVICE, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
------------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 205 $ 274
Accounts receivable....................................... 520 694
Prepaid expenses and other current assets................. 37 48
------ ------
Total current assets.............................. 762 1,016
Property and equipment, net................................. 815 926
Intangible assets, net...................................... 121 118
Other assets................................................ 48 13
------ ------
$1,746 $2,073
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 470 $ 439
Deferred revenue.......................................... 11 11
Accrued liabilities....................................... 151 213
Current portion of long-term debt......................... 168 154
------ ------
Total current liabilities......................... 800 817
Long-term portion of capital lease obligations.............. -- 45
Long-term debt.............................................. 429 450
Deferred income taxes....................................... 34 46
Commitments and contingencies (Note 4)
Shareholders' equity:
Common stock: no par value; 1,000 shares authorized; 600
shares issued and outstanding.......................... 47 47
Treasury stock payments................................... (25) (25)
Retained earnings......................................... 461 693
------ ------
Total shareholders' equity........................ 483 715
------ ------
$1,746 $2,073
====== ======
</TABLE>
See accompanying notes.
F-51
<PAGE> 123
ARROW SANITARY SERVICE, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31,
SEPTEMBER 30, ----------------
1997 1997 1998
------------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Revenues.................................................... $6,209 $2,872 $3,148
Operating expenses:
Cost of operations........................................ 4,970 2,080 2,255
Selling, general and administrative....................... 776 448 369
Depreciation and amortization............................. 143 70 85
------ ------ ------
Income from operations...................................... 320 274 439
Interest expense............................................ (72) (39) (30)
Other income (expense), net................................. (2) (5) 40
------ ------ ------
Income before income taxes.................................. 246 230 449
Income tax expense.......................................... (117) (98) (217)
------ ------ ------
Net income.................................................. 129 132 232
Retained earnings, beginning of period...................... 332 332 461
------ ------ ------
Retained earnings, end of period............................ $ 461 $ 464 $ 693
====== ====== ======
</TABLE>
See accompanying notes.
F-52
<PAGE> 124
ARROW SANITARY SERVICE, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31,
SEPTEMBER 30, ----------------
1997 1997 1998
------------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 129 $ 132 $ 232
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 143 70 85
Deferred income taxes.................................. 34 -- 12
Gain on sale of property and equipment................. (2) -- --
Changes in operating assets and liabilities:
Accounts receivable.................................. (2) (105) (174)
Prepaid expenses and other current assets............ 19 17 (11)
Other assets......................................... 1 2 35
Accounts payable..................................... 43 (46) (31)
Accrued liabilities.................................. 70 110 62
----- ----- -----
Net cash provided by operating activities................. 435 180 210
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment........... (117) (80) (134)
Treasury stock payments................................... (5) -- --
----- ----- -----
Net cash used in investing activities....................... (122) (80) (134)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. --....... 200 97
Principal payments on long-term debt...................... (191) (298) (104)
----- ----- -----
Net cash used in financing activities....................... (191) (98) (7)
----- ----- -----
Net increase in cash........................................ 122 2 69
Cash and cash equivalents, beginning of period.............. 83 83 205
----- ----- -----
Cash and cash equivalents, end of period.................... $ 205 $ 85 $ 274
===== ===== =====
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND
NON-CASH TRANSACTIONS:
Cash paid for interest...................................... $ 74 $ 39 $ 33
===== ===== =====
</TABLE>
See accompanying notes.
F-53
<PAGE> 125
ARROW SANITARY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO MARCH 31, 1998 AND
THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Arrow Sanitary Service, Inc. (the "Company") is a regional, integrated,
non-hazardous solid waste services company that provides collection, hauling and
disposal of recyclable materials for residential and commercial customers in
various counties of Oregon and Washington in and around Portland, Oregon.
SALE OF THE COMPANY
On June 17, 1998, the Company's shareholders entered into an agreement to
sell all capital stock in the Company to Waste Connections, Inc. ("WCI") for
cash and common stock of WCI.
