<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 6, 1998.
REGISTRATION NO. 333-48029
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
WASTE CONNECTIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 4953 94-3283464
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2260 DOUGLAS BOULEVARD, SUITE 280
ROSEVILLE, CALIFORNIA 95661
(916) 772-2221
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
RONALD J. MITTELSTAEDT
PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN
WASTE CONNECTIONS, INC.
2260 DOUGLAS BOULEVARD, SUITE 280
ROSEVILLE, CALIFORNIA 95661
(916) 772-2221
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES OF ALL COMMUNICATIONS TO:
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ROBERT D. EVANS, ESQ. STEPHEN A. RIDDICK, ESQ.
SHARTSIS, FRIESE & GINSBURG LLP PIPER & MARBURY L.L.P.
ONE MARITIME PLAZA, 18TH FLOOR 36 SOUTH CHARLES STREET
SAN FRANCISCO, CALIFORNIA 94111 BALTIMORE, MARYLAND 21201
(415) 421-6500 (410) 539-2530
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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=====================================================================================================================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE(1)
- ---------------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value...................... $27,600,000 $8,142.00
=====================================================================================================================
</TABLE>
(1) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
MAY 6, 1998
2,000,000 SHARES
LOGO
COMMON STOCK
------------------
All of the 2,000,000 shares of Common Stock (the "Common Stock") offered
hereby are being sold by Waste Connections, Inc. (the "Company"). Prior to this
offering, there has been no public market for the Common Stock of the Company.
It is currently estimated that the initial public offering price will be between
$10.00 and $12.00 per share. For information relating to factors to be
considered in determining the initial public offering price, see "Underwriting."
Application has been made to have the Common Stock approved for quotation on the
Nasdaq National Market under the symbol "WCNX."
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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============================================================================================================
PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
- ------------------------------------------------------------------------------------------------------------
Per Share................................. $ $ $
- ------------------------------------------------------------------------------------------------------------
Total(2).................................. $ $ $
============================================================================================================
</TABLE>
(1) Before deducting expenses of the offering payable by the Company estimated
at $1,200,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an additional 300,000 shares of Common Stock solely to cover
over-allotments, if any. To the extent the option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If the option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about ,
1998.
BT ALEX. BROWN CIBC OPPENHEIMER
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 3
This Prospectus contains registered service marks, trademarks and trade
names of the Company, including the Waste Connections, Inc. name and logo.
The Company intends to furnish its stockholders with annual reports
containing consolidated financial statements audited by its independent auditors
and with quarterly reports containing unaudited interim consolidated financial
information for each of the first three quarters of each fiscal year.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING
AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Financial Statements, including the Notes thereto, appearing
elsewhere in this Prospectus. Except as otherwise noted herein, all information
in this Prospectus: (i) gives effect to the automatic conversion upon
consummation of this offering of all outstanding shares of Series A Preferred
Stock into 2,499,998 shares of Common Stock; and (ii) assumes no exercise of the
Underwriters' over-allotment option. See "Description of Capital Stock,"
"Underwriting" and Notes 8 and 9 of Notes to the Company's Financial Statements
included elsewhere herein. Unless otherwise specified herein, 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 April 15, 1998, the Company
served more than 130,000 commercial, industrial and residential customers in
Washington, California, Idaho and Wyoming. The Company currently owns seven
collection operations and operates three transfer stations, one Subtitle D
landfill and one recycling facility. 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 seven solid waste services 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 several other
Western States. 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 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
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Company's targeted markets will provide the Company with 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.
BACKGROUND
In September 1997, the Company joined with two other parties to bid on
certain solid waste and recycling businesses offered for sale by Browning-Ferris
Industries, Inc. ("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.
RECENT DEVELOPMENTS
MADERA ACQUISITION
Effective February 1, 1998, the Company acquired Madera Disposal Systems,
Inc. ("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 (the "Fairmead Landfill")
and one recycling facility. The Fairmead Landfill is estimated to have a
remaining life of approximately 26 years.
IDAHO ACQUISITIONS
On January 30, 1998, the Company acquired from affiliates of the Company
the stock of Waste Connections of Idaho, Inc., a provider of solid waste
collection services to more than 10,000 customers in and around Idaho Falls and
Pocatello, Idaho. 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. See "Certain Transactions."
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 that serves approximately 2,800 customers.
WYOMING ACQUISITIONS
On April 8, 1998, the Company acquired solid waste collection assets from
A-1 Disposal, Inc. and Jesse's Disposal, which together serve approximately
2,300 customers in northeastern Wyoming.
LETTERS OF INTENT TO ACQUIRE ADDITIONAL OPERATIONS
As of April 15, 1998, the Company had entered into nonbinding, preliminary
letters of intent relating to the possible acquisition of six collection and
transfer companies and one integrated collection and landfill company, which the
Company estimates represent aggregate annualized
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<PAGE> 6
revenues of more than $19.5 million, and which would result in expansion into
three new markets. There can be no assurance that actual revenues realized by
the Company from the successful acquisition of these potential acquisition
candidates will not differ materially from the Company's estimate or that any of
these letters of intent will lead to completed acquisitions on the terms
currently contemplated.
AMENDMENT AND INCREASE OF CREDIT FACILITY
On April 21, 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 is contingent on this offering and will, among
other things, increase the Company's borrowing capacity from $25.0 million to
$60.0 million, modify certain covenants and lower the Company's borrowing costs.
As of March 31, 1998, the aggregate outstanding principal indebtedness under the
current credit facility was approximately $17.0 million.
THE OFFERING
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<S> <C>
Common Stock offered by the Company.................. 2,000,000 shares
Common Stock to be outstanding after this offering... 7,891,816 shares(1)
Use of proceeds...................................... Repayment of existing indebtedness
and for general corporate purposes,
including possible acquisitions and
capital expenditures.
Proposed Nasdaq National Market symbol............... WCNX
</TABLE>
- ---------------
(1) Excludes 2,273,300 shares of Common Stock issuable upon the exercise of
warrants and options outstanding as of April 15, 1998, at a weighted average
exercise price of $3.67 per share. See "Management -- Stock Option Plan,"
"Certain Transactions" and Note 9 of Notes to the Company's Financial
Statements included elsewhere herein.
5
<PAGE> 7
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 AS THREE MONTHS ENDED
(SEPTEMBER 9, ADJUSTED MARCH 31, 1998
1997) THROUGH YEAR ENDED -----------------------------
DECEMBER 31, DECEMBER 31, PRO FORMA
1997 1997(1) ACTUAL AS ADJUSTED(1)
-------------- ------------ ---------- ----------------
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STATEMENTS OF OPERATIONS DATA:
Revenues.................................................. $ 6,237 $ 35,013 $ 7,601 $ 8,462
Cost of operations........................................ 4,703 26,114 5,397 6,017
Selling, general and administrative....................... 619 4,252 770 897
Depreciation and amortization............................. 354 2,431 541 623
Start-up and integration.................................. 493 493 -- --
Stock compensation........................................ 4,395 4,395 279 279
---------- ---------- ---------- ----------
Income (loss) from operations............................. (4,327) (2,672) 614 646
Interest expense.......................................... (1,035) -- (301) --
Other income (expense), net............................... (36) 151 -- 16
---------- ---------- ---------- ----------
Income (loss) before income taxes......................... (5,398) (2,521) 313 662
Income tax (provision) benefit............................ 332 (781) (237) (377)
---------- ---------- ---------- ----------
Net income (loss)......................................... $ (5,066) $ (3,302) $ 76 $ 285
========== ========== ========== ==========
Redeemable convertible preferred stock accretion.......... $ (531) $ -- $ (572) $ --
---------- ---------- ---------- ----------
Net loss applicable to common stockholders................ $ (5,597) $ (3,302) $ (496) $ 285
========== ========== ========== ==========
Basic net income (loss) per share......................... $ (2.99) $ (0.45) $ (0.21) $ 0.04
========== ========== ========== ==========
Shares used in calculating basic net income
(loss) per share........................................ 1,872,567 7,372,565 2,311,111 7,811,109
Diluted net income per share.............................. $ 0.03
==========
Shares used in calculating diluted net income per share... 8,835,415
Pro forma basic net income (loss) per share(2)............ $ (1.16) $ 0.01
========== ==========
Shares used in calculating pro forma basic net income
(loss) per share........................................ 4,372,565 5,811,109
Pro forma diluted net income per share(2)................. $ 0.01
==========
Shares used in calculating pro forma diluted
net income per share.................................... 6,835,415
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
DECEMBER 31, --------------------------
1997 ACTUAL AS ADJUSTED(3)
------------ --------- --------------
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BALANCE SHEET DATA:
Cash...................................................... $ 820 $ 2,386 $ 5,234
Working capital........................................... 836 988 3,836
Property and equipment, net............................... 4,185 7,316 7,316
Total assets.............................................. 18,880 41,033 43,881
Long-term debt(4)......................................... 6,762 16,289 --
Redeemable convertible preferred stock.................... 7,523 8,095 --
Redeemable common stock(5)................................ -- 7,500 --
Total stockholders' equity (deficit)...................... (551) 1,181 35,913
</TABLE>
(see footnotes on following page)
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- ---------------
(1) Assumes the Company's acquisitions of Madera Disposal Systems, Inc., Waste
Connections of Idaho, Inc. and predecessor and the Company's predecessors
occurred on January 1, 1997, adjusted to reflect the sale of the Common
Stock offered hereby at an assumed initial public offering price of $11.00
per share and the application of the estimated net proceeds therefrom. See
"Use of Proceeds" and "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 through December
31, 1997, and the conversion of redeemable convertible Preferred Stock and
all outstanding shares of redeemable Common Stock for the three months ended
March 31, 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.
(3) Adjusted to reflect the sale of the Common Stock offered by the Company
hereby at an assumed initial public offering price of $11.00 per share and
the application of the estimated net proceeds therefrom, as described in
"Use of Proceeds."
(4) Excludes redeemable Common Stock and redeemable convertible Preferred Stock.
(5) Common Stock issued in connection with the acquisition of Madera is
redeemable in certain circumstances, as defined in the Stock Purchase
Agreement between the Company and the Madera shareholders; however, the
redemption right expires upon the closing of this offering. See Notes 2 and
9 of Notes to the Company's Financial Statements included elsewhere herein.
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<PAGE> 9
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business 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 may be 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 should be read as
applying 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 without limitation
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 upon which
to base an evaluation of its business and its prospects. The disclosures
regarding the Company contained in this Prospectus must be considered in light
of the risks, expenses and difficulties frequently encountered by companies in
their early stages of development. In addition, there can be no assurance that
the Company's recently assembled senior management team will be able to manage
the Company successfully and implement the Company's operating and growth
strategies effectively.
The Company's effective integration of acquired businesses into its
organization and operations is and will continue to be important to the
Company's growth and future financial performance. A part of the Company's
strategy is to achieve economies of scale and operating efficiencies by
increasing its size through acquisitions. These goals may not be achieved unless
the Company effectively combines the operations of acquired businesses with its
existing operations. Because of the Company's limited operating history, there
can be no assurance that its recently assembled senior management team will
succeed in integrating the Company's completed and future acquisitions. Any
difficulties the Company encounters in the integration process could have a
material adverse effect on its business, financial condition and results of
operations.
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. The Company's ability to execute its growth strategy
will depend on a number of 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.
If the Company is able to execute its growth strategy, it may experience
periods of rapid growth. Such growth, if it occurs, could place a significant
strain on the Company's management, operational, financial and other resources.
The Company's ability to maintain and manage its growth effectively will require
it to expand its management information systems capabilities and its operational
and financial systems and controls. Moreover, the Company will need to attract,
train, motivate, retain and manage additional senior managers, technical
professionals and other employees. Any failure to expand the Company's
operational and financial systems and controls or to recruit and integrate
appropriate personnel at a pace consistent with the Company's revenue growth
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Strategy."
Availability of Acquisition Targets. The Company expects that a substantial
part of its future growth will come from acquiring solid waste collection,
transfer and disposal operations. While the Company has identified numerous
acquisition candidates that it believes are suitable, no assurance
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can be given that the Company will be able to negotiate their acquisition at
prices or on terms and conditions favorable to the Company. The Company's
failure to implement its acquisition strategy successfully would limit its
potential 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 result in fewer acquisition
opportunities being available to the Company, as well as less attractive
acquisition terms, including increased purchase prices. These circumstances may
increase acquisition costs to levels that are beyond the Company's financial
capability or pricing parameters or that may have an adverse effect on the
Company's results of operations and financial condition. A significant factor in
its ability to consummate acquisitions after completion of this offering will be
the relative attractiveness of shares of the Company's Common Stock as
consideration for potential acquisition candidates. This attractiveness may
depend in large part on the relative market price and capital appreciation
prospects of the Common Stock compared to the equity securities 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.
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. The Company also
competes with counties, municipalities and solid waste districts that maintain
their own waste collection and disposal operations. These counties,
municipalities and solid waste districts may have financial advantages over the
Company, because of their access to user fees and similar charges, tax revenues
and tax-exempt financing. Certain 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
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company derives a substantial portion of its revenue from exclusive
municipal contracts and franchise agreements, of which a significant number 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 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. In addition, some of the
Company's contracts may be terminated by the customer 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. See "Business -- G Certificates." The Company's inability to
replace revenues from contracts lost through competitive bidding or early
termination or the renegotiation of existing contracts with other revenues
within a reasonable time period could have a material adverse effect on the
Company's business, financial condition and results of operations.
Intense competition exists not only to provide services to customers but
also to acquire other businesses within each market. Other companies have
adopted or should be expected to adopt the Company's strategy of acquiring and
consolidating regional and local businesses to develop a national presence.
Increasing consolidation in the solid waste services industry is expected to
increase competitive pressures. See "Business -- Competition."
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Potential Inability to Finance the Company's Potential Growth. The Company
anticipates that any future business acquisitions will be financed 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 be required to use more of its available cash
resources or borrowings under its credit facility to fund such acquisitions. To
the extent that cash from operations and borrowings under the Company's credit
facility are insufficient to fund acquisitions, the Company will require
additional equity and/or debt financing. Additionally, growth through the
development or acquisition of new landfills, transfer stations and other
facilities, as well as the ongoing maintenance of such landfills, transfer
stations or other facilities, may require substantial capital expenditures.
There can be no assurance that the Company will have sufficient existing capital
resources or be able to raise sufficient additional capital resources on terms
satisfactory to the Company to meet any or all of the foregoing capital
requirements.
The terms of the Company's credit facility require the Company to obtain
the consent of the lending banks prior to consummating acquisitions of other
businesses for cash consideration (including all liabilities assumed) in excess
of $3.0 million. In addition, the Company may not incur aggregate indebtedness
greater than $250,000 to sellers in acquisition transactions without its
lenders' consent. The Company's inability to obtain such consent could prevent
the Company from completing certain acquisitions, which could inhibit the
Company's ability to execute its growth strategy. Furthermore, the Company's
credit facility contains various financial covenants predicated on the Company's
current and projected financial condition following completion of an
acquisition. If the Company is unable to satisfy these financial covenants on a
pro forma basis following completion of an acquisition, it would be unable 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 those that are anticipated, 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 could result in acceleration of the date for repayment of debt incurred
under the credit facility and would have a material adverse effect on the
Company's business, financial condition and results of operations. See "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and Note 5 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 loss of any of whom may have a
material adverse effect on the Company's business, financial condition and
results of operations. 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." No assurance can be given that these
agreements would be enforceable by the Company.
Geographic Concentration. The Company's operations and customers are
located in Washington, California, Idaho and Wyoming, and the Company expects to
focus its operations on the Western U.S. for at least the foreseeable future. As
of March 31, 1998, approximately 73% of the Company's total annualized revenues
were derived from customers located in Washington. Therefore, the Company's
business, financial condition and results of operations are susceptible to
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. There can be no assurance that the
Company will complete a sufficient number of acquisitions in other markets to
lessen its geographic concentration. See "Business -- Strategy."
10
<PAGE> 12
Seasonality of Business. Based on historic trends experienced by the
businesses acquired by the Company, the Company's results of operations will
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, resulting from decreased solid waste volume relating to 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 a majority of the Company's operating
expenses are expected to remain fairly constant throughout the fiscal year,
operating income should be expected to be generally lower in the winter months.
There can be no assurance that future seasonal and quarterly fluctuations will
not have a material adverse effect on the Company's business, financial
condition and results of operations. 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, the enforcement of which has become
increasingly stringent in recent years as a result 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."
If the Company implements its strategy for landfill ownership and
operation, it will be necessary to obtain and maintain in effect one or more
licenses or permits, as well as zoning, environmental and/or other land use
approvals. These licenses or permits and approvals are difficult and time-
consuming to obtain and renew and are frequently subject to opposition by
various elected officials or citizens' groups. See "Business -- Legal
Proceedings." There can be no assurance that the Company will be successful in
obtaining and maintaining in effect the permits and approvals required for the
successful ownership or operation (including capacity increases) of any future
landfill activities engaged in by the Company, and the failure by the Company to
obtain or maintain in effect a permit or approval significant to its landfill
business could have a material adverse effect on the Company's results of
operations and financial condition.
The design, operation and closure of landfills is extensively regulated.
These regulations include, among others, the regulations ("Subtitle D
Regulations") establishing minimum 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"). Failure to comply
with these regulations could require the Company to undertake investigatory or
remedial activities, to curtail operations or to close a landfill temporarily or
permanently. Future changes to these regulations may require the Company to
modify, supplement or replace equipment or facilities at costs that may be
substantial. 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 have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Companies in the solid waste services business, including the Company, 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 or 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 require the Company to make expenditures to remediate
potential environmental problems relating to waste disposed of or stored by the
Company or its predecessors, or resulting from its or its predecessors'
11
<PAGE> 13
transportation and collection operations. The Company may also be subject to
actions brought by individuals or community groups in connection with the
permitting, franchising or licensing of its operations, any alleged violation of
such permits, franchises or licenses or other matters. Any adverse outcome in
these proceedings could have a material adverse effect on the Company's
business, financial condition and results of operations and may subject the
Company to adverse publicity. See "Potential Environmental Liability" below and
"Business -- Legal Proceedings."
Potential Environmental Liability. The Company is subject to liability for
any environmental damage that its solid waste facilities may 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's potential liability includes 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 business, financial condition
and results of operations. 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.
Similar liability is imposed on the generators of waste that contains
hazardous substances and on hazardous substance transporters that select the
treatment, storage or 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, such liability can be based on the existence of even
very small amounts of hazardous substances; unlike most of the other statutes
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 with which the Company is or will become associated. If any
of the Company's sites or operations ever experiences environmental problems,
the Company could be subject to substantial liability, which could have a
material adverse effect on its business, financial condition and results of
operations. The Company has not been named as a PRP in any action brought under
CERCLA. See "Business -- Regulation."
With respect to each business that the Company acquires or has acquired,
there may be liabilities that the Company fails or is unable to discover,
including liabilities arising from noncompliance with environmental laws by
prior owners, and for which the Company, as a successor owner, may be legally
responsible. Representations, warranties and indemnities from the sellers of
such businesses, if obtained and if legally enforceable, may not cover fully the
resulting environmental liabilities, because of their limited scope, amount or
duration, the financial limitations of the warrantor or indemnitor or other
reasons. Certain environmental liabilities, even though expressly not assumed by
the Company, may nonetheless be imposed on the Company under certain legal
theories of successor liability, 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. An uninsured claim against
the Company, if successful and of sufficient magnitude, could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business -- Acquisition Program."
12
<PAGE> 14
Limitations on Landfill Permitting and Expansion. The Company currently
owns no landfills and operates only one landfill. The Company's ability to meet
its growth objectives may depend in part, however, on its ability to acquire,
lease and expand landfills and develop new landfill sites. As of April 15, 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. There can be no assurance that the
Company will be successful in obtaining new landfill sites or expanding the
permitted capacity of the Fairmead Landfill once its remaining permitted
disposal capacity has been consumed.
In some areas in which the Company operates, suitable land for new sites or
expansion of existing landfill sites may be unavailable. Landfills in states in
which the Company operates are subject to state regulations and practices that
generally require operating permits to be renewed at least every five years. The
process of 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, often taking several years,
requiring numerous hearings and compliance with zoning, environmental and other
requirements and often subject to resistance from citizen, public interest or
other groups. There can be no assurance that the Company will succeed in
obtaining or maintaining the permits it requires to expand or that such permits
will not contain burdensome terms and conditions. Even when granted, final
permits to expand are often not approved until the remaining permitted disposal
capacity of a landfill is very low. Furthermore, 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 have a material adverse effect on the Company's business, financial
condition and results of operations. 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 mandate 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 result in the volume of waste being
reduced 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 have a material adverse effect on the Company's business,
financial condition and results of operations.
Potential Inadequacy of Accruals for Closure and Post-Closure
Costs. Although the Company currently owns no landfills and operates only one
landfill, it may own and/or operate additional landfills in the future. In such
case, the Company will have material financial obligations relating to closure
and post-closure costs of landfills and any disposal facilities that it owns or
operates. The Company will in the future provide accruals for future financial
obligations relating to closure and post-closure costs of its owned or operated
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. There can be no assurance that the
Company's financial obligations for closing or post-closing costs will not
exceed the amount accrued and reserved or amounts otherwise receivable pursuant
to funds or reserves established for such purpose. Such a circumstance could
have a material adverse effect on the Company's business, financial condition
and results of operation. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Services -- Landfills."
Incurrence of Charges Related to Capitalized Expenditures. In accordance
with generally accepted accounting principles, the Company capitalizes certain
expenditures and advances relating to acquisitions, pending acquisitions and
landfill development projects. Indirect acquisition costs
13
<PAGE> 15
such as executive salaries, general corporate overhead, public affairs and other
corporate services are expensed as incurred. The Company's policy is to charge
against earnings any unamortized capitalized expenditures and advances (net of
any portion thereof that the Company estimates will be recoverable, through sale
or otherwise) relating to any operation that is permanently shut down, any
pending acquisition that is not consummated and any landfill development project
that is not expected to be completed successfully. Therefore, the Company may be
required to incur a charge against earnings in future periods, which charge,
depending on its magnitude, could have a material adverse effect on the
Company's business, financial condition and results of operations. 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 performance or surety bonds, letters of credit,
or other means of financial assurance to secure contractual performance. Ten of
the Company's existing 29 solid waste collection and recycling contracts require
the Company to obtain performance bonds, which it has obtained. If the Company
in the future were unable to obtain performance or surety bonds or letters of
credit in sufficient amounts or at acceptable rates, it could be precluded from
entering into additional municipal solid waste services contracts or obtaining
or retaining landfill operating permits. Any future difficulty in obtaining
insurance could also impair the Company's ability to secure future contracts
conditioned on the contractor's having adequate insurance coverage. Accordingly,
the failure of the Company to obtain performance or surety bonds, letters of
credit or other means of financial assurance or to maintain adequate insurance
coverage could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Risk Management,
Insurance and Performance Bonds."
Commodity Risk Upon 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, have been, and may continue to be,
volatile and subject to changing market conditions. Accordingly, the Company's
results of operations may be affected by changing resale prices or demand for
certain recyclable waste products, particularly wastepaper. These changes may
contribute to variability in the Company's period-to-period results of
operations. See "Business -- Services -- Recycling and Other Services."
Potential Anti-Takeover Effect of Certain Charter and By-Law Provisions and
Delaware Law. The Company's Amended and Restated Certificate of Incorporation
(the "Restated Certificate of Incorporation") and Amended and Restated By-Laws
(the "Restated By-Laws") provide for the Company's Board of Directors to be
divided into three classes of directors serving staggered three-year terms. As a
result, beginning in 1998, approximately one-third of the Company's Board will
be elected each year. The classified Board is designed to ensure continuity and
stability in the Board's composition and policies in the event of a hostile
takeover attempt or proxy contest. The classification of the Board would extend
the time required to effect any changes in control of the Board and may
discourage any hostile takeover bid for the Company. The classified Board may
also make the removal of the Company's incumbent management more difficult, even
if such removal would be beneficial to stockholders generally, and therefore may
discourage certain tender offers.
The authorized capital of the Company includes 10,000,000 shares of "blank
check" Preferred Stock, of which 2,500,000 shares have been authorized and
2,499,998 shares have been issued as Series A Preferred Stock. All outstanding
shares of Series A Preferred Stock automatically convert into shares of Common
Stock on a one-for-one basis upon the closing of this offering. The Board of
Directors has the authority to issue shares of Preferred Stock and to determine
the price, designation, rights, preferences, privileges, restrictions and
conditions, including voting and dividend rights, of these shares of Preferred
Stock without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of holders of any Preferred Stock that may be issued in the future.
The issuance of Preferred Stock, while providing desirable flexibility in
connection with possible
14
<PAGE> 16
acquisitions and other corporate purposes, could make it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue any additional Preferred
Stock. See "Description of Capital Stock."
The Company is subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law, which, subject to certain exceptions,
prohibits the Company from engaging in a "business combination" with an
"interested stockholder" for a period of three years following the time that
such stockholder became an interested stockholder. The application of Section
203 also could have the effect of delaying or preventing 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 otherwise receive a premium for their shares over
then current market prices. In addition, these provisions may limit the ability
of stockholders to approve transactions that they may deem to be in their best
interests. See "Description of Capital Stock -- Preferred Stock" and "-- Certain
Statutory, Charter and By-Law Provisions."
Shares Eligible for Future Sale; Registration Rights. The sale of
substantial amounts of the Company's Common Stock in the public market following
this offering (including shares issued on the exercise of outstanding warrants
and stock options), or the perception that such sales could occur, could
adversely affect prevailing market prices of the Company's Common Stock. All of
the shares offered hereby will be freely saleable in the public market after
completion of this offering, unless acquired by affiliates of the Company. The
remaining 5,891,816 shares of Common Stock held by existing stockholders on
completion of this offering will be "restricted securities," as that term is
defined in Rule 144 under the Securities Act. Restricted securities may be sold
in the public market only if they are registered or if they qualify for an
exemption from registration under Rule 144 or 701 promulgated under the
Securities Act. All of the shares outstanding prior to completion of this
offering are subject to contractual restrictions that prohibit the stockholders
from selling or otherwise disposing of such shares for a period of 180 days
after the date of this Prospectus without the prior written consent of BT Alex.
Brown Incorporated. The Company has also agreed not to sell any shares of Common
Stock for 180 days after the date of this Prospectus without the prior written
consent of BT Alex. Brown Incorporated, except as consideration for business
acquisitions or upon the exercise of currently outstanding stock options or
warrants. After this 180-day period expires, 4,749,998 of the shares of Common
Stock that are either currently outstanding or will be outstanding on conversion
of the currently outstanding Series A Preferred Stock 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 of Common Stock will
become saleable in the public market in February 1999, and an additional 50,000
of the currently outstanding shares of Common Stock will become saleable in the
public market ratably over three years, subject to the restrictions of Rule 144.
In addition, certain stockholders, who after the closing of this offering will
own approximately 5,849,998 shares of Common Stock, have the right for the five
years after the closing of this offering, subject to certain conditions, to
include their shares in future registration statements relating to the Company's
securities and to cause the Company to register certain shares of Common Stock
owned by them. See "Shares Eligible for Future Sale."
After the completion of this offering, the Company intends to file a
registration statement under the Securities Act to register all shares issuable
on exercise of stock options or other awards granted or to be granted under its
existing stock plan. See "Management -- 1997 Stock Option Plan." After the
filing of such registration statement and subject to certain restrictions under
Rule 144, those shares will be freely saleable in the public market immediately
following exercise of such options.
The Company currently intends to file a shelf registration statement
covering up to an additional 3,000,000 shares of Common Stock under the
Securities Act for its use in connection with future acquisitions. Such shares,
when issued, could be freely saleable in the public market 180 days after the
date of this Prospectus, or earlier on prior written approval of BT Alex. Brown
Incorporated by
15
<PAGE> 17
persons not affiliated with the Company, unless the Company contractually
restricts their resale. See "Shares Eligible for Future Sale" and
"Underwriting."
No Prior Public Market; Fluctuations in Quarterly Results; Potential Stock
Price Volatility. Prior to this offering, there has been no public market for
the Company's Common Stock, and there can be no assurance that an active trading
market will develop or be sustained after completion of this offering. The
initial public offering price will be determined through negotiations between
the Company and the representatives of the Underwriters based on several
factors, and may not be indicative of the market price of the Common Stock after
completion of this offering. See "Underwriting." The Company believes that
period-to-period comparisons of its operating results should not be relied upon
as an indication of future performance. Due to a variety of factors, including
general economic conditions, government regulatory action, acquisitions, capital
expenditures and other costs related to the expansion of operations and
services, pricing changes and adverse weather conditions, it is possible that in
some future quarter, the Company's operating results will be below the
expectations of securities analysts and investors. In such event, the price of
the Company's Common Stock would likely be materially adversely affected. The
price of the Company's Common Stock may be highly volatile and is likely to be
affected by the foregoing and other factors. In addition, the stock market has
from time to time experienced significant price and volume fluctuations that
have often been unrelated to the operating performance of companies whose
securities are publicly traded. These broad market fluctuations, however, may
adversely affect the market price of the publicly traded securities of such
companies, including the Company's Common Stock. In the past, following periods
of volatility in the market price of a company's securities, securities class
action litigation has often been commenced against such company. There can be no
assurance that such litigation will not occur in the future with respect to the
Company. Litigation could result in substantial costs and divert management's
attention and resources, which could have a material adverse effect on the
Company's business, financial condition and results of operations. Any adverse
determination in any such litigation could also subject the Company to
significant liabilities.
Immediate and Substantial Dilution. Purchasers of shares of Common Stock in
this offering will incur an immediate and substantial dilution in the net
tangible book value per share of the Common Stock from the initial public
offering price. Investors will experience additional dilution as a result of
Common Stock being issued upon the exercise of outstanding stock options and
warrants. To implement its acquisition strategy, the Company intends to register
up to 3,000,000 additional shares of Common Stock for issuance in connection
with future acquisitions. If shares of Common Stock are issued in connection
with future acquisitions, purchasers of shares of Common Stock in this offering
may experience additional dilution. See "Dilution" and "Shares Eligible for
Future Sale."
No Dividends. The Company does not intend to pay cash dividends on the
Common Stock in the foreseeable future and anticipates that future earnings will
be retained to finance future operations and expansion. In addition, the terms
of the Company's credit facility prohibit the Company from paying dividends or
making other payments with respect to its Common Stock 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 thereafter. The Company
expects to complete those modifications and upgrades during 1999. The total Year
2000 project cost is estimated to be approximately $100,000. 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.
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,000,000 shares of
Common Stock offered hereby (after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company) are
estimated to be $19.3 million ($22.4 million if the Underwriters' overallotment
option is exercised in full), assuming an initial public offering price of
$11.00 per share.
The Company intends to use approximately $18.0 million of the net proceeds
to repay all outstanding indebtedness under its credit facility with BankBoston,
N.A. The Company's credit facility provides for borrowing capacity of up to
$25.0 million, presently bears interest based on either an adjusted prime rate
or the Eurodollar rate plus 2.0% to 2.75% per annum (the applicable rate was
8.4% as of the date of this Prospectus) and will mature on January 30, 2001. The
credit facility was obtained primarily to fund acquisitions and to refinance
debt incurred in connection with the acquisition the Company completed in
September 1997. The terms of the credit facility permit the Company to redraw on
the credit facility as needed for future acquisitions and capital expenditures
(subject to certain restrictions) and general corporate purposes. On April 21,
1998, the Company received a preliminary letter of commitment from its lender to
amend and increase its credit facility. The amendment is contingent on the
completion of this offering and will, among other things, increase the Company's
borrowing capacity to $60.0 million, modify certain covenants and lower the
Company's borrowing costs.
The balance of the estimated net offering proceeds will be used for
acquisitions, capital expenditures and working capital. Pending specific
application of the net proceeds, the Company intends to invest unused net
proceeds in short-term, interest-bearing securities. The Company continually
evaluates potential acquisition candidates and intends to continue to pursue
acquisition opportunities that may become available.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock, and the
Company does not anticipate paying any cash dividends on the Common Stock in the
foreseeable future. The Company intends to retain all earnings for use in the
operation and expansion of its business. In addition, the Company's credit
facility contains restrictions on the payment of cash dividends. The Series A
Preferred Stock provides for cumulative dividends, which the Company intends to
pay in cash prior to the conversion of the Series A Preferred Stock into Common
Stock upon consummation of this offering.
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<PAGE> 19
CAPITALIZATION
The following table sets forth, as of March 31, 1998, (i) the long-term
debt and capitalization of the Company on an historical basis, and (ii) such
long-term debt and capitalization as adjusted to give effect to the sale by the
Company of the 2,000,000 shares offered hereby at an assumed initial public
offering price of $11.00 per share, after deducting underwriting discounts and
commissions and estimated offering expenses, after conversion of all outstanding
shares of redeemable Common Stock and redeemable convertible Preferred Stock
into 1,000,000 and 2,499,998 shares of Common Stock, respectively, after payment
of $123,000 in accumulated Preferred Stock dividends, and after the application
of a portion of the estimated net offering proceeds to repay indebtedness as
described under "Use of Proceeds." This table should be read in conjunction with
the Company's Financial Statements and Notes thereto and the Unaudited Pro Forma
Financial Statements and Notes thereto, which are included elsewhere in this
Prospectus. See "Description of Capital Stock."
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
(IN THOUSANDS)
ACTUAL AS ADJUSTED(1)
------- --------------
<S> <C> <C>
Long-term debt, net......................................... $16,289 $ --
------- -------
Redeemable Convertible Preferred Stock, $.01 par value,
2,500,000 shares authorized; 2,499,998 shares issued and
outstanding actual; no shares issued and outstanding as
adjusted.................................................. 8,095 --
Redeemable Common Stock, $.01 par value; 1,000,000 shares
issued and outstanding actual; no shares issued and
outstanding as adjusted(2)................................ 7,500 --
Stockholder's equity:
Preferred Stock, $.01 par value, 7,500,000 shares
authorized; no shares issued and outstanding actual and
as adjusted............................................ -- --
Common Stock, $.01 par value, 50,000,000 shares
authorized; 2,350,000 shares issued and outstanding
actual; 7,849,998 shares issued and outstanding as
adjusted(3)............................................ 24 79
Additional paid-in capital................................ 8,142 42,819
Stockholder notes receivable.............................. (82) (82)
Deferred stock compensation(4)............................ (810) (810)
Accumulated deficit....................................... (6,093) (6,093)
------- -------
Total stockholders' equity (deficit)...................... 1,181 35,913
------- -------
Total capitalization.............................. $33,065 $35,913
======= =======
</TABLE>
- ---------------
(1) A portion of the estimated net proceeds from this offering will be used to
repay all of the Company's then outstanding indebtedness.
(2) Common Stock issued in connection with the acquisition of Madera is
redeemable in certain circumstances. Upon completion of this offering, these
shares will no longer be redeemable. See Notes 2 and 9 of Notes to the
Company's Financial Statements included elsewhere herein.
(3) Excludes 2,273,300 shares issuable on the exercise of options and warrants
outstanding at March 31, 1998, at a weighted average exercise price of $3.67
per share. See "Management -- 1997 Stock Option Plan," "Certain
Transactions" and Note 9 of Notes to the Company's Financial Statements
included elsewhere herein.
(4) Deferred stock compensation relates to stock options granted to employees
with exercise prices below the estimated fair value of the stock on the date
of grant. Deferred stock compensation is being amortized to stock
compensation expense over the vesting periods of the respective stock
options. See Notes 1 and 9 of Notes to the Company's Financial Statements
included elsewhere herein.
18
<PAGE> 20
DILUTION
The negative net tangible book value of the Company's Common Stock as of
March 31, 1998, was $(9.0) million, or $(1.54) per share. Net tangible book
value per share represents the amount of the Company's total tangible assets,
less its total liabilities (excluding redeemable Common Stock and redeemable
convertible Preferred Stock), divided by the total number of shares of Common
and Preferred Stock (including redeemable stock) outstanding immediately prior
to this offering.