INTERIM FINANCIAL INFORMATION
The unaudited interim financial statements as of March 31, 1998 and for the
six months ended March 31, 1997 and 1998 have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the six months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ended September 30,
1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable. Credit
risk on accounts receivable is minimized as a result of the large and diverse
nature of the Company's customer base. Credit losses have been within
management's expectations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Improvements or betterments
which significantly extend the life of an asset are capitalized. Expenditures
for maintenance and repair costs are charged to operations as incurred. The cost
of assets retired or otherwise disposed of and the related accumulated
depreciation are eliminated from the accounts in the year of disposal. Gains and
losses resulting from property disposals are included in other income (expense).
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, or lease term, whichever is shorter.
F-54
<PAGE> 126
ARROW SANITARY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO MARCH 31, 1998 AND
THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The estimated useful lives of property and equipment are as follows:
<TABLE>
<S> <C>
Buildings............................................... 30 years
Machinery and equipment................................. 3 - 10 years
Rolling stock........................................... 10 years
Furniture and fixtures.................................. 3 - 6 years
Containers.............................................. 5 - 12 years
</TABLE>
INTANGIBLE ASSETS
Intangible assets are comprised of the following at September 30, 1997:
<TABLE>
<S> <C>
Goodwill.................................................... $126
Covenant not to compete..................................... 12
----
138
Accumulated amortization.................................... (17)
----
$121
====
</TABLE>
Goodwill represents the excess of the purchase price over the fair value of
the net assets of entities previously acquired by the Company and is amortized
on a straight-line basis over the period of expected benefit of 40 years. The
covenant not to compete is amortized on a straight-line basis over the period of
expected benefit of 5 years.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided. Certain customers
are billed in advance and, accordingly, recognition of the related revenues is
deferred until the services are provided.
INCOME TAXES
The Company uses the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
SIGNIFICANT CUSTOMERS AND SUPPLIERS
The Company has three major customers which represent 21%, 14% and 11% of
total sales, respectively, for the year ended September 30, 1997. In addition,
the Company purchases a substantial portion of its recyclable materials and
equipment from four major suppliers.
F-55
<PAGE> 127
ARROW SANITARY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO MARCH 31, 1998 AND
THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
------------- -----------
(UNAUDITED)
<S> <C> <C>
Land................................................. $ 121 $ 121
Buildings............................................ 168 168
Machinery and equipment.............................. 480 593
Rolling stock........................................ 1,026 1,028
Furniture and fixtures............................... 104 109
Containers........................................... 296 342
------- -------
2,195 2,361
Less accumulated depreciation and amortization....... (1,380) (1,435)
------- -------
$ 815 $ 926
======= =======
</TABLE>
3. FINANCING ARRANGEMENTS
BANK LINE OF CREDIT
The Company maintains a revolving line of credit with a financial
institution. Under the agreement, the Company may borrow an amount up to $150.
Interest on the revolving line of credit accrues at the financial institution's
prime rate (8.5% at September 30, 1997) plus 1.5%. The agreement provides that
the Company comply with various financial and other covenants. The line of
credit had no amounts outstanding at September 30, 1997.
LONG-TERM DEBT
Long-term debt as of September 30, 1997 consists of the following:
<TABLE>
<S> <C>
Contract financing notes payable bearing interest at 9%;
payable in monthly installments of principal and interest
(ranging from $1 to $2); maturing between October 20, 1998
and November 15, 2004..................................... $159
Mortgage financing notes payable bearing interest at 8.25%;
payable in monthly installments of principal and interest
of $1; maturing on January 20, 2022; secured by certain
real estate............................................... 139
Equipment financing notes payable bearing interest (ranging
from 8.5% to 10.75%); payable in monthly installments of
principal (ranging from $2 to $5) plus interest; maturing
on March 20, 1998 and October 12, 2000; secured by the
Company's accounts receivable, inventory, equipment, and
certain other assets...................................... 299
----
597
Less: current portion....................................... 168
----
Long-term debt.............................................. $429
====
</TABLE>
One of the equipment financing notes, with no outstanding balance at
September 30, 1997, contains certain restrictive covenants, which among other
things require that specified financial balances and ratios be maintained,
restrict the payment of dividends and prohibit the incurrence of additional
indebtedness.