After giving effect to the sale by the Company of 2,000,000 shares of
Common Stock in this offering at the assumed initial public offering price of
$11.00 per share (and after deduction of the underwriting discounts and
commissions and estimated offering expenses), the Company's net tangible book
value as of March 31, 1998, would have been approximately $10.2 million, or
$1.30 per share of Common Stock. This represents an immediate increase in net
tangible book value of approximately $2.84 per share to existing stockholders
and an immediate dilution of net tangible book value of approximately $9.70 per
share to new investors purchasing Common Stock in this offering, as illustrated
in the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $11.00
Negative net tangible book value per share prior to
this offering......................................... $(1.54)
Increase in net tangible book value per share
attributable to new investors......................... 2.84
------
Net tangible book value per share after this offering....... 1.30
------
Dilution in net tangible book value per share to new
investors................................................. $ 9.70
======
</TABLE>
The following table sets forth, as of March 31, 1998, the difference
between existing stockholders and new investors purchasing shares of Common
Stock in this offering with respect to the number of shares purchased from the
Company (before deduction of the underwriting discounts and commissions and
estimated offering expenses), the total consideration paid and the average price
per share paid:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 5,849,998 74.5% $14,663,000 40.0% $ 2.51
New investors...................... 2,000,000 25.5 22,000,000 60.0 $ 11.00
--------- ----- ----------- -----
Total.................... 7,849,998 100.0% $36,663,000 100.0%
========= ===== =========== =====
</TABLE>
As of March 31, 1998, the Company had outstanding stock options and
warrants exercisable for 2,273,300 shares of Common Stock at a weighted average
exercise price of $3.67 per share. If these options and warrants are exercised,
further dilution to new investors will occur. The Company may also issue
additional shares to effect future business acquisitions or upon exercise of
stock options granted in the future or other equity awards, which could result
in additional dilution to then existing stockholders. See "Management --
Executive Compensation -- Stock Options and Warrants."
19
<PAGE> 21
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 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.
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 has been derived from 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, has been derived from 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 has been derived from
financial statements that have not been audited. The selected financial
information as of March 31, 1998 and for the three months ended March 31, 1997
and 1998 has been derived from unaudited financial statements included elsewhere
in this Prospectus. In the opinion of the Company's management, the unaudited
financial data include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and
results of operations for the unaudited periods. The Company's operating results
for the three months ended March 31, 1998 are not necessarily indicative of 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 herein.
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 predecessor operations.
The selected pro forma financial information for the three months ended
March 31, 1998 and for the year ended December 31, 1997, gives effect to this
offering and the Company's acquisitions of Waste Connections of Idaho, Inc.,
Madera Disposal Systems, Inc. and the Company's predecessors as of the dates and
for the periods indicated, and has been derived from unaudited pro forma
financial statements included elsewhere in this Prospectus. The pro forma
financial information does not purport to represent what the Company's results
actually would have been if such events had occurred at the dates indicated, nor
does such information purport to project the results of the Company for any
future period.
The selected historical and pro forma financial information should be read
in conjunction with Management's Discussion and Analysis of Financial Condition
and Results of Operations, the audited and unaudited Financial Statements and
Notes thereto of the Company and its predecessors, and the Unaudited Pro Forma
Financial Statements and Notes thereto included elsewhere in this Prospectus.
20
<PAGE> 22
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,
INC.
FIBRES THE DISPOSAL FIBRES THE DISPOSAL PERIOD FROM
INTERNATIONAL, GROUP INTERNATIONAL, GROUP JANUARY 1,
INC. COMBINED INC. COMBINED 1995
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, NOVEMBER 30,
1993 1993 1994 1994 1995
-------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA(1):
Revenues............................... $3,787 $20,794 $5,610 $22,004 $7,340
Cost of operations..................... 2,737 16,775 4,432 18,298 5,653
Selling, general and administrative.... 553 3,559 552 3,320 823
Depreciation and amortization.......... 428 520 642 606 715
------ ------- ------ ------- ------
Income (loss) from operations.......... 69 (60) (16) (220) 149
Interest expense....................... (78) (390) (191) (548) (162)
Other income (expense), net............ 1 684 (2) 871 98
------ ------- ------ ------- ------
Income (loss) before income taxes...... (8) 234 (209) 103 85
Income tax (provision) benefit......... -- (77) -- -- (29)
------ ------- ------ ------- ------
Net income (loss)...................... $ (8) $ 157 $ (209) $ 103 $ 56
====== ======= ====== ======= ======
<CAPTION>
THE
DISPOSAL
GROUP
COMBINED
PERIOD
THE DISPOSAL FROM PREDECESSORS
PREDECESSORS GROUP JANUARY 1, COMBINED
ONE MONTH COMBINED 1996 PERIOD
ENDED YEAR ENDED THROUGH ENDED
DECEMBER 31, DECEMBER 31, JULY 31, DECEMBER 31,
1995 1995 1996 1996
------------ ------------ ---------- ------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA(1):
Revenues............................... $595 $19,660 $8,738 $13,422
Cost of operations..................... 527 16,393 6,174 11,420
Selling, general and administrative.... 72 3,312 2,126 1,649
Depreciation and amortization.......... 74 628 324 962
---- ------- ------ -------
Income (loss) from operations.......... (78) (673) 114 (609)
Interest expense....................... (1) (206) (12) (225)
Other income (expense), net............ 5 -- 2,661 (147)
---- ------- ------ -------
Income (loss) before income taxes...... (74) (879) 2,763 (981)
Income tax (provision) benefit......... -- 298 (505) --
---- ------- ------ -------
Net income (loss)...................... $(74) $ (581) $2,258 $ (981)
==== ======= ====== =======
</TABLE>
<TABLE>
<CAPTION>
WASTE
CONNECTIONS, INC.
PERIOD FROM PREDECESSORS
PREDECESSORS INCEPTION COMBINED WASTE CONNECTIONS, INC.
COMBINED (SEPTEMBER 9, PRO FORMA AS THREE THREE MONTHS ENDED
NINE MONTHS 1997) ADJUSTED MONTHS MARCH 31, 1998
ENDED THROUGH YEAR ENDED ENDED ---------------------------
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31, PRO FORMA
1997 1997 1997(2) 1997 ACTUAL AS ADJUSTED(2)
------------- ----------------- ------------ ------------ ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA(1):
Revenues......................... $18,114 $ 6,237 $ 35,013 $5,694 $ 7,601 $ 8,462
Cost of operations............... 14,753 4,703 26,114 4,674 5,397 6,017
Selling, general and 3,009 619 4,252 715 770 897
administrative.................
Depreciation and amortization.... 1,083 354 2,431 378 541 623
Start-up and integration......... -- 493 493 -- -- --
Stock compensation............... -- 4,395 4,395 -- 279 279
------- ---------- ---------- ------ ---------- ----------
Income (loss) from operations.... (731) (4,327) (2,672) (73) 614 646
Interest expense................. (456) (1,035) -- (152) (301) --
Other income (expense), net...... 14 (36) 151 -- -- 16
------- ---------- ---------- ------ ---------- ----------
Income (loss) before income (1,173) (5,398) (2,521) (225) 313 662
taxes..........................
Income tax (provision) benefit... -- 332 (781) -- (237) (377)
------- ---------- ---------- ------ ---------- ----------
Net income (loss)................ $(1,173) $ (5,066) $ (3,302) $ (225) $ 76 $ 285
======= ========== ========== ====== ========== ==========
Redeemable convertible preferred (531) -- (572) --
stock accretion................
---------- ---------- ---------- ----------
Net income (loss) applicable to $ (5,597) $ (3,302) $ (496) $ 285
common stockholders............
========== ========== ========== ==========
Basic net income (loss) per $ (2.99) $ (0.45) $ (0.21) $ 0.04
share..........................
========== ========== ========== ==========
Shares used in calculating basic 1,872,567 7,372,565 2,311,111 7,811,109
net income (loss) per share....
Diluted net income per share..... $ 0.03
==========
Shares used in calculating 8,835,415
diluted net income per share...
Pro forma basic net income (loss) $ (1.16) $ 0.01
per share(3)...................
========== ==========
Shares used in calculating pro 4,372,565 5,811,109
forma basic net income (loss)
per share......................
Proforma diluted net income per $ 0.01
share(3).......................
==========
Shares used in calculating pro 6,835,415
forma diluted net income per
share..........................
</TABLE>
(see footnotes on following page)
21
<PAGE> 23
<TABLE>
<CAPTION>
FIBRES THE DISPOSAL FIBRES THE DISPOSAL THE DISPOSAL
INTERNATIONAL, GROUP INTERNATIONAL, GROUP PREDECESSORS GROUP PREDECESSORS
INC. COMBINED INC. COMBINED COMBINED COMBINED COMBINED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1993 1994 1994 1995 1995 1996
-------------- ------------ -------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
DATA(1):
Cash and
equivalents....... $ 3 $ 196 $ 3 $ 203 $ 184 $ 961 $ 102
Working capital..... 494 (1,497) 87 (4,279) 90 2,498 695
Property and
equipment, net.... 1,454 2,440 3,807 2,771 4,035 2,221 5,069
Total assets........ 3,325 7,455 5,732 7,318 9,151 6,942 15,291
Long-term debt(5)... 1,167 1,258 2,353 90 149 6,890 89
Redeemable
convertible
preferred stock... -- -- -- -- -- -- --
Redeemable common
stock(6).......... -- -- -- -- -- -- --
Total stockholders'
equity
(deficit)......... 991 (163) (227) (1,486) -- (2,067) --
<CAPTION>
WASTE CONNECTIONS, INC.
----------------------------------------------
MARCH 31, 1998
DECEMBER 31, --------------------------
1997 ACTUAL AS ADJUSTED(4)
----------------- --------- --------------
<S> <C> <C> <C>
BALANCE SHEET
DATA(1):
Cash and
equivalents....... $ 820 $ 2,386 $ 5,234
Working capital..... 836 988 3,836
Property and
equipment, net.... 4,185 7,316 7,316
Total assets........ 18,880 41,033 43,881
Long-term debt(5)... 6,762 16,289 --
Redeemable
convertible
preferred stock... 7,523 8,095 --
Redeemable common
stock(6).......... -- 7,500 --
Total stockholders'
equity
(deficit)......... (551) 1,181 35,913
</TABLE>
- ---------------
(1) The entities the Company acquired in September 1997 from 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. 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 predecessor operations.
(2) Assumes the Company's acquisitions of Waste Connections of Idaho, Inc.,
Madera Disposal Systems, Inc. and the Company's predecessors occurred on
January 1, 1997, adjusted to reflect the sale of the Common Stock offered
hereby at an assumed initial public offering price of $11.00 per share, and
the application of the estimated net proceeds therefrom. See "Use of
Proceeds" and "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 three months
ended March 31, 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) Adjusted to reflect the sale of the Common Stock offered hereby at an
assumed initial public offering price of $11.00 per share, and the
application of the estimated net proceeds therefrom. See "Use of Proceeds"
and "Unaudited Pro Forma Financial Statements."
(5) Excludes redeemable Common Stock and redeemable convertible Preferred
Stock.
(6) Common stock issued in connection with the acquisition of Madera is
redeemable in certain circumstances, as defined in the Stock Purchase
Agreement between the Company and the Madera shareholders; however, the
redemption right expires upon the closing of this offering. See Notes 2 and
9 of Notes to the Company's Financial Statements included elsewhere herein.
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Unaudited
Pro Forma Financial Statements and Notes thereto, the audited and unaudited
Financial Statements and Notes thereto of the Company and its predecessors,
Madera's audited Financial Statements and Notes thereto, and other financial
information included elsewhere 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 as a result of various factors, including without limitation those
set forth in "Risk Factors" and the matters set forth 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. As of April 15, 1998, the Company
served more than 130,000 commercial, industrial and residential customers in
Washington, California, Idaho and Wyoming. The Company currently owns seven
collection operations and operates three transfer stations, one Subtitle D
landfill and one recycling facility.
The Company generally intends to pursue an acquisition-based growth
strategy and has acquired seven companies since its inception in September 1997.
All of these acquisitions were accounted for as purchases. Accordingly, the
results of operations of these acquired businesses have been included in the
Company's financial statements only from the respective dates of acquisition.
The Company anticipates that a substantial part of its future growth will come
from acquiring additional solid waste collection, transfer and disposal
businesses and, therefore, it is expected that additional acquisitions could
continue to affect period-to-period comparisons of the Company's operating
results. In connection with the Company's growth strategy, the Company 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 anticipates that any future business acquisitions
will be financed 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.
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.
On January 30, 1998, the Company acquired the stock of Waste Connections of
Idaho, Inc., a provider of 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 Browing-Ferris Industries
of Idaho, Inc.
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
23
<PAGE> 25
residential customers, and agreements to operate two transfer stations, one
Subtitle D landfill and one recycling facility.
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.
On April 8, 1998, the Company acquired solid waste collection assets from
A-1 Disposal, Inc. and Jesse's Disposal, both operating in northeastern Wyoming,
and together serving approximately 2,300 residential and commercial customers.
All of the foregoing acquisitions were accounted for under the purchase
method of accounting for business combinations. Accordingly, the results of
operations of these acquired businesses are included in the Company's Financial
Statements from the actual dates of acquisition.
The entities the Company acquired in September 1997 from various
subsidiaries of 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.
GENERAL
The Company's revenues are attributable primarily to fees charged to
customers for solid waste collection, transfer, disposal and recycling services.
The Company derives a substantial portion of its collection revenues from
commercial, industrial and residential services, which are frequently performed
under service agreements or pursuant to 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. Such exclusive arrangements are awarded, at least initially, on a
competitive bid basis and thereafter on a bid or negotiated basis. Some of the
Company's residential collection services are also performed on a subscription
basis with individual households. 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 grant the Company
collection rights in certain areas. These 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 most residential customers on a subscription
basis are billed 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.
Transfer station and landfill customers are charged a tipping fee on a per
ton basis for disposing of their solid waste at the transfer stations and
disposal facility operated by the Company under contract with the County of
Madera. The majority of the Company's transfer and landfill customers are under
one to ten year disposal contracts, most of which provide for annual cost of
living increases.
The Company's prices for its solid waste services are typically determined
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
Company's ability to pass on price increases is sometimes limited by the terms
of its contracts. Long-term solid waste collection contracts typically contain a
formula, generally based on a predetermined published price index, for automatic
adjustment of fees to cover increases in some, but not all, operating costs.
24
<PAGE> 26
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 operates three transfer stations, which reduce the
Company's costs by improving its utilization of collection personnel and
equipment and by consolidating the waste stream to gain more favorable disposal
rates.
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
the amortization of goodwill and other intangible assets using the straight line
method.
The Company capitalizes certain third party expenditures related to pending
acquisitions or development projects, such as legal and engineering expenses.
Indirect acquisition costs, such as executive and corporate overhead, public
relations and other corporate services, are expensed as incurred. The Company's
policy is to charge against net income any unamortized capitalized expenditures
and advances (net of any portion thereof that the Company estimates to be
recoverable, through sale or otherwise) relating to any operation that is
permanently shut down, any pending acquisition that is not consummated and any
landfill development project that is not successfully completed. At March 31,
1998, the Company had no such capitalized costs. The Company routinely evaluates
all capitalized costs, and expenses those related to projects the Company
believes are not likely to be successful.
Because it does not currently own any landfills, the Company does not
accrue for estimated landfill closure and post-closure maintenance costs. Under
regulations pursuant to which the permit for the Fairmead Landfill was issued,
the Company and Madera County, as operator and owner, respectively, are jointly
liable for closure and post-closure liabilities with respect to the landfill.
The Company 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 the Company does not believe Madera had any
financial obligation for closure and post-closure costs for the Fairmead
Landfill as of March 31, 1998. The Company will have material financial
obligations relating to closure and post-closure costs of any disposal
facilities it may own or operate in the future, and in such case the Company
will provide accruals for future financial obligations relating to closure and
post-closure costs of its 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.
BASIS OF PRESENTATION
The entities the Company acquired in September 1997 from 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 statement of operations data. The interest expense allocations
from BFI are based on formulas that do not necessarily correspond to the
balances in the related intercompany accounts. Moreover, the financial position
25
<PAGE> 27
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.
RESULTS OF OPERATIONS
The financial information for the Company and its predecessors included in
this section and in the audited financial statements included elsewhere herein
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>
26
<PAGE> 28
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.
Due to the fact that the predecessor operations existed for different
periods, year-to-year comparisons are not meaningful and therefore discussions
of SG&A, depreciation and amortization and interest expense have not been
included in this Prospectus.
Waste Connections, Inc. -- Three Months Ended March 31, 1998 vs. Predecessors
Combined -- Three Months Ended March 31, 1997
Revenue. Total revenues increased $1.9 million, or 33.5%, to $7.6 million
in 1998 from $5.7 million in 1997. The increase was primarily attributable to
the inclusion of two months of the Idaho operations acquired January 30, 1998
and the Madera operations acquired February 1, 1998 and growth in the base
business.
Cost of Operations. Total cost of operations increased $723,000, or 15.5%,
to $5.4 million in 1998 from $4.7 million in 1997. The increase was primarily
attributable to the inclusion of two months of the Idaho operations and the
Madera operations and a decline in expenses in the existing 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 remained relatively
unchanged in 1997 versus 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 81.5% 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
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<PAGE> 29
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 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. Changes in cost
of operations as a percentage of revenue were impacted by reductions in prices
of recyclable materials in 1996, 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> <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) Prior to 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. The Subchapter S election was terminated upon its
acquisition by the Company. 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 herein.
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<PAGE> 30
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.
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 and are expected in
the future to include capital expenditures for landfill cell construction,
landfill development and landfill closure activities. The Company plans
29
<PAGE> 31
to meet its capital needs through various financing sources, including
internally generated funds and debt and equity financing.
As of March 31, 1998, the Company had working capital of $965,000,
including cash and cash equivalents of $2.4 million. The Company's strategy in
managing its working capital is generally to apply 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. As of April 15, 1998, the Company had sold or issued an
additional 1,091,818 shares of Common Stock at a weighted average value of $3.11
per share, and granted options and warrants to purchase 2,273,300 shares of
Common Stock at a weighted average exercise price of $3.67 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 assumed 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 results of operations on a per share
basis would be more favorable if there were fewer shares outstanding. See "Risk
Factors -- Immediate and Substantial Dilution" and "Dilution."
The Company has a $25.0 million revolving credit facility with BankBoston,
N.A., 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. It 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. The credit facility also requires the
lenders' approval of acquisitions in certain circumstances. See "Risk
Factors -- Potential Inability to Finance the Company's Potential Growth." As of
March 31, 1998, an aggregate of approximately $17.0 million was outstanding
under the revolving line of credit. The interest rate on outstanding borrowings
under the BankBoston facility was 8.4% as of March 31, 1998. The Company has
obtained a preliminary letter of commitment from a syndicate of banks led by
BankBoston, contingent on the closing of this offering, to increase the credit
facility to $60.0 million. The credit facility will be used for: (i) refinancing
any existing debt; (ii) permitted acquisitions; (iii) capital expenditures; (iv)
working capital; (v) standby letters of credit; and (vi) general corporate
purposes. The facility will mature three years from the closing of this offering
and will be secured by substantially all the assets of the Company. The expanded
credit facility will bear 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 expanded credit facility is expected
to allow the Company to continue its acquisition-based growth strategy.
For the three months ended March 31, 1998, net cash provided by operations
was approximately $713,000 and was primarily provided by net income for the
period. For the period from inception to December 31, 1997, net cash provided by
operations was $2.6 million. This was primarily the result of the net loss for
the period offset by non-cash charges for stock compensation expenses and cash
provided by changes in operating assets and liabilities. For example, accounts
payable increased as vendors extended credit to the Company. This was offset by
a decline in accounts receivable as the Company collected outstanding
receivables.
For the three months ended March 31, 1998, net cash used in investing
activities was $9.2 million. Of this, $8.9 million was used to fund the cash
portion of the acquisitions of Madera, Waste Connections of Idaho and Hunter
Enterprises. The remaining cash was primarily invested in MIS systems, trucks
and containers. For the period from inception to December 31, 1997, net cash
used in investing activities was $11.9 million. Of this, $11.5 million was used
for the acquisition of
30
<PAGE> 32
the Company's predecessor operations from BFI. The remainder was primarily
invested in additional trucks, MIS systems and property improvements.
For the three months ended March 31, 1998, net cash provided by financing
activities was $10.0 million, which was provided by net borrowings under the
Company's various debt arrangements. For the period from inception to December
31, 1997, net cash provided by financing activities was $10.1 million, which was
provided by net borrowings of $3.1 million and sales of Preferred Stock for $7.0
million. At March 31, 1998, the Company had approximately $17.0 million of
long-term debt outstanding.
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 of the likelihood that it will be utilized through the
reversal of existing temporary differences.
Capital expenditures for 1998 are currently expected to be approximately
$1.3 million, of which approximately $1.1 million is expected to be utilized for
vehicle and equipment additions and replacements. The Company intends to fund
its planned 1998 capital expenditures principally through internally generated
funds, proceeds from this offering and borrowings under existing credit
facilities. In addition, the Company anticipates that it may require substantial
additional capital expenditures to facilitate its growth strategy of acquiring
solid waste collection and disposal businesses. If the Company is successful in
acquiring 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 amount of these
expenditures cannot be currently determined, 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 anticipated net proceeds of the 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, has accounted for approximately 12.6% of the Company's
revenues since inception. There are approximately nine years remaining under
that contract. No other single contract or customer accounted for more than 5.0%
of the Company's revenues or is material to its liquidity and cash flow. The
weighted average life, based on revenues, of the municipal contracts and
franchise agreement is approximately seven years.
INFLATION
To date, inflation has not had a significant effect on the Company's
operations. Consistent with industry practice, many of the Company's contracts
provide for a pass-through of certain costs, including increases in landfill
tipping fees and, in some cases, fuel costs. The Company believes, therefore,
that it should be able to implement price increases to offset many cost
increases resulting 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's results of operations should be expected 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. This seasonality reflects the lower volume of solid waste
generated during the late fall, winter and early spring months, resulting from
decreased solid waste volume relating to construction and demolition activities
during the winter months in the
31
<PAGE> 33
Western U.S. In addition, certain of the Company's operating costs should be
expected to be generally higher in the winter months; 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 per ton). Because a majority of the
Company's operating expenses are expected to remain fairly constant throughout
the fiscal year, operating income should be expected to be generally lower
during the winter.
IMPACT OF 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 thereafter. The Company expects to complete those
modifications and upgrades during 1999. The total Year 2000 project cost is
estimated to be approximately $100,000, which includes approximately $40,000 for
the purchase of new software that will be capitalized and approximately $60,000
that will be expensed as incurred. 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.
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<PAGE> 34
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 April 15, 1998, the Company
served more than 130,000 commercial, industrial and residential customers in
Washington, California, Idaho and Wyoming. The Company currently owns seven
collection operations and operates three transfer stations, one Subtitle D
landfill and one recycling facility.
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 seven solid waste services businesses since its formation
and has identified more than 300 independent operators of such businesses in the
states where is 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 Kansas, Montana,
Nebraska, Oklahoma, Oregon, South Dakota 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 undergone significant consolidation and
integration 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 resulted in rising operating and capital costs 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 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. The evolution of the
industry competitive model is 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.
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<PAGE> 35
Economies of Scale. Larger integrated operators achieve economies of scale
through vertical integration of their operations. These integrated companies
have increased their acquisition activity to expand 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 both to operate in compliance 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
presents substantial 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.
The Company operates one landfill 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.
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<PAGE> 36
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
Washington, California, Idaho and Wyoming, and is assessing potential
acquisitions of solid waste services operations in Kansas, Montana, Nebraska,
Oklahoma, Oregon, South Dakota 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 California, Washington and Idaho. 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
improve 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
35
<PAGE> 37
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 operates three 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 in the event any municipality privatizes its solid waste
operations or rebids existing contracts, and it increases the Company's
opportunities to acquire private collection operations.
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 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 are
employed at the Company's existing operations. 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, as a means
of further improving operating efficiencies and increasing the volume of solid
waste collected by the acquired operations.
ACQUISITION PROGRAM
The Company currently operates in Washington, California, Idaho 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
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criteria to assist management in evaluating 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
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 augment or 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 are subject to initial evaluation and approval
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.
Recent Acquisition Developments
On January 30, 1998, the Company acquired from affiliates of the Company
the stock of Waste Connections of Idaho, Inc., a provider of 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. See "Certain Transactions."
Effective February 1, 1998, the Company acquired Madera Disposal Systems,
Inc. ("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 (the "Fairmead Landfill")
and one recycling facility. The operating agreement for the Fairmead Landfill
has a remaining term of approximately 11 years. As of April 15, 1998, the
Fairmead Landfill is estimated to have a remaining life of approximately 26
years. Approximately 45% of the solid waste disposed of at the Fairmead Landfill
in 1997 was delivered by Madera.
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.
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.
Letters of Intent to Acquire Additional Operations
As of April 15, 1998, the Company had entered into nonbinding, preliminary
letters of intent relating to the possible acquisition of six collection and
transfer companies and one integrated collection and landfill company (three new
service markets), which the Company estimates
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represent aggregate annualized revenues of more than $19.5 million. There can be
no assurance that actual revenues realized by the Company from the successful
acquisition of these potential acquisition candidates will not differ materially
from the Company's estimate or that any of these letters of intent will lead to
completed acquisitions on the terms currently contemplated.
SERVICES
Commercial, Industrial and Residential Waste Services
The Company serves more than 130,000 commercial, industrial and residential
customers. Of these, more than 49,000 are served under G certificates that grant
the Company rights, which are generally perpetual and exclusive, to provide
services within specified areas, approximately 6,600 are served under an
exclusive franchise agreement with a remaining term of 11 years, and
approximately 60,000 are served under exclusive municipal contracts with 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, stationary compactors that compact waste prior to collection are installed
on the premises of a substantial number of large volume customers. No single
commercial or industrial contract is material to the Company's results of
operations.
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.
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 and one transfer station in
Washington which receive, compact, and transfer solid waste to larger vehicles
for transport 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 one Subtitle D landfill, the Fairmead Landfill, under
an operating agreement with Madera County with a remaining term of 11 years. In
fiscal 1997, approximately 45%
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of the solid waste disposed of at the Fairmead Landfill was delivered by Madera.
As of April 15, 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.
The Company monitors the available permitted in-place disposal capacity of
the Fairmead Landfill 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 is actively engaged in identifying 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 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 one recycling processing facility 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.
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OPERATIONS
The Company is managed on a decentralized basis, which 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 seven operating locations
serving four 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 also
assist in identifying acquisition candidates. Once the Company begins the
acquisition process, 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 review the performance of district
managers and operations on a regular basis.
G CERTIFICATES
A substantial portion of the Company's collection business in Washington is
performed 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 typically
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.
G certificates have generally been construed by the WUTC and the Washington
Legislature 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, 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
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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 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 employed 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 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's growth to date has primarily been 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.
The Company has a diverse customer base. Its largest single contract, with
the City of Vancouver, accounted for approximately 12.6% of the Company's
revenues from the date of inception through March 31, 1998. Under this contract,
the Company serves more than 34,000 residential and commercial customers. There
are approximately nine years remaining under that contract. No other single
contract or customer accounted for more than 5.0% of the Company's revenues from
the date of inception through March 31, 1998. The weighted average life of the
Company's municipal contracts and franchise agreement, based on revenues, is
approximately seven years.
COMPETITION
The solid waste services industry is highly competitive and fragmented and
requires substantial labor and capital resources. The industry presently
includes five large national waste companies: Allied Waste Industries, Inc.,
Browning-Ferris Industries, Inc., Republic Industries, Inc., USA Waste Services,
Inc. and Waste Management, Inc. (which has announced an impending merger with
USA Waste 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,
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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 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 balance of the Company's services
are provided 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 grant
the Company perpetual and generally 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,
and 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.
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
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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 modelled
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 March 31,
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 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
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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 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
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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
act to 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 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 results of operations could be adversely
affected.
Even in the absence of federal legislation, certain state and local
jurisdictions may seek to enforce flow control restrictions through local
legislation or contractually and, in certain cases, the Company may elect not to
challenge such restrictions based on various considerations. These restrictions
could result in the volume of waste going to landfills being reduced 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 results of operations 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 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
affect the Company's ability to operate 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.
45
<PAGE> 47
Public Utility Regulation
The rates that landfill operators may charge are regulated in many states
by public authorities. 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
have an adverse effect on the Company's business, financial condition and
results of operations.
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 result in an increase in such
costs. The Company also maintains a worker safety program that encourages safe
practices in the workplace. Operating practices at all Company 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,
workmen's 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 landfills or operates landfills
other than the Fairmead 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 April 15, 1998, the Company had provided customers
and various regulatory authorities with bonds and letters of credit in the
aggregate amount of approximately $800,000 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
The Company leases the real estate, buildings and other physical properties
for its solid waste operations. These leases include a lease of approximately
5,500 square feet of office space in Roseville, California for the Company's
principal executive offices, which lease expires in November 2002. The Company
also leases real property in Issaquah, Washington under a lease
46
<PAGE> 48
expiring in 2008 and in Maltby, Washington, Idaho Falls and Pocatello, Idaho,
under leases expiring at the end of 1999. The Company subleases real property in
Vancouver, Washington under a lease expiring in 2001, with an option to extend
the term for five years. Under its agreement with the County of Madera to
operate Fairmead Landfill, the Company is permitted to maintain an equipment
yard and office on the landfill premises without charge. In connection with two
recent acquisitions in Wyoming, the Company acquired ownership of real estate
formerly used by one of the collection operations and assumed a lease that
terminates in August 1997. The Company expects to renew this lease and
consolidate its operations in Gillette, Wyoming, at the leased facility and to
dispose of the real estate that it acquired in connection with the acquisitions.
At April 15, 1998, the Company owned or leased approximately 150 pieces of
equipment, including waste collection vehicles and related support vehicles, as
well as bulldozers, compactors, earth movers and related heavy equipment used in
landfill operations, and had more than 62,000 carts and containers in use, with
such carts ranging in size from 30 to 95 gallons and such containers ranging
from one to 50 cubic yards. The Company has a regular maintenance program for
its vehicles, equipment and operating properties. However, the Company expects
to make substantial investments in additional equipment and property for
expansion and replacement of assets and in connection with future acquisitions.
EMPLOYEES
At April 15, 1998, the Company employed approximately 248 full-time
employees, including approximately 28 persons classified as professionals or
managers, approximately 195 employees involved in collection, transfer, disposal
and recycling operations, and approximately 25 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.
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 are currently operating
under a one-year negotiating agreement, and, if those negotiations are
unsuccessful, the earliest date on which the union would be permitted to take
additional action is July 27, 1998. Such additional action includes calling a
strike or, if the Company agrees, continuing to negotiate or commencing
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
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 a waste management business. However, 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.
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<PAGE> 49
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the Company's
executive officers and directors as of May 1, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Ronald J. Mittelstaedt(1).............. 35 President, Chief Executive Officer and
Chairman
Steven F. Bouck........................ 41 Executive Vice President and Chief
Financial Officer
Eugene V. Dupreau...................... 50 Vice President -- Madera; Director
Charles B. Youngclaus.................. 58 Vice President -- Madera; Advisory
Director
Darrell W. Chambliss................... 33 Vice President -- Operations; Secretary
Michael R. Foos........................ 32 Vice President and Corporate Controller
Eric J. Moser.......................... 31 Treasurer and Assistant Corporate
Controller
Michael W. Harlan(1)(2)................ 37 Director
William J. Razzouk(1)(3)............... 50 Director
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee, upon consummation of the offering.
(3) Member of the Compensation Committee, upon consummation of the offering.
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 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
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<PAGE> 50
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.
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. Since March 1997, Mr. Harlan has
been 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.
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<PAGE> 51
William J. Razzouk has been a director of the Company since January 30,
1998. Since September 1997, Mr. Razzouk has been 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 also owns a management consulting business and an investment company that
focuses on identifying strategic acquisitions. 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 La Quinta
Motor Inns and Fritz Companies, Inc. and previously was a director of Sanifill,
Inc. and Cordis Corp. 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 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, and 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 of stockholders, successors to directors of the
class whose term expires at such meeting will be elected 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 to become operative
upon the closing of this offering. A majority of the members of the Executive
Committee are, and both members of each of the Audit and Compensation Committees
will be, 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. After completion of this offering, each independent
director will receive a fee of $1,500 for attendance at 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.
Commencing 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.
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<PAGE> 52
EXECUTIVE COMPENSATION
Summary Compensation Information
The Company was incorporated in September 1997. The following table sets
forth information with respect to 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 $30,000 -- $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 -----------------------
BENEFICIAL OWNER GRANTED 1997 PER SHARE(1) EXPIRATION DATE 5% 10%
---------------- ---------- ------------ -------------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ronald J. Mittelstaedt... 100,000(3) 15.9% $2.80 Dec. 14, 2007 $1,512,000 $2,573,000
100,000(4) 15.9% $2.80 Dec. 14, 2007 $1,512,000 $2,573,000
</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 may be realized on
exercise of options and warrant immediately prior to the expiration of their
term assuming the specified assumed rates of stock price appreciation (5%
and 10%) on the Company's Common Stock over the term of the options and
warrant, assuming an initial public offering price of $11.00 per share. The
potential realizable values set forth above do not take into account
applicable tax and expense payments that may be associated with such
exercises. Actual realizable value, if any, will depend on the future price
of the Common Stock on the actual date of exercise, which may be earlier
than the stated expiration date. The 5% and 10% assumed annualized rates of
stock price appreciation over the exercise period of the options and
warrants used in the table above are mandated by the rules of the Securities
and Exchange Commission (the "Commission") and do not represent the
Company's estimate or projection of the future price of the Common Stock on
any date. There is no representation, either express or implied, that
51
<PAGE> 53
the stock price appreciation rates for the Common Stock assumed for purposes
of this table will actually be achieved.
(3) Warrant vested immediately on date of grant.
(4) Options vest 33% on October 1, 1998, 33% on October 1, 1999, and 34% on
October 1, 2000.
Option and Warrant Values. The following table sets forth information for
the Chief Executive Officer with respect to the value of 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,
these values have been calculated 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
and Eric J. Moser. 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. If this offering is consummated by
October 1, 1998, Mr. Mittelstaedt's base salary will be adjusted to at least
$250,000. 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 provides for an initial five-year term, at the end of which
the agreement 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 at
any time terminate the agreement, with or without cause, provided that 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. The agreement also provides that a
change of control of the Company (as defined in the agreement) will be deemed a
termination of Mr. Mittelstaedt without cause, unless Mr. Mittelstaedt waives
that provision.
Pursuant to 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 election to the Company's Board of
Directors. If the Board consists of five or fewer members, Mr. Mittelstaedt may
recommend two nominees, and if it consists of more than five members, he may
recommend three nominees.
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<PAGE> 54
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The full Board of Directors served as the compensation committee of the
Board during 1997. At the time 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 April 15, 1998, the Company had granted options to purchase
872,300 shares of Common Stock at a weighted average exercise price of $5.39 per
share.
The Stock Option Plan is currently administered by the Board of Directors.
Upon consummation of the offering, the Compensation Committee will administer
the Stock Option Plan. The administrator of the Stock Option Plan has the
authority to determine 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 shall 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 may be no less than
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 following retirement or disability, the
Optionee may exercise his or her options, but only within the period ending,
subject to the discretion of the administrator of the Stock Option Plan, 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 will
terminate, and the shares of Common Stock subject to the options will become
available for issuance under the Stock Option Plan. If the Optionee ceases to be
an employee, consultant or director of the Company other than because of
retirement, death or disability, his or her options terminate on the date such
relationship terminates, subject to the discretion of the administrator of the
Stock Option Plan, and the shares of Common Stock subject to the options will
become available for issuance under the Stock Option Plan. Each option agreement
may include the right of the Company to repurchase any and all shares acquired
by an Optionee under the Stock Option Plan upon termination of the Optionee,
whether voluntary or involuntary or with or without cause.
53
<PAGE> 55
CERTAIN TRANSACTIONS
Initial Funding
In September and October 1997, the Company sold an aggregate of 2,300,000
shares of Common Stock at a price of $0.01 per share and 2,499,998 shares of
Series A Preferred Stock at a price of $2.80 per share to 19 accredited
investors, including certain officers and directors of the Company, in a private
placement. Such sales were made in accordance with Regulation D promulgated
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.
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.