F-56
<PAGE> 128
ARROW SANITARY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO MARCH 31, 1998 AND
THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. FINANCING ARRANGEMENTS (CONTINUED)
As of September 30, 1997, aggregate contractual future principal payments
by fiscal year on long-term debt are due as follows:
<TABLE>
<S> <C>
1998........................................................ $168
1999........................................................ 121
2000........................................................ 81
2001........................................................ 27
2002........................................................ 26
Thereafter.................................................. 174
----
$597
====
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Operating Leases
The Company leases its facilities and certain equipment under noncancelable
operating leases. Rent expense under these agreements approximated $50 for the
year ended September 30, 1997.
The future minimum lease payments under these agreements as of September
30, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 54
1999........................................................ 54
2000........................................................ 49
2001........................................................ 48
2002........................................................ 48
Thereafter.................................................. 494
----
$747
====
</TABLE>
CONTINGENCIES
Legal Proceedings
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, the Company may
periodically become subject to various judicial and administrative proceedings
involving federal, state or local agencies. In these proceedings, an agency may
seek to impose fines on the Company or to revoke or deny renewal of an operating
permit held by the Company. From time to time the Company may also be subject to
actions brought by citizens' groups or adjacent landowners in connection with
the permitting and licensing of landfills and transfer stations, or alleging
environmental damage or violations of the permits and licenses pursuant to which
the Company operates.
In addition, the Company may become party to various claims and suits
pending for alleged damages to persons and property, alleged violations of
certain laws and alleged liabilities arising out of matters occurring during the
normal operation of the waste management business. However, as of September 30,
1997, there is
F-57
<PAGE> 129
ARROW SANITARY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO MARCH 31, 1998 AND
THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
no current proceeding or litigation involving the Company that the Company
believes will have a material adverse impact on the Company's business,
financial condition, results of operations or cash flows.
Employees
Approximately 11 of the Company's route drivers are represented by the
Teamsters Union. The Company entered into a three-year collective bargaining
agreement in March 1998. The Company is not aware of any other organizational
efforts among its employees and believes that its relations with its employees
are good.
5. 401(k) PLAN
The Company has a voluntary savings and investment plan (the "401(k)
Plan"). The 401(k) Plan is available to all eligible employees of the Company.
Under the 401(k) Plan the Company is required to match 3% of employees'
contributions up to a maximum of 6% of the employees' wages once the employee
contributes a minimum of 3%. The Company will match 100% of employee
contributions between 3 and 6%. Sixteen of twenty-one eligible employees
participated in the plan with minimum contributions of at least 3%. During the
year ended September 30, 1997, the Company's 401(k) Plan expense was
approximately $35.
6. INCOME TAXES
The provision for income taxes for the year ended September 30, 1997
consists of the following:
<TABLE>
<S> <C>
Current:
Federal................................................... $ 60
State..................................................... 23
Deferred:
Federal................................................... 29
State..................................................... 5
----
$117
====
</TABLE>
Deferred taxes result from temporary differences in the recognition of
certain expense items for income tax and financial reporting purposes. The
Company's deferred taxes as of September 30, 1997 are substantially comprised of
depreciation deducted for tax purposes that will be recorded in future periods
for financial reporting purposes.
The principal reasons for the difference between the effective income tax
rate and the federal statutory income tax rate are as follows:
<TABLE>
<S> <C>
Federal expense expected at statutory rates................. $ 84
State and local income taxes, net of Federal benefit........ 15
Officers life insurance expense............................. 17
Other....................................................... 1
----
$117
====
</TABLE>
The Company paid $10 for income taxes during the year ended September 30,
1997.
F-58
<PAGE> 130
ARROW SANITARY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO MARCH 31, 1998 AND
THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
7. YEAR 2000 (UNAUDITED)
The Company will need to modify or replace portions of its software so that
its computer systems will function properly with respect to dates in the year
2000 ("Year 2000") and thereafter. To date, the Company has not incurred any
costs related to the Year 2000 project. The Company does not believe that its
expenditures relating to the Year 2000 project will be material. However, if the
required Year 2000 modifications and conversions are not made or are not
completed in a timely manner, the Year 2000 issue could materially affect the
Company's operations.
F-59
<PAGE> 131
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Shrader Refuse and Recycling Service Company
We have audited the accompanying balance sheets of Shrader Refuse and
Recycling Service Company as of September 30, 1996 and 1997, and the related
statements of income, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Shrader Refuse and Recycling
Service Company at September 30, 1996 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
Lincoln, Nebraska
August 24, 1998
F-60
<PAGE> 132
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------- JUNE 30,
1996 1997 1998
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 287 $ 116 $ 342
Marketable equity securities.............................. 246 403 576
Accounts receivable, less allowance for doubtful accounts
of $29 and $32 at September 30, 1996 and 1997,
respectively........................................... 674 897 808
Prepaid expenses.......................................... 37 69 79
------ ------ ------
Total current assets.............................. 1,244 1,485 1,805
Property and equipment, net................................. 3,939 5,195 5,112
Goodwill, net............................................... 223 214 209
Other assets................................................ 122 157 208
------ ------ ------
$5,528 $7,051 $7,334
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 244 $ 202 $ 323
Accrued liabilities....................................... 100 103 117
Current portion of long-term debt......................... 763 703 703
Current portion of capital lease obligations.............. 18 97 97
------ ------ ------
Total current liabilities......................... 1,125 1,105 1,240
Long-term debt, net of current portion...................... 1,676 1,258 959
Capital lease obligations, net of current portion........... 338 1,583 1,511
Commitments and contingencies (Note F)
Stockholders' equity:
Common stock: $1 par value; 10,000 shares authorized;
8,571 shares issued and outstanding.................. 9 9 9
Retained earnings......................................... 2,338 3,012 3,465
Net unrealized gain on marketable equity securities....... 42 84 150
------ ------ ------
Total stockholders' equity........................ 2,389 3,105 3,624
------ ------ ------
$5,528 $7,051 $7,334
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-61
<PAGE> 133
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE
YEAR ENDED MONTHS ENDED
SEPTEMBER 30, JUNE 30,
---------------- ----------------
1996 1997 1997 1998
------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................................ $5,461 $6,896 $5,027 $5,382
Operating expenses:
Cost of operations.................................... 3,861 4,601 3,241 3,479
Selling, general and administrative................... 516 567 426 425
Depreciation and amortization......................... 565 770 546 697
------ ------ ------ ------
4,942 5,938 4,213 4,601
------ ------ ------ ------
Income from operations.................................. 519 958 814 781
Other income (expense):
Interest expense...................................... (206) (292) (219) (287)
Other income, net..................................... 35 59 19 19
------ ------ ------ ------
(171) (233) (200) (268)
------ ------ ------ ------
Net income.............................................. $ 348 $ 725 $ 614 $ 513
====== ====== ====== ======
Pro forma income taxes (unaudited) (Note G)............. $ 141 $ 290 $ 245 $ 206
------ ------ ------ ------
Pro forma net income (unaudited) (Note G)............... $ 207 $ 435 $ 369 $ 307
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-62
<PAGE> 134
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996 AND 1997
AND THE NINE MONTHS ENDED JUNE 30, 1998
(INFORMATION RELATED TO THE NINE MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSS) ON
COMMON STOCK MARKETABLE TOTAL
--------------- RETAINED EQUITY STOCKHOLDERS'
SHARES AMOUNT EARNINGS SECURITIES EQUITY
------ ------ -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance October 1, 1995........................ 8,571 $9 $2,154 $ (2) $2,161
Net income..................................... -- -- 348 -- 348
Distributions to stockholders.................. -- -- (164) -- (164)
Change in net unrealized gain (loss) on
marketable equity securities................. -- -- -- 44 44
----- -- ------ ---- ------
Balance at September 30, 1996.................. 8,571 9 2,338 42 2,389
Net income..................................... -- -- 725 -- 725
Distributions to stockholders.................. -- -- (51) -- (51)
Change in net unrealized gain (loss) on
marketable equity securities................. -- -- -- 42 42
----- -- ------ ---- ------
Balance at September 30, 1997.................. 8,571 9 3,012 84 3,105
Net income..................................... -- -- 513 -- 513
Distributions to stockholders.................. -- -- (60) -- (60)
Change in net unrealized gain (loss) on
marketable equity securities................. -- -- -- 66 66
----- -- ------ ---- ------
Balance at June 30, 1998....................... 8,571 $9 $3,465 $150 $3,624
===== == ====== ==== ======
</TABLE>
The accompanying notes are an integral part of this statement.