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<PAGE> 56
On February 1, 1998, Steven F. Bouck was granted options to purchase
230,000 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. Mr. Bouck also received an option to
purchase 30,000 shares of Common Stock at an exercise price of $2.80 per share,
which vests ratably on October 1, 1998, 1999 and 2000 if certain events occur.
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 was 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.
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 aggregate purchase price was $3,000, which was
the aggregate price paid initially by Messrs. Mittelstaedt, Bishop and Cutler
for such 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.
In addition, the Company is required to pay contingent consideration to
certain former Madera shareholders, subject to their involvement 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.
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
four 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 gross revenues received by the Company from Fibres from the
Company's inception through December 31, 1997, were approximately $222,701. The
net amount retained by the Company, after deducting the fees the Company paid to
Fibres for the right to collect the recyclables, was approximately $10,860 for
such period.
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<PAGE> 57
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Company as of April 15, 1998, and after the
sale of the shares of Common Stock offered hereby and the automatic conversion
to Common Stock of all outstanding shares of Series A Preferred Stock, by: (i)
each person or entity known to the Company to beneficially own 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>
OWNED AS OF APRIL 15, TO BE OWNED AFTER
1998 THE OFFERING
NAME OF ----------------------- -----------------------
BENEFICIAL OWNER(1) NUMBER PERCENTAGE NUMBER PERCENTAGE
------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
James N. Cutler, Jr.(2)(3)................ 925,750 27.3% 961,465 12.2%
J. Bradford Bishop(2)(3).................. 925,750 27.3 943,607 12.0
Ronald J. Mittelstaedt(2)(4)(5)........... 717,500 21.2 1,074,643 13.6
Frank W. Cutler(2)(3)(4).................. 522,000 15.4 672,246 8.5
Eugene V. Dupreau(2)(6)................... 400,000 11.8 400,000 5.1
Charles B. Youngclaus(2)(6)............... 400,000 11.8 400,000 5.1
Melvin G. Dias(2)(7)...................... 400,000 11.8 400,000 5.1
Imperial Bank(2)(8)....................... 200,000 5.9 200,000 2.5
Kieckhefer Partnership 84-1(2)(4)......... -- -- 562,104 7.1
Michael W. Harlan(2)...................... -- -- -- --
William J. Razzouk(2)..................... -- -- -- --
Eugene P. Polk(2)(9)...................... -- -- 468,418 5.9
All executive officers and directors as a
group (9 persons)(4)(5)................. 1,617,500 47.7% 2,010,358 25.5%
</TABLE>
- ---------------
(1) Beneficial ownership is determined in accordance with the rules of the
Commission, and includes generally voting power and/or investment power with
respect to securities. Shares of Common Stock subject to options and/or
warrants currently exercisable or exercisable within 60 days of the date
hereof are deemed outstanding for computing the percentage beneficially
owned by the person holding such options but are not deemed outstanding for
computing the percentage beneficially owned by any other person. Except as
otherwise indicated by footnote, the Company believes that the persons named
in this table, based on information provided by such persons, 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,
Charles B. Youngclaus and Melvin G. Dias 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 165 Madison Avenue, Suite 1300, Memphis, Tennessee
38103. The address of Imperial Bank is 777 108th Avenue NE, Suite 1670,
Bellevue, Washington 98004.
(3) Includes 247,000 shares purchasable under currently exercisable warrants.
(4) As of March 1, 1998, the Mittelstaedt Family Trust, J. Bradford Bishop,
James N. Cutler, Jr., Kieckhefer Partnership 84-1, Kieckhefer Trust
Partnership 61-1 and Frank W. Cutler beneficially owned 357,143, 17,857,
35,715, 562,104, 281,052 and 7,389 shares, respectively, of Series A
Preferred Stock. Those shares automatically convert to the same number of
shares of Common Stock on the closing of the offering.
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<PAGE> 58
(5) Includes 100,000 shares purchasable under currently exercisable warrants.
Also includes 567,900 shares held by the Mittelstaedt Family Trust dated
6/18/97, of which Mr. Mittelstaedt is the Trustee.
(6) Includes 66,667 shares purchasable under immediately exercisable warrants.
(7) Includes 66,666 shares purchasable under immediately exercisable warrants.
(8) Shares purchasable under currently exercisable warrants.
(9) As of March 1, 1998, Eugene Polk beneficially owned 468,418 shares of Series
A Preferred Stock: 285,713 through three trusts for which he 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 through the Polk Investment Partnership 93-1, for which he serves as
a Manager. Those shares automatically convert to the same number of shares
of Common Stock on the closing of the offering.
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<PAGE> 59
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 the date of this
Prospectus, there are 3,391,818 shares of Common Stock outstanding and 2,499,998
shares of Series A Preferred Stock outstanding. The Series A Preferred shares
will automatically convert to 2,499,998 shares of Common Stock upon the
consummation of this offering. After giving effect to this offering, there will
be 7,891,816 shares of Common Stock outstanding (8,191,816 if the Underwriters'
over-allotment option is exercised in full).
The following description of the Company's capital stock is a summary of
the material terms of such stock. The following does not purport to be complete
and is subject in all respects to applicable Delaware law and to the provisions
of the Company's Amended and Restated Certificate of Incorporation and Amended
and Restated By-laws.
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 such
preferences to which holders of shares of Preferred Stock, if any, may be
entitled, the holders of outstanding shares of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the Board of Directors out of funds legally available therefor. In the event of
a liquidation, dissolution or winding up of the Company, the holders of
outstanding shares of Common Stock are entitled to share ratably in all assets
of the Company which are legally available for distribution to stockholders,
subject to the prior rights on liquidation of creditors and to preferences, if
any, to which holders of shares of Preferred Stock, if any, may be entitled. In
connection with the acquisition of Madera, the Company issued 1,000,000 shares
of Common Stock, which was redeemable under certain circumstances. Upon the
consummation of this offering, those shares will no longer be redeemable. The
holders of outstanding shares of Common Stock do not have any preemptive,
subscription, redemption, conversion or sinking fund rights. The outstanding
shares of Common Stock 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 and containing such rights, privileges and limitations, including
dividend rights, voting rights, conversion privileges, redemption rights,
liquidation rights and/or sinking fund rights, as may from time to time be
determined by the Board of Directors of the Company. The Company has issued
2,499,998 shares of Series A Preferred Stock, which on the closing of this
offering will convert automatically to 2,499,998 shares of Common Stock. The
Series A Preferred Stock provides for cumulative dividends, which if not paid in
cash prior to the Preferred Stock's conversion into Common Stock are to be paid
in additional shares of Common Stock. The Company intends to pay any such
accumulated dividends in cash prior to conversion. Additional Preferred Stock
may be issued in the future in connection with acquisitions, financings or such
other matters as the Board of Directors deems to be appropriate. The effect of
having such Preferred Stock authorized is that the Company's Board of Directors
alone, within the bounds and subject to the federal securities laws and the
Delaware General Corporation Law (the "Delaware Law"), may be able to authorize
the issuance of Preferred Stock, which may adversely affect the voting and other
rights of holders of Common Stock. The issuance of Preferred Stock may also have
the effect of delaying, deferring or preventing a change in control of the
Company.
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CERTAIN STATUTORY, CHARTER AND BY-LAW PROVISIONS
The following brief description of certain provisions of the Delaware Law
and the Company's Amended and Restated Certificate of Incorporation (the
"Restated Certificate") and Amended and Restated By-laws (the "Restated
By-laws") does not purport to be complete and is subject in all respects to the
provisions of the Delaware Law, the Restated Certificate and the Restated
By-laws, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus forms a part.
Classified Board of Directors. The Restated Certificate provides that the
Board shall be divided into three classes and that the number of directors in
each class shall be as nearly equal as is possible based on the number of
directors constituting the entire Board. The Restated Certificate effectively
provides that the term of office of the first class will expire at the annual
meeting of stockholders following December 31, 1998, the term of office of the
second class will expire at the annual meeting of stockholders following
December 31, 1999, and the term of office of the third class will expire at the
annual meeting of stockholders following December 31, 2000. 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 and until their
successors are elected and qualified.
The classification of directors has the effect of making 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 effect a
change in a majority of the Board. Such a 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 as well as any
available alternatives to the proposal and to act in what they believe to be the
best interests of the stockholders. However, such classification provisions
could also have the effect of discouraging 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 be beneficial to the Company and its
stockholders. The classification of the Board could thus increase the likelihood
that incumbent directors will retain their positions.
Number of Directors; Removal; Filling Vacancies. The Restated Certificate
provides that, subject to any rights of holders of Preferred Stock to elect
additional directors under specified circumstances, the number of directors
comprising the entire Board will be fixed from time to time by action of not
less than a majority of the directors then in office. In no event shall such
number be less than three or more than nine, unless approved by action of not
less than two-thirds of the directors then in office. In addition, the Restated
Certificate provides that, subject to any rights of holders of Preferred Stock,
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), provided that 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.
Under the Delaware Law, unless otherwise provided in the certificate of
incorporation, directors serving on a classified board may only be removed by
the stockholders for cause. The Restated Certificate provides that following the
offering, directors may 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 have the effect of
discouraging a third party from initiating a proxy contest, making a tender
offer or otherwise attempting to gain control of the Company, or of attempting
to change the composition or policies of the Board, even though such attempts
might be
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beneficial to 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 Restated By-laws provide that (subject
to the rights, if any, of holders of any class or series of Preferred Stock then
outstanding): (i) only a majority of the Board of Directors or the President or
Chairman of the Board will be able to call a special meeting of stockholders;
(ii) the business permitted to be conducted at a special meeting of stockholders
shall be limited to matters stated in the notice of meeting or properly brought
before the meeting by or at the direction of the Board of Directors; and (iii)
following the offering, 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 by the stockholders of stockholder proposals over the
opposition of the Board, except at an annual meeting.
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").
The Stockholder Notice Procedure provides that, subject to the rights of
any holders of Preferred Stock, 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
prior to the meeting at which directors are to be elected, will be eligible for
election as directors of the Company. The Stockholder Notice Procedure provides
that at an annual meeting, only such business may be conducted as 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 of such stockholder's intention to bring such
business before such meeting. Under the Stockholder Notice Procedure, 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 prior to 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: (i) the day such notice was mailed;
or (ii) the day such public disclosure was made).
Under the Stockholder Notice Procedure, a stockholder's notice to the
Company proposing to nominate a person for election as director must contain
certain information about the nominating stockholder and the proposed nominee,
and a stockholder's notice relating to the conduct of business other than the
nomination of directors must contain certain information about such business and
about the proposing stockholder. If the Chairman or other officer presiding at a
meeting determines that a person was not nominated, or other business was not
brought before the meeting, in accordance with the Stockholder Notice Procedure,
such person will not be eligible for election as a director, or such business
will not be conducted at such meeting, as the case may be.
By requiring advance notice of nominations by stockholders, the Stockholder
Notice Procedure affords the Board an opportunity to consider the qualifications
of the proposed nominees and, to the extent deemed necessary or desirable by the
Board, to inform stockholders about such qualifications. By requiring advance
notice of other proposed business, the Stockholder Notice Procedure also
provides a more orderly procedure for conducting annual meetings of stockholders
and, to the extent deemed necessary or desirable by the Board, provides the
Board with an opportunity to inform stockholders, prior to such meetings, of any
business proposed to be conducted at such meetings, together with any
recommendations as to the Board's position 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.
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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 forgoing provisions may have the effect of precluding a contest
for the election of directors or the consideration of stockholder proposals and
of discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of directors or to approve its own proposal, if
the proper advance notice procedures are not followed, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
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 may determine to be reasonably necessary or desirable to encourage
any person or entity to enter into negotiations with the Board and management
regarding any transaction which may result in a change of control of the
Company, or to contest or oppose any such transaction which the Board determines
to be unfair, abusive or otherwise undesirable to the Company, its business,
assets, properties or stockholders. The Board or any such committee is
specifically authorized to adopt plans or to issue securities of the Company
including plans, rights, options, capital stock, notes, debentures or other debt
securities, which securities may be exchangeable or convertible into cash or
other securities on such terms and conditions as the Board or any such committee
determines. In addition, the Board or such committee of the Board may provide
that any holder or class of holders of such designated securities will be
treated differently than, and unequally to, all other security holders in
respect of the terms, conditions, provisions and rights of such securities.
The existence of this authority or the actions which may be taken by the
Board pursuant thereto are intended to give the Board flexibility in order to
act in the best interests of stockholders in the event of a potential change of
control transaction. Such provisions may, however, 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 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 following the offering. 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. In general,
section 203 prevents a Delaware corporation from engaging in a "business
combination" (as defined) with an "interested stockholder" (defined generally as
a person owning 15% or more of a corporation's outstanding voting stock or
affiliate or associate) for three years following the time such stockholder
became an
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interested stockholder, unless: (i) before such person became an interested
stockholder, the board of directors of the corporation approved the business
combination or the transaction in which the interested stockholder became an
interested stockholder; (ii) upon consummation of the transaction that resulted
in the interested stockholder's becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the rights to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (iii) at or subsequent to the time such person became an interested
stockholder, the business combination was approved by the board of directors of
the corporation and authorized at a meeting of stockholders by the affirmative
vote of the holders of 66 2/3% of the outstanding voting stock of the
corporation not owned by the interested stockholder. Under section 203, the
restrictions described above also do not apply to certain business combinations
proposed by an interested stockholder following the announcement or notification
of one of certain extraordinary transactions involving the corporation and a
person who had not been an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the corporation's directors, if such extraordinary transaction is approved or
not opposed by a majority of the directors who were directors prior to any
person becoming an interested stockholder during the previous three years or
were recommended for election or elected to succeed such directors by a majority
of such directors.
TRANSFER AGENT AND REGISTRAR
BankBoston, N.A., c/o Boston EquiServe, L.P., will serve as transfer agent
and registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 7,891,816 shares of
Common Stock outstanding. All of the shares offered hereby will be freely
saleable in the public market after completion of this offering, unless acquired
by affiliates of the Company. All of the shares outstanding prior to completion
of this offering are subject to contractual restrictions that prohibit the
stockholder from selling or otherwise disposing of shares for a period of 180
days after the date of this Prospectus without the prior written consent of BT
Alex. Brown Incorporated. After this 180-day period expires, 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, and an additional 50,000 of the currently outstanding
shares will become eligible for resale in the public market ratably over three
years, subject to the restrictions of Rule 144. Shares of Common Stock held by
affiliates of the Company will be 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 for a period of 180 days after the date of this
Prospectus, except as consideration for business acquisitions or upon exercise
of currently outstanding stock options or warrants, 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 is entitled to
sell within any three-month period that number of shares which does not exceed
the greater of 1% of the outstanding shares of the Common Stock (78,000 shares
after completion of this offering) 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
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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 would be entitled to sell such shares under Rule 144 without regard to the
limitations discussed above.
There has been no public market for the Common Stock prior to this offering
and no assurance can be given that an active public market for the Common stock
will develop or be sustained after completion of this offering. Sales of
substantial amounts of the Common Stock, or the perception that such sales could
occur, could adversely affect the prevailing market price of the Common Stock
and could impair the Company's ability to raise capital or effect acquisitions
through the issuance of Common Stock.
After the completion of this offering, the Company intends to file a
registration statement under the Securities Act to register all shares issuable
on exercise of stock options or other awards granted or to be granted under its
Stock Option Plan. After the filing of such registration statement and subject
to certain restrictions under Rule 144, those shares will be freely saleable in
the public market immediately following exercise of such options. The Company
currently intends to file a shelf registration statement covering up to an
additional 3,000,000 shares of Common Stock under the Securities Act, for its
use in connection with acquisitions that may be made by the Company. Such
shares, when issued, could be freely saleable in the public market 180 days
after the date of this Prospectus, or earlier on prior approval of BT Alex.
Brown Incorporated by persons not affiliated with the Company, unless the
Company contractually restricts their resale. See "Underwriting."
63
<PAGE> 65
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives, BT
Alex. Brown Incorporated and CIBC Oppenheimer Corp., have severally agreed to
purchase from the Company the following respective number of shares of Common
Stock at the initial public offering price less the underwriting discounts and
commissions set forth on the cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------------
<S> <C>
BT Alex. Brown Incorporated.................................
CIBC Oppenheimer Corp.......................................
Total............................................. 2,000,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of Common Stock offered hereby if
any of such shares are purchased.
The Company has been advised by the Representatives of the Underwriters
that the Underwriters propose to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow, and such dealers may
re-allow, a concession not in excess of $ per share to certain other
dealers. After commencement of the initial public offering, the offering price
and other selling terms may be changed by the Representatives of the
Underwriters.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 300,000
additional shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to the total number of shares offered by the
Company hereunder, and the Company will be obligated, pursuant to the option, to
sell such shares to the Underwriters. The Underwriters may exercise such option
only to cover over-allotments made in connection with the sale of the Common
Stock offered hereby. If purchased, such additional shares will be offered by
the Underwriters on the same terms as those on which the 2,000,000 shares are
being offered.
To facilitate the offering of the Common Stock, the Underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price of
the Common Stock. Specifically, the Underwriters may over-allot shares of the
Common Stock in connection with the offering, thereby creating a short position
in the Underwriters' syndicate account. Additionally, to cover such over-
allotments or to stabilize the market price of the Common Stock, the
Underwriters may bid for, and purchase, shares of the Common Stock in the open
market. Any of these activities may maintain the market price of the Common
Stock at a level above that which might otherwise prevail in the open market.
The Underwriters are not required to engage in these activities, and, if
commenced, any such activities may be discontinued at any time. The
Representatives, on behalf of the syndicate of Underwriters, also may reclaim
selling concessions allowed to an Underwriter or dealer, if the syndicate
repurchases shares distributed by that Underwriter or dealer.
64
<PAGE> 66
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The Company has agreed not to sell, contract to sell or otherwise dispose
of any shares of Common Stock for a period of 180 days after the date of this
Prospectus, except as consideration for business acquisitions or upon exercise
of currently outstanding stock options or warrants, without the prior written
consent of BT Alex. Brown Incorporated. All stockholders, directors and officers
of the Company have agreed not to sell, contract to sell or otherwise dispose of
any shares of Common Stock for a period of 180 days without the prior written
consent of BT Alex. Brown Incorporated.
The Representatives of the Underwriters have advised the Company that they
do not intend to confirm sales to any account over which they exercise
discretionary authority.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price will be
determined by negotiations between the Company and the Representatives of the
Underwriters. Among the factors to be considered in such negotiations are
prevailing market conditions, the results of operations of the Company in recent
periods, the market capitalizations and stages of development of other companies
that the Company and the Representatives believe to be comparable to the
Company, estimates of the business potential of the Company, the present state
of the Company's development and other factors deemed relevant.
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. Certain legal matters related to this offering will be
passed upon for the Underwriters by Piper & Marbury L.L.P., Baltimore, Maryland.
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 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, and the Financial Statements of Madera Disposal Systems, Inc.
at December 31, 1996 and 1997, and for each of the three years in the period
ended December 31, 1997, appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their reports thereon appearing elsewhere in this Prospectus and Registration
Statement. 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.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement (of
which the Prospectus is a part) on Form S-1 (together with all amendments
thereto, the "Registration Statement"), under the Securities Act with respect to
the shares of Common Stock offered hereby. This Prospectus does not contain all
the information set forth in the Registration Statement and the exhibits and
schedules filed therewith, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements contained
in this Prospectus regarding the contents of any contract or other document
filed as an exhibit to the Registration Statement are not necessarily complete
and, in each instance, reference is made to the copy of such contract or other
document
65
<PAGE> 67
filed as an exhibit to the Registration Statement, each such statement being
deemed to be qualified in its entirety by such reference. For further
information with respect to the Company and the Common Stock offered hereby,
reference is hereby made to the Registration Statement and to the exhibits and
schedules filed therewith. The Registration Statement, including all exhibits
and schedules thereto, may be inspected without charge at the principal office
of the Commission located at 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the following regional offices of the Commission: Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center,
13th Floor, New York, New York 10048. Copies of such material may be obtained
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Room 1204, Washington, D.C. 20549, at prescribed rates.
The Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's web-site is
http:\\www.sec.gov.
66
<PAGE> 68
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 three months ended March 31, 1998.............. F-5
Notes to Unaudited Pro Forma Consolidated Statements of
Operations............................................. F-6
Unaudited Pro Forma Consolidated Balance Sheet as of March
31, 1998............................................... F-9
Notes to Unaudited Pro Forma Consolidated Balance Sheet... F-10
WASTE CONNECTIONS, INC. AND PREDECESSORS
Report of Ernst & Young LLP, Independent Auditors......... F-11
Combined Balance Sheet of Predecessors as of December 31,
1996................................................... F-12
Consolidated Balance Sheet of Waste Connections, Inc. as
of December 31, 1997 (Audited) and March 31, 1998
(Unaudited)............................................ F-12
Combined Statement of Operations of Predecessors for the
nine months ended September 30, 1997................... F-13
Consolidated Statement of Operations of Waste Connections,
Inc. for the period from inception (September 9, 1997)
through December 31, 1997 (Audited) and the three
months ended March 31, 1997 and 1998 (Unaudited)....... F-13
Combined Statement of Operations of The Disposal Group for
the period from January 1, 1996 through July 31,
1996................................................... F-14
Combined Statement of Operations of Predecessors for the
period ended December 31, 1996......................... F-14
Combined Statement of Operations of The Disposal Group for
the year ended December 31, 1995....................... F-15
Statement of Operations of Fibres International, Inc. for
the period from January 1, 1995 through November 30,
1995................................................... F-15
Statement of Operations of Predecessors for the one month
ended December 31, 1995................................ F-15
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 three
months ended March 31, 1998 (Unaudited)................ F-16
Combined Statement of Cash Flows of Predecessors for the
nine months ended September 30, 1997................... F-17
Consolidated Statement of Cash Flows of Waste Connections,
Inc. for the period from inception (September 9, 1997)
through December 31, 1997 (Audited) and the three
months ended March 31, 1997 and 1998 (Unaudited)....... F-17
Combined Statement of Cash Flows of The Disposal Group for
the period from January 1, 1996 through July 31,
1996................................................... F-18
Combined Statement of Cash Flows of Predecessors for the
period ended December 31, 1996......................... F-18
Combined Statement of Cash Flows of The Disposal Group for
the year ended December 31, 1995....................... F-19
Statement of Cash Flows of Fibres International, Inc. for
the period from January 1, 1995 through November 30,
1995................................................... F-19
Statement of Cash Flows of Predecessors for the one month
ended December 31, 1995................................ F-19
Notes to Financial Statements............................. F-20
</TABLE>
F-1
<PAGE> 69
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MADERA DISPOSAL SYSTEMS, INC.
Report of Ernst & Young LLP, Independent Auditors......... F-41
Balance sheets as of December 31, 1996 and 1997........... F-42
Statements of income and retained earnings for the years
ended December 31, 1995, 1996 and 1997................. F-43
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997.................................... F-44
Notes to Financial Statements............................. F-45
</TABLE>
F-2
<PAGE> 70
WASTE CONNECTIONS, INC.
INTRODUCTION TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
The following Unaudited Pro Forma Consolidated Balance Sheet as of March
31, 1998 gives effect to this offering and the Unaudited Pro Forma Consolidated
Statements of Operations for the year ended December 31, 1997 and the three
months ended March 31, 1998, give effect to this offering and the business
combinations involving Waste Connections, Inc., (the "Company"), its
predecessors, Waste Connections of Idaho, Inc. ("WCII"), its predecessors and
Madera Disposal Systems, Inc. ("Madera"). Such combinations were accounted for
using the purchase method of accounting. The Unaudited Pro Forma Consolidated
Balance Sheet is presented as if this offering had occurred on March 31, 1998,
and the Pro Forma Consolidated Statements of Operations for the year ended
December 31, 1997 and for the three months ended March 31, 1998 are presented as
if this offering and the Company's acquisitions of its predecessors, WCII and
its predecessors and Madera had occurred as of January 1, 1997.
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 and WCII 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 combined financial statements of the predecessors,
including adjusting depreciation expense to reflect purchase price allocations,
reducing interest expense to reflect retirement of the outstanding
acquisition-related debt with the proceeds of this offering 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,
and WCII and its predecessors 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> 71
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>
PRO FORMA
WASTE ADJUSTED WASTE
CONNECTIONS, WASTE CONNECTIONS
INC. CONNECTIONS, OF IDAHO, INC.
PERIOD FROM PRO FORMA INC. AND MADERA PREDECESSORS
INCEPTION PREDECESSORS ADJUSTMENTS PREDECESSORS DISPOSAL COMBINED
(SEPTEMBER COMBINED NINE TO COMBINE WASTE COMBINED SYSTEMS, INC. NINE MONTHS
9, 1997) TO MONTHS ENDED CONNECTIONS, YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30, INC. AND DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1997 PREDECESSORS 1997 1997 1997
------------ ------------- ---------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................... $ 6,237 $18,114 $ -- $24,351 $7,845 $2,053
Operating expenses:
Cost of operations......... 4,703 14,753 (146)(a) 19,015 5,289 1,377
(195)(b)
(100)(c)
Selling, general and
administrative........... 619 3,009 (570)(d) 2,926 1,041 312
(132)(e)
Depreciation and
amortization............. 354 1,083 81(f) 1,416 627 307
(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 57
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 57
(Provision) benefit for
income taxes............... 332 -- (561)(i) 240 -- --
469(j)
--------- ------- ------ ------- ------ ------
Net income (loss)........... $ (5,066) $(1,173) $1,310 $(4,929) $ 781 $ 57
========= ======= ====== ======= ====== ======
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>
WASTE
CONNECTIONS
OF IDAHO, INC.
PERIOD FROM
INCEPTION
(SEPTEMBER 25,
1997) TO PRO FORMA
DECEMBER 31, PRO FORMA AS
1997 ADJUSTMENTS ADJUSTED
-------------- ----------- ---------
<S> <C> <C> <C>
Revenues.................... $764 $ -- $ 35,013
Operating expenses:
Cost of operations......... 433 -- 26,114
Selling, general and
administrative........... 56 (83)(k) 4,252
Depreciation and
amortization............. 94 (377)(l) 2,431
364(m)
Start-up and integration... -- -- 493
Stock compensation......... -- -- 4,395
---- -------- ---------
Income (loss) from
operations................. 181 96 (2,672)
Interest expense............ (50) 280(n) --
(897)(o)
2,200(p)
Other income (expense),
net........................ -- -- 151
---- -------- ---------
Income (loss) before
(provision) benefit for
income taxes............... 131 1,679 (2,521)
(Provision) benefit for
income taxes............... (52) (297)(q) (781)
(672)(i)
---- -------- ---------
Net income (loss)........... $ 79 $ 710 $ (3,302)
==== ======== =========
Redeemable convertible
preferred stock
accretion.................. $ --
---------
Net loss applicable to
common stockholders........ $ (3,302)
=========
Basic net loss per common
share...................... $ (0.45)
=========
Shares used in the per share
calculation................ 7,372,565
=========
</TABLE>
See accompanying notes.
F-4
<PAGE> 72
WASTE CONNECTIONS, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
WASTE
CONNECTIONS,
INC. MADERA WASTE
CONSOLIDATED DISPOSAL CONNECTIONS,
THREE SYSTEMS, INC. OF IDAHO
MONTHS INC. ONE ONE
ENDED MONTH ENDED MONTH ENDED PRO FORMA
MARCH 31, JANUARY 31, JANUARY 31, PRO FORMA COMBINED
1998 1998 1998 ADJUSTMENTS AS ADJUSTED
------------ ----------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues........................ $ 7,601 $ 611 $250 $ -- $ 8,462
Operating expenses:
Cost of operations............ 5,397 412 208 -- 6,017
Selling, general and
administrative............. 770 112 34 (19)(k) 897
Depreciation and
amortization............... 541 69 32 (19)(l)(m) 623
Stock compensation............ 279 -- -- -- 279
--------- ----- ---- ----- ---------
Income (loss) from operations... 614 18 (24) 38 646
Interest expense................ (301) (289) (7) 597(p) --
Other income (expense), net..... -- 16 -- -- 16
--------- ----- ---- ----- ---------
Income (loss) before (provision)
benefit for income taxes...... 313 (255) (31) 635 662
(Provision) benefit for income
taxes......................... (237) -- 19 (159)(q)(i) (377)
--------- ----- ---- ----- ---------
Net income (loss)............... $ 76 $(255) $(12) $ 476 $ 285
========= ===== ==== ===== =========
Redeemable convertible preferred
stock accretion............... $ (572) $ --
--------- ---------
Net income (loss) applicable to
common stockholders........... $ (496) $ 285
========= =========
Basic net income (loss) per
common share.................. $ (0.21) $ 0.04
========= =========
Diluted net income per share.... $ 0.03
=========
Shares used in the per share
calculations:
Basic......................... 2,311,111 7,811,109
========= =========
Diluted....................... 8,835,415
=========
</TABLE>
See accompanying notes.
F-5
<PAGE> 73
WASTE CONNECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
ASSUMPTIONS. The unaudited pro forma consolidated statements of operations
for the year ended December 31, 1997, and for the three months ended March 31,
1998 are presented as if the acquisitions of the Company's and WCII's
predecessors, WCII and Madera 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 WCII and Madera consist of the following:
<TABLE>
<CAPTION>
WCII MADERA
------ --------
<S> <C> <C>
Cash paid to shareholders.............................. $ 3 $6,949
Common stock issued.................................... -- 7,500
Pay-off of long-term debt and capital lease
obligations.......................................... -- 2,630
Liabilities assumed.................................... 1,943 1,626
Acquisition costs...................................... -- 180
Common stock warrants issued........................... -- 954
------ --------
$1,946 $19,839
====== ========
</TABLE>
The Company has preliminary allocated the purchase prices as follows:
<TABLE>
<CAPTION>
WCII MADERA
------ --------
<S> <C> <C>
Tangible assets purchased.............................. $1,946 $4,534
Goodwill............................................... -- 14,580
Long-term franchise agreements and contracts........... -- 725
------ --------
$1,946 $19,839
====== ========
</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 and a required element 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
F-6
<PAGE> 74
WASTE CONNECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
the predecessors. The non-assumption of the consulting agreement was
directly attributable to and a required element of the acquisition.
(f) To increase depreciation for the increase in the property and
equipment's carrying value to fair value.
(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 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 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 and required
elements of the Madera acquisition.
(l) To reduce depreciation for the reduction in the property and
equipment's carrying value to fair value.
(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 eliminate all interest expense, as the offering proceeds will be
used to pay off all outstanding debt obligations of the Company.
(q) 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%.
F-7
<PAGE> 75
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 income (loss) per share for the year ended December 31, 1997, and the
three months ended March 31, 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>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 1998
------------ ------------
<S> <C> <C>
Company weighted average shares outstanding.... 1,872,567 2,311,111
Shares issued in connection with the
acquisition of Madera........................ 1,000,000 1,000,000
Shares issuable upon conversion of redeemable
Convertible Preferred Stock.................. 2,499,998 2,499,998
Shares issuable in connection with the
offering..................................... 2,000,000 2,000,000
---------- -----------
Shares used in calculating pro forma basic net
income (loss) per share...................... 7,372,565 7,811,109
==========
Dilutive effect of employee stock options and
stock purchase warrants...................... 1,024,306
-----------
Shares used in calculating pro forma diluted
net income per share......................... 8,835,415
===========
</TABLE>
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.
CONTINGENT PAYMENTS. In connection with the Madera acquisition the Company
is required to pay contingent consideration to certain former Madera
shareholders, 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.
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-8
<PAGE> 76
WASTE CONNECTIONS, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
MARCH 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
WASTE
CONNECTIONS, INC. PRO FORMA PRO FORMA
CONSOLIDATED ADJUSTMENTS AS ADJUSTED
------------------ ----------- -----------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash.......................................... $ 2,386 $ 19,260(1) $ 5,234
(123)(2)
(16,289)(2)
Accounts receivable, net...................... 4,198 -- 4,198
Prepaid expenses and other current assets..... 1,061 -- 1,061
------- -------- -------
Total current assets.................. 7,645 2,848 10,493
Property and equipment, net..................... 7,316 -- 7,316
Goodwill, net................................... 24,935 -- 24,935
Other assets.................................... 1,137 -- 1,137
------- -------- -------
$41,033 $ 2,848 $43,881
======= ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................. $ 3,661 $ -- $ 3,661
Deferred revenue.............................. 972 -- 972
Accrued liabilities........................... 1,701 -- 1,701
Current portion of accrued losses on acquired
contracts.................................. 323 -- 323
------- -------- -------
Total current liabilities............. 6,657 -- 6,657
Accrued losses on acquired contracts............ 1,149 -- 1,149
Long-term debt, net............................. 16,289 (16,289)(2) --
Deferred income taxes........................... 162 -- 162
Redeemable convertible preferred stock.......... 8,095 (123)(2) --
(7,972)(3)
Redeemable common stock......................... 7,500 (7,500)(4) --
Stockholders' equity (deficit):
Common stock.................................. 24 20(1) 79
25(3)
10(4)
Additional paid-in capital.................... 8,142 19,240(1) 42,819
7,947(3)
7,490(4)
Stockholder notes receivable.................. (82) -- (82)
Deferred stock compensation................... (810) -- (810)
Accumulated deficit........................... (6,093) -- (6,093)
------- -------- -------
Total stockholders' equity
(deficit)........................... 1,181 34,732 35,913
------- -------- -------
$41,033 $ 2,848 $43,881
======= ======== =======
</TABLE>
See accompanying notes.
F-9
<PAGE> 77
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 March
31, 1998 is presented as if the Company's initial public offering had occurred
on March 31, 1998.
PRO FORMA ADJUSTMENTS. The following adjustments have been made to the
unaudited pro forma consolidated balance sheet to reflect the Company's initial
public offering:
(1) Issuance of 2,000,000 shares of Common Stock with estimated net
proceeds of $19,260
(2) Pay-off of all outstanding debt obligations of the Company
($16,868) and accumulated preferred stock dividends ($123)
(3) Conversion of 2,499,998 shares of redeemable Series A Preferred
Stock into 2,499,998 shares of Common Stock which automatically
converts upon the Company's initial public offering.
(4) Reclassification of 1,000,000 shares of redeemable Common Stock to
Common Stock since the Company's initial public offering will
cause the redemption feature to be cancelled.
F-10
<PAGE> 78
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-12
through F-19 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-11
<PAGE> 79
WASTE CONNECTIONS, INC. AND PREDECESSORS
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
WASTE CONNECTIONS, INC.
CONSOLIDATED
-----------------------------------------------
PRO FORMA REDEEMABLE
PREDECESSORS STOCK AND
COMBINED STOCKHOLDERS' EQUITY
DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31,
1996 (NOTE 1) 1997 1998 1998 (NOTE 14)
------------- ------------ --------- --------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash.............................................. $ 102 $ 820 $ 2,386
Accounts receivable, less allowance for doubtful
accounts of $56 at March 31, 1998 and $19 at
December 31, 1997 ($81 in 1996)................. 2,650 3,940 4,198
Prepaid expenses and other current assets......... 339 358 1,061
------- ------- --------
Total current assets........................ 3,091 5,118 7,645
Property and equipment, net......................... 5,069 4,185 7,316
Goodwill, net....................................... 6,762 9,408 24,935
Other assets........................................ 369 169 1,137
------- ------- --------
$15,291 $18,880 $ 41,033
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 1,025 $ 2,609 $ 3,661
Deferred revenue.................................. 564 597 972
Accrued liabilities............................... 634 825 1,701
Current portion of accrued losses on acquired
contracts....................................... 119 251 323
Current portion of long-term debt................. 54 -- --
------- ------- --------
Total current liabilities................... 2,396 4,282 6,657
Accrued losses on acquired contracts................ -- 702 1,149
Long-term debt...................................... 89 6,762 16,289
Deferred income taxes............................... -- 162 162
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 and
March 31, 1998)................................... -- 7,523 8,095 $ --
=======
Redeemable common stock $.01 par value; no shares
issued and outstanding at December 31, 1997;
1,000,000 shares issued and outstanding at March
31, 1998; and no shares issued and outstanding pro
forma............................................. -- -- 7,500 $ --
=======
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; 2,350,000
shares issued and outstanding at March 31, 1998;
5,849,998 shares issued and outstanding pro
forma........................................... -- 23 24 58
Additional paid-in capital........................ -- 5,105 8,142 23,702
Stockholder notes receivable...................... -- (82) (82) (82)
Deferred stock compensation....................... -- -- (810) (810)
Accumulated deficit............................... -- (5,597) (6,093) (6,093)
------- ------- -------- -------
Total stockholders' equity (deficit)........ -- (551) 1,181 $16,775
------- ------- -------- =======
$15,291 $18,880 $ 41,033
======= ======= ========
</TABLE>
See accompanying notes.