F-63
<PAGE> 135
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE
YEAR ENDED MONTHS ENDED
SEPTEMBER 30, JUNE 30,
----------------- ----------------
1996 1997 1997 1998
------- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 348 $ 725 $ 614 $ 513
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 565 770 546 697
Realized (gain) loss on marketable equity securities... 8 (23) (19) (19)
Gain on sale of property and equipment................. (6) (8) -- --
Changes in operating assets and liabilities:
Accounts receivable, net............................. (25) (223) (49) 89
Prepaid expenses..................................... 16 (32) (7) (10)
Other assets......................................... (6) (35) (85) (51)
Accounts payable..................................... 73 (42) (30) 121
Accrued liabilities.................................. 23 3 18 14
------- ------ ------ ------
Net cash provided by operating activities......... 996 1,135 988 1,354
------- ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment........... (2,010) (655) (395) (609)
Proceeds from sale of property and equipment.............. 6 26 -- --
Purchases of marketable equity securities................. (272) (307) (273) (232)
Proceeds from sale of marketable equity securities........ 81 215 184 144
------- ------ ------ ------
Net cash used in investing activities............. (2,195) (721) (484) (697)
------- ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 1,777 300 120 250
Principal payments on long-term debt and capital lease
obligations............................................ (518) (834) (617) (621)
Cash distributions made to stockholders................... (164) (51) (39) (60)
------- ------ ------ ------
Net cash provided by (used in) financing
activities...................................... 1,095 (585) (536) (431)
------- ------ ------ ------
Net change in cash and cash equivalents..................... (104) (171) (32) 226
Cash and cash equivalents:
Beginning of period....................................... 391 287 287 116
------- ------ ------ ------
End of period............................................. $ 287 $ 116 $ 255 $ 342
======= ====== ====== ======
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND
NON-CASH TRANSACTIONS:
Cash paid for interest.................................... $ 206 $ 299 $ 219 $ 287
======= ====== ====== ======
Capital lease obligations incurred for the purchase of
property and equipment................................. $ 376 $1,380 $1,380 $ --
======= ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-64
<PAGE> 136
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.)
NOTE A -- ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Organization and Business
Shrader Refuse and Recycling Service Company (the "Company") is a
non-hazardous solid waste services company that provides collection, hauling,
disposal and recycling services to residential and commercial customers in
various counties of Nebraska.
The Company derives a portion of its revenue from exclusive municipal
contracts, of which a significant number will be subject to competitive bidding
at some time in the future. The Company intends to bid on additional municipal
contracts as a means of adding customers. There can be no assurance that the
Company will be the successful bidder to obtain or retain contracts that come up
for competitive bidding.
2. Sale of the Company
On July 31, 1998, the Company's stockholders sold all capital stock of the
Company to Waste Connections, Inc. ("WCI") for cash and common stock of WCI.
3. Interim Financial Information
The unaudited interim financial statements as of June 30, 1998 and for the
nine months ended June 30, 1997 and 1998 have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the nine months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending September 30,
1998.
4. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
5. Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
6. Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable. Credit
risk on accounts receivable is minimized as a result of the large and diverse
nature of the Company's customer base. Credit losses have been within
management's expectations.
7. Marketable Equity Securities
The Company's marketable equity securities are classified as "available for
sale" and stated at market value. Unrealized holding gains and losses on such
securities are reported as a separate component of stockholders' equity until
realized.
F-65
<PAGE> 137
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.)
NOTE A -- ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Gains and losses on the disposition of marketable equity securities are
determined using the first-in, first-out method. Declines in the fair value of
individual securities below their cost that are other than temporary are
recorded as realized losses through a charge to income.
8. Property and Equipment
Property and equipment are stated at cost. Improvements or betterments
which significantly extend the life of an asset are capitalized. Expenditures
for maintenance and repair costs are charged to operations as incurred. The cost
of assets retired or otherwise disposed of and the related accumulated
depreciation are eliminated from the accounts in the year of disposal. Gains and
losses resulting from property disposals are included in other income or
expense. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, or lease term, whichever is shorter.
The estimated useful lives of property and equipment are as follows:
<TABLE>
<S> <C>
Buildings under capital leases........................... 10 years
Machinery and equipment.................................. 3-10 years
Rolling stock............................................ 5-10 years
Containers............................................... 5-12 years
</TABLE>
9. Goodwill
Goodwill represents the excess of the purchase price over the fair value of
the tangible net assets of entities previously acquired by the Company and is
amortized on a straight-line basis over the period of expected benefit of 40
years.
10. Revenue Recognition
The Company recognizes revenues as services are provided. Certain customers
are billed in advance and, accordingly, recognition of the related revenues is
deferred until the services are provided.
11. Income Taxes
The Company operates under Subchapter "S" of the Internal Revenue Code for
federal and state income tax reporting purposes. Consequently, all of the income
tax attributes and liabilities of the Company's operations flow through to the
individual shareholders.
12. Significant Customer
The Company has one major customer which represents 16% of total revenues
for the year ended September 30, 1997.
NOTE B -- MARKETABLE EQUITY SECURITIES
At September 30, 1996 and 1997, the aggregate market value of marketable
equity securities exceeded their aggregate cost by $42 and $84, respectively.
Gross unrealized gains totaled $44 and $89 and gross unrealized losses totaled
$2 and $5 at September 30, 1996 and 1997, respectively.
F-66
<PAGE> 138
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.)
NOTE B -- MARKETABLE EQUITY SECURITIES (CONTINUED)
Proceeds from sales of marketable equity securities during the years ended
September 30, 1996 and 1997 were $81 and $215, respectively. Gross gains of $4
and gross losses of $12 were realized on sales during 1996. Gross gains of $37
and gross losses of $14 were realized on sales during 1997.
NOTE C -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------- JUNE 30,
1996 1997 1998
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Buildings under capital leases....................... $ 376 $1,756 $1,756
Machinery and equipment.............................. 440 455 471
Rolling stock........................................ 3,359 3,656 4,009
Containers........................................... 1,781 2,089 2,328
------ ------ ------
5,956 7,956 8,564
Less accumulated depreciation and amortization....... 2,017 2,761 3,452
------ ------ ------
$3,939 $5,195 $5,112
====== ====== ======
</TABLE>
NOTE D -- GOODWILL
Goodwill is comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------- JUNE 30,
1996 1997 1998
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill............................................. $ 351 $ 351 $ 351
Accumulated amortization............................. 128 137 142
------ ------ ------
$ 223 $ 214 $ 209
====== ====== ======
</TABLE>
NOTE E -- FINANCING ARRANGEMENTS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------- JUNE 30,
1996 1997 1998
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to bank bearing interest at rates
ranging from 7.75% to 9.50%, payable in monthly
installments of principal and interest; maturing
through August 2001................................ $2,244 $1,766 $1,467
Note payable to related party, with interest at 9%
per annum payable quarterly until monthly
installments of principal and interest commence on
November 1997. This note matures July 2003 and is
without collateral................................. 195 195 195
------ ------ ------
2,439 1,961 1,662
Less current portion................................. 763 703 703
------ ------ ------
Long-term debt, net of current portion............... $1,676 $1,258 $ 959
====== ====== ======
</TABLE>
F-67
<PAGE> 139
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.)