F-12
<PAGE> 80
WASTE CONNECTIONS, INC. AND PREDECESSORS
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 (AUDITED)
AND THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
WASTE
CONNECTIONS, INC.
PREDECESSORS CONSOLIDATED WASTE
COMBINED PERIOD FROM PREDECESSORS CONNECTIONS, INC.
NINE MONTHS INCEPTION COMBINED CONSOLIDATED
ENDED (SEPTEMBER 9, 1997) THREE MONTHS THREE MONTHS
SEPTEMBER 30, THROUGH ENDED ENDED
1997 (NOTE 1) DECEMBER 31, 1997 MARCH 31, 1997 MARCH 31, 1998
------------- ------------------- -------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
- -----------------------------------------
Revenues................................. $18,114 $ 6,237 $5,694 $ 7,601
Operating expenses:
Cost of operations..................... 14,753 4,703 4,674 5,397
Selling, general and administrative.... 3,009 619 715 770
Depreciation and amortization.......... 1,083 354 378 541
Start-up and integration............... -- 493 -- --
Stock compensation..................... -- 4,395 -- 279
------- ---------- ------ -----------------
Income (loss) from operations............ (731) (4,327) (73) 614
Interest expense......................... (456) (1,035) (152) (301)
Other income (expense), net.............. 14 (36) -- --
------- ---------- ------ -----------------
Income (loss) before income taxes........ (1,173) (5,398) (225) 313
Income tax (provision) benefit........... -- 332 -- (237)
------- ---------- ------ -----------------
Net income (loss)........................ $(1,173) (5,066) $ (225) 76
======= ======
Redeemable convertible preferred stock
accretion.............................. (531) (572)
---------- -----------------
Net loss applicable to common
stockholders........................... $ (5,597) $ (496)
========== =================
Basic net loss per share................. $ (2.99) $ (0.21)
========== =================
Shares used in calculating basic net loss
per share.............................. 1,872,567 2,311,111
Pro forma basic net income (loss) per
share.................................. $ (1.16) $ 0.01
========== =================
Shares used in calculating pro forma
basic net loss per share............... 4,372,565 5,811,109
Pro forma diluted net income per share... $ 0.01
=================
Shares used in calculating pro forma
diluted net income per share........... 6,835,415
- -----------------------------------------
</TABLE>
See accompanying notes.
F-13
<PAGE> 81
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-14
<PAGE> 82
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-15
<PAGE> 83
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 THREE MONTHS ENDED MARCH 31, 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)..................... -- -- -- -- -- -- 2,044 --
Accretion of redeemable
convertible preferred stock
(unaudited)..................... -- 572 -- -- -- -- -- --
Deferred stock compensation
associated with stock options
(unaudited)..................... -- -- -- -- -- -- 854 --
Amortization of deferred stock
compensation (unaudited)........ -- -- -- -- -- -- -- --
Net income (unaudited)........... -- -- -- -- -- -- -- --
--------- ------ --------- ------ --------- --- ------ ----
Balances at March 31, 1998
(unaudited)..................... 2,499,998 $8,095 1,000,000 $7,500 2,350,000 $24 $8,142 $(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)..................... -- -- 2,044
Accretion of redeemable
convertible preferred stock
(unaudited)..................... -- (572) (572)
Deferred stock compensation
associated with stock options
(unaudited)..................... (854) -- --
Amortization of deferred stock
compensation (unaudited)........ 44 -- 44
Net income (unaudited)........... -- 76 76
----- ------- -------
Balances at March 31, 1998
(unaudited)..................... $(810) $(6,093) $ 1,181
===== ======= =======
</TABLE>
See accompanying notes.
F-16
<PAGE> 84
WASTE CONNECTIONS, INC. AND PREDECESSORS
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 (AUDITED)
AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
WASTE CONNECTIONS, INC.
PREDECESSORS CONSOLIDATED
COMBINED PERIOD FROM PREDECESSORS WASTE CONNECTIONS, INC.
NINE MONTHS INCEPTION COMBINED CONSOLIDATED
ENDED (SEPTEMBER 9, 1997) THREE THREE MONTHS
SEPTEMBER 30, THROUGH MONTHS ENDED ENDED
1997 (NOTE 1) DECEMBER 31, 1997 MARCH 31, 1997 MARCH 31, 1998
------------- ----------------------- -------------- -----------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
- ---------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $(1,173) $ (5,066) $(225) $ 76
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Gain on sale of assets................... (4) -- -- --
Depreciation and amortization............ 1,083 354 378 541
Deferred income taxes.................... -- (369) -- --
Amortization of debt issuance costs, debt
guarantee fees and accretion of
discount on long-term debt............. -- 860 -- 47
Stock compensation....................... -- 4,395 -- 279
Changes in operating assets and
liabilities, net of effects from
acquisitions:
Accounts receivable, net............... (604) (1,021) (174) 1,432
Prepaid expenses and other current
assets............................... (74) (51) 173 (641)
Accounts payable....................... (221) 2,607 241 (1,167)
Deferred revenue....................... (137) 169 (137) (110)
Accrued liabilities.................... (450) 801 323 334
Accrued losses on acquired contracts... -- (65) (33) (78)
------- ---------- ----- -------
Net cash provided by (used in) operating
activities............................... (1,580) 2,614 546 713
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment................................ 188 -- -- --
Payments for acquisitions, net of cash
acquired................................. -- (11,493) -- (8,848)
Prepaid acquisition costs.................. -- (20) -- --
Capital expenditures for property and
equipment................................ (735) (264) (716) (343)
Decrease (increase) in other assets........ 22 (19) (38) --
Issuance of stockholder notes receivable... -- (82) -- --
------- ---------- ----- -------
Net cash used in investing activities........ (525) (11,878) (754) (9,191)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net intercompany balance................... 2,142 -- 221 --
Proceeds from short-term borrowings........ -- 600 -- --
Proceeds from long-term debt............... -- 5,500 -- 17,109
Principal payments on notes payable........ (38) (2,724) -- (195)
Principal payments on long-term debt....... -- (157) -- (6,762)
Proceeds from sale of redeemable
convertible preferred stock.............. -- 6,992 -- --
Proceeds from sale of common stock......... -- 23 -- 140
Debt issuance costs........................ -- (150) -- (248)
------- ---------- ----- -------
Net cash provided by financing activities.... 2,104 10,084 221 10,044
------- ---------- ----- -------
Net increase (decrease) in cash.............. (1) 820 13 1,566
Cash at beginning of period.................. 102 -- 102 820
------- ---------- ----- -------
Cash at end of period........................ $ 101 $ 820 $ 115 $ 2,386
======= ========== ===== =======
SUPPLEMENTARY DISCLOSURES OF CASH FLOW
INFORMATION AND NON-CASH TRANSACTIONS:
Cash paid for income taxes................. $ -- $ -- $ 80
======= ========== =======
Cash paid for interest..................... $ -- $ 183 $ 98
======= ========== =======
Redeemable convertible preferred stock
accretion................................ $ 531 $ 572
========== =======
In connection with the BFI related
acquisitions (Note 2), the Company
assumed liabilities as follows:
Fair value of assets acquired............ $ 17,040 $15,571
Cash paid for acquisitions (including
acquisition costs)..................... (11,493) (8,848)
----------
Liabilities assumed, stock and notes
payable to seller...................... $ 5,547 $ 6,723
========== =======
</TABLE>
See accompanying notes.
F-17
<PAGE> 85
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-18
<PAGE> 86
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-19
<PAGE> 87
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
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
F-20
<PAGE> 88
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
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 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.
F-21
<PAGE> 89
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
Interim Financial Information
The unaudited interim consolidated financial statements as of March 31,
1998 and for the three 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 three months ended March 31, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 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.
\ 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.
F-22
<PAGE> 90
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
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.
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 March 31,
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.
F-23
<PAGE> 91
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
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.
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
F-24
<PAGE> 92
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
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
Because it does not currently own any landfills, the Company does not
accrue for estimated landfill closure and post-closure maintenance costs. The
Company may have material financial obligations relating to closure and
post-closure costs of any disposal facilities it may own or operate in the
future, and in such case the Company will provide accruals for future financial
obligations relating to closure and post-closure costs of its 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.
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.
F-25
<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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
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
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 three months ended March 31, 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.
Waste Connections of Idaho, Inc.
On January 30, 1998, the Company acquired all of the outstanding stock of
Waste Connections of Idaho, Inc. ("WCII") for $3 and the assumption of
liabilities in the amount of $1,943. WCII was owned by affiliates of the Company
and commenced operations in September 1997 through the purchase of certain solid
waste collection assets located in Eastern Idaho from Browning-Ferris of Idaho,
Inc. The acquisition has been accounted for in accordance with the purchase
method of accounting.
F-26
<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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
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 WCII
acquisition is as follows:
<TABLE>
<S> <C>
Acquired assets:
Accounts receivable................................... $ 785
Prepaid expenses and other current assets............. 167
Property and equipment................................ 994
Assumed liabilities:
Deferred revenue...................................... (237)
Accounts payable and accrued liabilities.............. (256)
Notes payable......................................... (1,450)
-------
$ 3
=======
</TABLE>
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.
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:
F-27
<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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
<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>
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. 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>
F-28
<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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
3. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1996 and 1997 and March 31, 1998
consists of the following:
<TABLE>
<CAPTION>
PREDECESSORS COMPANY
COMBINED --------------------------
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Land and buildings............ $2,314 $ -- $1,000
Machinery and equipment....... 146 60 761
Rolling stock................. 2,068 2,353 3,612
Containers.................... 1,084 1,995 2,656
Furniture and fixtures........ 137 67 119
------ ------ ------
5,749 4,475 8,148
Less accumulated
depreciation................ (680) (290) (832)
------ ------ ------
$5,069 $4,185 $7,316
====== ====== ======
</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 March 31, 1998 consist of
the following:
<TABLE>
<CAPTION>
PREDECESSORS COMPANY
COMBINED --------------------------
DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1997 1998
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Long-term franchise agreements and
contracts........................... $ -- $ -- $ 725
Non-competition agreement, net........ -- 142 150
Other................................. 369 27 262
---- ---- ------
$369 $169 $1,137
==== ==== ======
</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 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). 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
F-29
<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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
over the term of the agreement (five years). Accumulated amortization amounted
to $8 as of December 31, 1997.
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> 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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
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.
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 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
F-31
<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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
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 March 31, 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 March 31, 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.
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
F-32
<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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
management. The union and management are currently operating under a one-year
negotiating agreement, and, if those negotiations are unsuccessful, the earlier
date on which the union would be permitted to take additional action is July 27,
1998. Such additional action includes calling a strike or, if the Company
agrees, continuing to negotiate or commencing 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. As of December
31, 1997 and March 31, 1998, the Conversion Price was $2.80 per share. Each
share will automatically be converted into common stock immediately upon the
closing of a registered public offering of the Company's common stock with
proceeds to the Company of at least $5.00 per share and aggregate proceeds of at
least $5,000.
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> 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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
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 March 31, 1998, no options to purchase
common stock were exercisable under the Option Plan. In addition, as of December
31, 1997 and March 31, 1998, options for 671,500 and 327,700 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 March 31, 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)............... 343,800 6.13
Forfeited (unaudited)............. -- --
Exercised (unaudited)............. -- --
-------
Outstanding as of March 31, 1998
(unaudited)..................... 872,300 $5.39
=======
</TABLE>
F-34
<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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
The following table summarizes information about stock options outstanding
as of December 31, 1997 and March 31, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
EXERCISE PRICES 1997 1998
--------------- ------------ -----------
(UNAUDITED)
<S> <C> <C>
$ 2.80......................... 376,000 496,000
$ 3.00......................... -- 70,000
$ 5.00......................... 9,500 13,800
$ 6.00......................... -- 19,500
$ 9.50......................... -- 50,000
$10.50......................... 143,000 168,000
$11.00......................... -- 5,000
$12.50......................... -- 50,000
------- -------
528,500 872,300
======= =======
</TABLE>
The weighted average remaining contractual life of stock options
outstanding as of December 31, 1997, was 10 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 three months ended March 31, 1998, the Company recorded deferred
stock compensation of $854 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 $44 was recorded during the three
months ended March 31, 1998 relating to these options, and the remaining $810
will be amortized into expense in future periods.
F-35
<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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
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 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.
Initial Public Offering
In December 1997, the Company's board of directors authorized the filing of
a registration statement with the Securities and Exchange Commission permitting
the Company to sell up to an aggregate of 2,300,000 shares of common stock
(including the underwriters' over-allotment option) to the public. Under the
terms of the offering currently contemplated, the Preferred Stock will be
converted into common stock, prior to or concurrently with the completion of the
offering, and the redemption provisions of the common stock issued in connection
with the Madera acquisition (Note 2) will expire.
F-36
<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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
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>
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>
F-37
<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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
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-38
<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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
11. NET LOSS PER SHARE INFORMATION
The following table sets forth the computation of basic net loss per share
and pro forma basic net loss per share for the period from inception (September
9, 1997) through December 31, 1997 and the three months ended March 31, 1998:
<TABLE>
<CAPTION>
MARCH 31, 1998
DECEMBER 31, 1997 ------------------------------------
--------------------- (UNAUDITED)
PRO FORMA PRO FORMA PRO FORMA
BASIC BASIC BASIC BASIC DILUTED
NET LOSS NET LOSS NET LOSS NET INCOME NET INCOME
PER SHARE PER SHARE PER SHARE PER SHARE PER SHARE
--------- --------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Numerator:
Net income (loss).................. $ (5,066) $ (5,066) $ 76 $ 76 $ 76
Redeemable convertible preferred --
stock accretion................. (531) -- (572) --
--------- --------- --------- --------- ---------
$ (5,597) $ (5,066) $ (496) $ 76 $ 76
========= ========= ========= ========= =========
Denominator:
Weighted average common shares 3,311,111
outstanding..................... 1,872,567 1,872,567 2,311,111 3,311,111
Dilutive effect of stock options 1,024,306
and warrants outstanding........ -- -- -- --
Common shares issuable upon 2,499,998
conversion of preferred stock... -- 2,499,998 -- 2,499,998
--------- --------- --------- --------- ---------
1,872,567 4,372,565 2,311,111 5,811,109 6,835,415
========= ========= ========= ========= =========
$ (2.99) $ (1.16) $ (0.21) $ 0.01 $ 0.01
========= ========= ========= ========= =========
</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 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
F-39
<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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31,
1997 AND 1998 IS UNAUDITED)
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.
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.
14. UNAUDITED PRO FORMA REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
The Company's unaudited pro forma redeemable stock and stockholders' equity
as of March 31, 1998, gives effect to the conversion of the Preferred Stock into
2,499,998 shares of common stock. The conversion of the Preferred Stock into
common stock will occur prior to or concurrently with the completion of the
Company's initial public offering (Note 9). In addition, the redemption
provisions of the common stock issued in connection with the Madera acquisition
(Note 2) will expire upon completion of the initial public offering.
F-40
<PAGE> 108
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-41
<PAGE> 109
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-42
<PAGE> 110
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-43
<PAGE> 111
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-44
<PAGE> 112
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.
F-45
<PAGE> 113
MADERA DISPOSAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
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.
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
F-46
<PAGE> 114
MADERA DISPOSAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
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.
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>
F-47
<PAGE> 115
MADERA DISPOSAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
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.
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>
F-48
<PAGE> 116
MADERA DISPOSAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
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.
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
F-49
<PAGE> 117
MADERA DISPOSAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
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.
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-50
<PAGE> 118
======================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 8
Use of Proceeds...................... 17
Dividend Policy...................... 17
Capitalization....................... 18
Dilution............................. 19
Selected Historical and Pro Forma
Financial and Operating Data....... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 23
Business............................. 33
Management........................... 48
Certain Transactions................. 54
Principal Stockholders............... 56
Description of Capital Stock......... 58
Shares Eligible for Future Sale...... 62
Underwriting......................... 64
Legal Matters........................ 65
Experts.............................. 65
Available Information................ 65
Index to Financial Statements........ F-1
- -------------------------------------------
UNTIL , 1998 (25 DAYS AFTER
THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK
OFFERED HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
===========================================
</TABLE>
======================================================
2,000,000 SHARES
LOGO
COMMON STOCK
-------------------
PROSPECTUS
-------------------
BT ALEX. BROWN
CIBC OPPENHEIMER
, 1998
======================================================
<PAGE> 119
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 8,142
NASD Filing Fee............................................. 3,260
Nasdaq Listing Fee.......................................... 37,000
Accounting Fees and Expenses*............................... 600,000
Printing and Engraving Expenses*............................ 200,000
Legal Fees and Expenses*.................................... 300,000
Transfer Agent and Registrar Fees*.......................... 2,500
Director and Officer Insurance Premiums..................... 18,900
Miscellaneous Expenses*..................................... 30,198
----------
Total*...................................................... $1,200,000
==========
</TABLE>
- ---------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Amended and Restated Certificate of Incorporation (the "Restated
Certificate") of the Company provides that a director will not be personally
liable to the Company or its stockholders for monetary damages for 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 amended.
Section 145(a) of the Delaware Law provides that a corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation) by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of non contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
Section 145(b) of the Delaware Law states that a corporation may indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the
II-1
<PAGE> 120
request or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit is brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 145(c) of the Delaware Law provides that to the extent that a
director, officer, employee or agent of a corporation has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of section 145, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
Section 145(d) of the Delaware Law states that any indemnification under
subsections (a) and (b) of section 145 (unless ordered by a court) shall be made
by the corporation only as authorized in the specific case upon a determination
that indemnification of the director, officer, employee or agent is proper in
the circumstances because he has met the applicable standard of conduct set
forth in subsections (a) and (b). Such determination shall be made (i) by the
board of directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (ii) if such a quorum is
not obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (iii) by the
stockholders.