NOTE E -- FINANCING ARRANGEMENTS (CONTINUED)
On July 1, 1998, the Company entered into an $875 credit facility with a
bank maturing December 2001. The credit facility is a line of credit through
January 1, 1999, whereupon all borrowings under the facility will be refinanced
on a note payable due in monthly installments through December 2001. Borrowings
bear interest at 8.0% per annum. During July 1998, the Company utilized all of
the credit facility for equipment purchases.
The notes payable to bank and the credit facility are collateralized by
substantially all of the Company's assets and the personal guarantees of the
stockholders. The Company is subject to certain restrictive covenants with the
bank, which among other things, require that a specified debt service coverage
ratio be maintained and restrict the payment of dividends solely to amounts
sufficient to meet the tax requirements of the stockholders relative to the
Company's status as a Subchapter "S" Corporation. The Company was in compliance
with or received waivers of the covenant requirements for the year ended
September 30, 1997.
As of September 30, 1997, aggregate contractual future principal payments
by fiscal year are due as follows:
<TABLE>
<S> <C>
1998................................................ $ 703
1999................................................ 546
2000................................................ 355
2001................................................ 284
2002................................................ 39
Thereafter.......................................... 34
------
$1,961
======
</TABLE>
In conjunction with the acquisition of the Company by WCI on July 31, 1998,
all of the outstanding long-term debt of the Company was repaid.
NOTE F -- COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Leases
The Company leases three facilities from a related party under two ten-year
leases expiring in 2005 and 2007. For financial reporting purposes, minimum
lease rentals relating to the facilities have been capitalized. The related
assets and obligations have been recorded using the Company's implicit borrowing
rate at the inception of the leases. The following amounts are included in
property and equipment as buildings under capital leases:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------- JUNE 30,
1996 1997 1998
---- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Buildings....................................... $376 $1,756 $1,756
Less accumulated amortization................... 38 121 253
---- ------ ------
$338 $1,635 $1,503
==== ====== ======
</TABLE>
F-68
<PAGE> 140
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.)
NOTE F -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
The following is a schedule by fiscal years of future minimum lease
payments under capital leases together with the present value of the net minimum
lease payments as of September 30, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 321
1999........................................................ 321
2000........................................................ 321
2001........................................................ 321
2002........................................................ 321
Thereafter.................................................. 1,368
------
Total minimum lease payments................................ 2,973
Less amount representing interest........................... 1,293
------
$1,680
======
Current portion............................................. $ 97
Long-term portion........................................... 1,583
------
$1,680
======
</TABLE>
Prior to entering into the current leases, the Company leased these
facilities on a month-to-month basis from the related party. The Company
recognized rent expense of $171 and $117 in fiscal 1996 and 1997, respectively.
Total rent and minimum lease payments to the related party during fiscal 1996
and 1997 were $249 and $260, respectively.
In conjunction with the acquisition of the Company by WCI on July 31, 1998,
the current leases were terminated, two of the three facilities were acquired
and the remaining facility was leased under a two-year lease with an option to
extend for an additional two years through July 2002.
Noncompete Agreement
The Company has a noncompete agreement with a related party that requires
the Company to pay $4 a month through October 1997 provided the related party
abides by the noncompete agreement. The Company paid the related party $44 in
each of the fiscal years ended September 30, 1996 and 1997.
CONTINGENCIES
Legal Proceedings
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, the Company may
periodically become subject to various judicial and administrative proceedings
involving federal, state or local agencies. In these proceedings, an agency may
seek to impose fines on the Company or to revoke or deny renewal of an operating
permit held by the Company. From time to time the Company may also be subject to
actions brought by citizens' groups or adjacent landowners in connection with
the permitting and licensing of landfills and transfer stations, or alleging
environmental damage or violations of the permits and licenses pursuant to which
the Company operates.
In addition, the Company may become party to various claims and suits
pending for alleged damages to persons and property, alleged violations of
certain laws and alleged liabilities arising out of matters occurring
F-69
<PAGE> 141
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.)
NOTE F -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
during the normal operation of the waste management business. As of September
30, 1997, there is no current proceeding or litigation involving the Company
that the Company believes will have a material adverse impact on the Company's
business, financial condition, results of operations or cash flows.
NOTE G -- PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
Unaudited pro forma information reflects income tax expense as if the
Company had been subject to federal and state income taxes. The pro forma
provisions for income taxes for the years ended September 30, 1996 and 1997 and
the nine month periods ended June 30, 1997 and 1998 differ from the amounts
computed by applying the applicable statutory federal income tax rate (34%) to
income before income taxes due to state income taxes and certain non-deductible
expenses.
The following is a summary of pro forma income taxes for the years ended
September 30, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------
1996 1997
----- -----
<S> <C> <C>
Current:
Federal................................................... $ 47 $ 66
State..................................................... 10 14
Deferred:
Federal................................................... 69 171
State..................................................... 15 39
---- ----
Pro forma income taxes...................................... $141 $290
==== ====
</TABLE>
The Company's pro forma deferred income tax liabilities of approximately
$739 and $949 at September 30, 1996 and 1997, respectively, relate principally
to differences between tax and financial methods of reporting depreciation
expense and the use of the cash method of accounting for income tax purposes
which gives rise to differences between financial statement and tax return
recognition of receivables, prepaid expenses, accounts payable and accrued
liabilities.
NOTE H -- FINANCIAL INSTRUMENTS
The following estimated fair value information pertains to the Company's
financial instruments and does not purport to represent the aggregate net fair
value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents: The carrying amount approximates fair value
because of the short maturity of those instruments.
Marketable equity securities: Quoted market prices for the Company's
marketable equity securities are used to estimate fair value.
Long-term debt and capital lease obligations: Current incremental borrowing
rates for similar type borrowings are used to estimate the fair value of the
Company's long-term debt and capital lease obligations.
F-70
<PAGE> 142
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.)
NOTE H -- FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
--------------------- ---------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents......................... $ 287 $ 287 $ 116 $ 116
Marketable equity securities...................... 246 246 403 403
Financial Liabilities:
Long-term debt.................................... 2,439 2,528 1,961 1,970
Capital lease obligations......................... 356 486 1,680 2,038
</TABLE>
F-71
<PAGE> 143
------------------------------------------------------
------------------------------------------------------
PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION IN THIS PROSPECTUS.
NEITHER THE COMPANY NOR ANY SELLING STOCKHOLDER HAS AUTHORIZED ANYONE TO PROVIDE
PROSPECTIVE INVESTORS WITH INFORMATION DIFFERENT FROM THAT IN THIS PROSPECTUS.
THIS PROSPECTUS IS NOT AN OFFER TO SELL, AND IT DOES NOT SEEK AN OFFER TO BUY,
THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
THE INFORMATION IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF WHEN THIS PROSPECTUS IS DELIVERED OR THESE SECURITIES
ARE SOLD.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information............... 2
Prospectus Summary.................. 3
Risk Factors........................ 7
Dividend Policy..................... 16
Price Range of Common Stock......... 16
Selected Historical and Pro Forma
Financial and Operating Data...... 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 21
Business............................ 33
Management.......................... 51
Certain Transactions................ 59
Principal Stockholders.............. 62
Description of Capital Stock........ 64
Shares Eligible for Future Sale..... 67
Outstanding Securities Covered by
this Prospectus................... 69
Legal Matters....................... 70
Experts............................. 70
Index to Financial Statements....... F-1
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
3,000,000 SHARES
[LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
OCTOBER 20, 1998
------------------------------------------------------
------------------------------------------------------