Section 145(e) of the Delaware Law provides that expenses (including
attorneys' fees) incurred by an officer or director in defending any civil,
criminal, administrative or investigative action, suit or proceeding may be paid
by the corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized in section 145. Such
expenses (including attorneys' fees) incurred by other employees and agents may
be so paid upon such terms and conditions, if any, as the board of directors
deems appropriate.
Section 145(f) of the Delaware Law states that the indemnification and
advancement of expenses provided by, or granted pursuant to, the other
subsections of section 145 shall not be deemed exclusive of any other rights to
which those seeking indemnification or advancement of expenses may be entitled
under any bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office.
Section 145(g) of the Delaware Law provides that a corporation shall have
the power to purchase and maintain insurance on behalf of any person who is or
was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of section 145.
Section 145(j) of the Delaware Law states that the indemnification and
advancement of expenses provided by, or granted pursuant to, section 145 shall,
unless otherwise provided when authorized or ratified, continue as to a person
who has ceased to be a director, officer, employee or agent, and shall inure to
the benefit of the heirs, executors and administrators of such a person.
II-2
<PAGE> 121
Pursuant to Section 145 of the Delaware Law, the Registrant has purchased
insurance on behalf of its present and former directors and officers against any
liability asserted against or incurred by them in such capacity or arising out
of their status as such. The Company has entered into indemnification agreements
with each of its directors and officers providing for mandatory indemnification
and advancement of expenses to the maximum extent permitted by the Delaware Law.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth below is a listing of all sales by the Company of unregistered
securities since the Company was incorporated on September 9, 1997. All such
sales were exempt from registration under the Securities Act, pursuant to
Section 4(2) of the Securities Act (and, as noted below, Regulation D or Rule
701 thereunder), as they were transactions not involving a public offering. The
Company believes that each of the issuances made pursuant to Section 4(2) was
made to a sophisticated investor, who had the financial resources to bear the
risk of the investment and who had the means and opportunity to obtain
information concerning the Company. The consideration paid to the Company in
respect of each issuance was cash, unless otherwise indicated. All sales
described below were made by the Company without the assistance of any
underwriters.
1. In September and October 1997, the Company in a private placement
sold an aggregate of 2,300,000 shares of Common Stock at a price of $0.01
per share and 2,499,998 shares of Series A Preferred Stock at a price of
$2.80 per share to 19 accredited investors, including certain officers and
directors of the Company. Such sales were made in accordance with
Regulation D promulgated under the Securities Act.
2. In September 1997, the Company issued warrants to purchase 200,000
shares of Common Stock, with an exercise price of $0.01 per share, to
Imperial Bank in connection with the credit facility with Imperial Bank
entered into by the Company. Such warrants were issued pursuant to
Regulation D under the Securities Act.
3. In October and November 1997, the Company issued options to purchase
428,500 shares of Common Stock to employees of the Company. Such options
have exercise prices ranging from $2.80 per share to $10.50 per share and a
weighted average exercise price of $5.42 per share. Some of such options
were issued pursuant to Regulation D under the Securities Act and others
were issued pursuant to Rule 701 under the Securities Act.
4. In December 1997, the Company issued warrants to purchase an
aggregate of 841,000 shares of Common Stock to the Company's directors and
options to purchase 100,000 shares of Common Stock to Ronald J.
Mittelstaedt. Such warrants and options have an exercise price of $2.80 per
share and were issued pursuant to Regulation D under the Securities Act.
5. In December 1997 and January 1998, the Company issued warrants to
purchase an aggregate of 15,000 shares of Common Stock to three
consultants, with an exercise price of $5.00 per share, and warrants to
purchase 5,000 shares of Common Stock to a fourth consultant, with an
exercise price of $2.80 per share. Such warrants were issued pursuant to
Rule 701 under the Securities Act.
6. In January 1998, the Company issued warrants to purchase 140,000
shares of Common Stock to BankBoston, N.A., at an exercise price of $2.80
per share, in connection with the Company's credit facility with
BankBoston, N.A. Such warrants were issued pursuant to Regulation D under
the Securities Act.
7. In January and February 1998, the Company issued options to
purchase 104,300 shares of Common Stock to various employees of the
Company, at exercise prices ranging from $2.80 to $10.50 per share, and a
weighted average exercise price of $5.27 per share. Such options were
issued pursuant to Rule 701 and Regulation D under the Securities Act.
II-3
<PAGE> 122
8. In January 1998, the Company issued options to purchase an
aggregate of 30,000 shares of Common Stock to Michael W. Harlan and William
J. Razzouk, at an exercise price of $3.00 per share. Such options were
issued pursuant to Regulation D under the Securities Act.
9. In February 1998, the Company issued to the shareholders of Madera
an aggregate of 1,000,000 shares of Common Stock and warrants to purchase
200,000 shares of Common Stock at an exercise price of $4.00 per share, all
as part of the consideration for the acquisition by the Company of Madera.
Such shares and warrants were issued pursuant to Regulation D under the
Securities Act.
10. In February 1998, the Company issued options to purchase 230,000
shares of Common Stock to Steven Bouck, of which 130,000 are exercisable at
$2.80 per share, 50,000 are exercisable at $9.50 per share, and 50,000 are
exercisable at $12.50 per share. On the same date, the Company issued to
Mr. Bouck warrants to purchase 50,000 shares of Common Stock, at an
exercise price of $2.80 per share, which were exercised in March 1998. Such
options and warrants were issued pursuant to Regulation D under the
Securities Act.
11. In March 1998, the Company issued options to purchase 5,000 shares
of Common Stock to David Goldsmith, a consultant to the Company, at an
exercise price equal to the price to the public of the shares included in
this registration statement. Such options were issued pursuant to Rule 701
and Regulation D under the Securities Act.
12. In February and March 1998, the Company issued options to purchase
39,500 shares of Common Stock to various employees at exercise prices of
$3.00 to $10.50 per share. Such options were issued pursuant to Rule 701
and Regulation D under the Securities Act.
13. In April 1998, the Company issued 23,636 shares of Common Stock to
A-1 Disposal, Inc. in connection with the acquisition of the solid waste
collection assets of that company. Such shares were issued pursuant to
Regulation D under the Securities Act.
14. In April 1998, the Company issued 18,182 shares of Common Stock to
Gwendolyn Sullivan in connection with the acquisition of certain solid
waste collection assets owned by her. Such shares were issued pursuant to
Regulation D under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
A. EXHIBITS.
The following exhibits are filed herewith and made a part hereof:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C>
1.1* Form of Underwriting Agreement among the Registrant and the
Underwriters
3.1** Amended and Restated Certificate of Incorporation of the
Company, in effect as of the date hereof
3.2** Amended and Restated By-laws of the Company, in effect as of
the date hereof
4.1 Form of Common Stock Certificate
5.1* Opinion of Shartsis, Friese & Ginsburg LLP
10.1+** Revolving Credit Agreement, dated as of January 30, 1998,
between the Company and various banks represented by
BankBoston, N.A
10.2** 1997 Stock Option Plan
10.3** Form of Option Agreement(1)
10.4** Form of Warrant Agreement(2)
10.5** Warrant Agreement and related Anti-Dilution Agreement issued
to Imperial Bank
10.6** Warrant Agreement and related Anti-Dilution Agreement issued
to BankBoston, N.A
</TABLE>
II-4
<PAGE> 123
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<S> <C>
10.7** Form of Stock Purchase Agreement dated as of September 30,
1997(3)
10.8** Form of Second Amended and Restated Investors' Rights
Agreement dated as of September 30, 1997(3)
10.9** Form of Stockholders' Agreement dated as of September 30,
1997(3)
10.10** Employment Agreement among the Company, J. Bradford Bishop,
Frank W. Cutler, James N. Cutler, Jr. and Ronald J.
Mittelstaedt, dated as of October 1, 1997
10.11** First Amended Employment Agreement between the Company and
Darrell Chambliss, dated as of October 1, 1997
10.12** First Amended Employment Agreement between the Company and
Michael Foos, dated as of October 1, 1997
10.13** First Amended Employment Agreement between the Company and
Eric Moser, dated as of October 1, 1997
10.14** Employment Agreement between the Company and Steven Bouck,
dated as of February 1, 1998
10.15** Employment Agreement between the Company and Eugene V.
Dupreau, dated as of February 23, 1998
10.16** Employment Agreement between the Company and Charles B.
Youngclaus, dated as of February 23, 1998
10.17+** Purchase and Sale Agreement, dated as of September 29, 1997,
between Browning-Ferris Industries, Inc., Browning-Ferris,
Inc. and Browning-Ferris Industries of Idaho, Inc., as
Sellers, and the Company, Waste Connections of Idaho, Inc.
and Continental Paper Recycling, L.L.C. as Buyers
10.18** Stock Purchase Agreement, dated as of January 26, 1998,
among the Company, Waste Connections of Idaho, Inc. and the
shareholders of Waste Connections of Idaho, Inc.
10.19+** Stock Purchase Agreement, dated as of February 4, 1998,
among the Company and the shareholders of Madera Disposal
Company, Inc.
10.20+** Asset Purchase Agreement, dated as of March 1, 1998, among
the Company, Waste Connections of Idaho, Inc., Hunter
Enterprises, Inc. and the shareholder of Hunter Enterprises,
Inc.
10.21** Form of Indemnification Agreement entered into by the
Company and each of its directors and officers
10.22** Asset Purchase Agreement, dated as of April 8, 1998, between
Waste Connections, Inc., Waste Connections of Wyoming, Inc.,
A-1 Disposal, Inc., David Jones and Thomas Fries.
10.23** Asset Purchase Agreement, dated as of April 8, 1998, between
Waste Connections, Inc., Waste Connections of Wyoming, Inc.
and Gwendolyn L. Sullivan.
11* Statement re: Computation of per share earnings
21.1** Subsidiaries of the Registrant
23.1* Consent of Shartsis, Friese & Ginsburg LLP (included in
opinion filed as Exhibit 5.1)
23.2 Consent of Ernst & Young LLP, Independent Auditors
23.3* Consent of Williams, Kastner & Gibbs PLLC
24.1** Power of Attorney (included in Part II of the Registration
Statement under the caption "Signatures")
27.1** Financial Data Schedule
</TABLE>
II-5
<PAGE> 124
- ---------------
* To be filed by amendment.
** Previously filed.
+ Filed without exhibits and schedules (to be provided supplementally on request
of the Commission).
(1) Pursuant to the 1997 Stock Option Plan, the Company issued options in this
form to the following officers of the Company (or in certain cases to an
entity controlled by such individual) for the number of shares of Common
Stock indicated: Darrell W. Chambliss (150,000); Michael R. Foos (150,000);
Ronald J. Mittelstaedt (100,000); Eric J. Moser (85,000); Steven F. Bouck
(230,000); Eugene V. Dupreau (10,000) and Charles B. Youngclaus (10,000).
The Company also issued options in this form to the following directors of
the Company: Michael W. Harlan (15,000); and William J. Razzouk (15,000).
(2) The Company issued warrants in this form to the following directors of the
Company (or in certain cases to an entity controlled by such individual) for
the number of shares of Common Stock indicated: James N. Cutler, Jr.
(247,000); J. Bradford Bishop (247,000); Ronald J. Mittelstaedt (100,000).
The Company also issued warrants in this form as follows: warrants to
purchase 247,000 shares of Common Stock to Board consultant Frank W. Cutler;
warrants to purchase an aggregate of 200,000 shares of Common Stock to the
shareholders of Madera in connection with the Company's acquisition of
Madera; warrants to purchase 20,000 shares of Common Stock to four
consultants to the Company; and warrants to purchase 50,000 shares of Common
Stock to Steven Bouck.
(3) Each purchaser of shares in the Company's September 1997 private placement
of 2,300,000 shares of Common Stock and 2,499,998 shares of Series A
Preferred Stock entered into a Stock Purchase Agreement, Investors' Rights
Agreement and Stockholders' Agreement in these forms with respect to the
shares purchased. Subsequent holders of the Company's Common Stock have also
become parties to the Investors' Rights and Stockholders' Agreements.
B. FINANCIAL STATEMENT SCHEDULE.
The following financial statement schedule is filed herewith and made a
part hereof:
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-6
<PAGE> 125
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE> 126
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Roseville, State of California, on May 6, 1998.
WASTE CONNECTIONS, INC.
By: /s/ RONALD J. MITTELSTAEDT
------------------------------------
Ronald J. Mittelstaedt
President, Chief Executive Officer
and Chairman
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities indicated on May 6, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RONALD J. MITTELSTAEDT President, Chief Executive May 6, 1998
- ----------------------------------------------------- Officer and Chairman
Ronald J. Mittelstaedt
/s/ EUGENE V. DUPREAU* Director and Vice President -- May 6, 1998
- ----------------------------------------------------- Madera
Eugene V. Dupreau
/s/ MICHAEL W. HARLAN* Director May 6, 1998
- -----------------------------------------------------
Michael W. Harlan
/s/ WILLIAM J. RAZZOUK* Director May 6, 1998
- -----------------------------------------------------
William J. Razzouk
/s/ STEVEN F. BOUCK* Executive Vice President and May 6, 1998
- ----------------------------------------------------- Chief Financial Officer
Steven F. Bouck
/s/ MICHAEL R. FOOS* Vice President and Corporate May 6, 1998
- ----------------------------------------------------- Controller
Michael R. Foos
* /s/ RONALD J. MITTELSTAEDT May 6, 1998
- -----------------------------------------------------
Attorney-in-Fact
</TABLE>
II-8
<PAGE> 127
WASTE CONNECTIONS, INC. AND PREDECESSORS
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
----------------------- DEDUCTIONS
BALANCE AT CHARGED TO CHARGED TO (WRITE-OFFS, BALANCE
BEGINNING COSTS AND OTHER NET OF AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS COLLECTIONS) OF PERIOD
----------- ---------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Deducted from asset accounts:
Allowance for doubtful accounts:
Fibres International, Inc.:
January 1, 1995 through
November 30, 1995........... $ 18 $ 10 $ -- $ -- $ 28
The Disposal Group Combined:
Year ended December 31, 1995... 73 139 -- (99) 113
Period from January 1, 1996
through July 31, 1996....... 113 72 -- (94) 91
Predecessors Combined:
One month ended December 31,
1995........................ 28 -- -- -- 28
Period ended December 31,
1996........................ 28 61 -- (8) 81
Nine months ended September 30,
1997........................ 81 139 -- (97) 123
Waste Connections, Inc.:
Period from inception
(September 9, 1997) through
December 31, 1997........... -- 19 -- -- 19
</TABLE>
<PAGE> 128
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
-------- ----------- ------
<S> <C> <C>
1.1* Form of Underwriting Agreement among the Registrant and the
Underwriters
3.1** Amended and Restated Certificate of Incorporation of the
Company, in effect as of the date hereof
3.2** Amended and Restated By-laws of the Company, in effect as of
the date hereof
4.1 Form of Common Stock Certificate
5.1* Opinion of Shartsis, Friese & Ginsburg LLP
10.1+** Revolving Credit Agreement, dated as of January 30, 1998,
between the Company and various banks represented by
BankBoston, N.A
10.2** 1997 Stock Option Plan
10.3** Form of Option Agreement(1)
10.4** Form of Warrant Agreement(2)
10.5** Warrant Agreement and related Anti-Dilution Agreement issued
to Imperial Bank
10.6** Warrant Agreement and related Anti-Dilution Agreement issued
to BankBoston, N.A
10.7** Form of Stock Purchase Agreement dated as of September 30,
1997(3)
10.8** Form of Investors' Rights Agreement dated as of September
30, 1997(3)
10.9** Form of Stockholders' Agreement dated as of September 30,
1997(3)
10.10** Employment Agreement among the Company, J. Bradford Bishop,
Frank W. Cutler, James N. Cutler, Jr. and Ronald J.
Mittelstaedt, dated as of October 1, 1997
10.11** First Amended Employment Agreement between the Company and
Darrell Chambliss, dated as of October 1, 1997
10.12** First Amended Employment Agreement between the Company and
Michael Foos, dated as of October 1, 1997
10.13** First Amended Employment Agreement between the Company and
Eric Moser, dated as of October 1, 1997
10.14** Employment Agreement between the Company and Steven Bouck,
dated as of February 1, 1998
10.15** Employment Agreement between the Company and Eugene V.
Dupreau, dated as of February 23, 1998
10.16** Employment Agreement between the Company and Charles B.
Youngclaus, dated as of February 23, 1998
10.17+** Purchase and Sale Agreement, dated as of September 29, 1997,
between Browning-Ferris Industries, Inc., Browning-Ferris,
Inc. and Browning-Ferris Industries of Idaho, Inc., as
Sellers, and the Company, Waste Connections of Idaho, Inc.
and Continental Paper Recycling, L.L.C. as Buyers
10.18** Stock Purchase Agreement, dated as of January 26, 1998,
among the Company, Waste Connections of Idaho, Inc. and the
shareholders of Waste Connections of Idaho, Inc.
10.19+** Stock Purchase Agreement, dated as of February 4, 1998,
among the Company and the shareholders of Madera Disposal
Company, Inc.
</TABLE>
<PAGE> 129
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
-------- ----------- ------
<S> <C> <C>
10.20+** Asset Purchase Agreement, dated as of March 1, 1998, among
the Company, Waste Connections of Idaho, Inc., Hunter
Enterprises, Inc. and the shareholder of Hunter Enterprises,
Inc.
10.21** Form of Indemnification Agreement entered into by the
Company and each of its directors and officers
10.22** Asset Purchase Agreement, dated as of April 8, 1998, between
Waste Connections, Inc., Waste Connections of Wyoming, Inc.,
A-1 Disposal, Inc., David Jones and Thomas Fries.
10.23** Asset Purchase Agreement, dated as of April 8, 1998, between
Waste Connections, Inc., Waste Connections of Wyoming, Inc.
and Gwendolyn L. Sullivan.
11* Statement re: Computation of per share earnings
21.1** Subsidiaries of the Registrant
23.1* Consent of Shartsis, Friese & Ginsburg LLP (included in
opinion filed as Exhibit 5.1)
23.2 Consent of Ernst & Young LLP, Independent Auditors
23.3* Consent of Williams, Kastner & Gibbs PLLC
24.1** Power of Attorney (included in Part II of the Registration
Statement under the caption "Signatures")
27.1** Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
+ Filed without exhibits and schedules (to be provided supplementally on
request of the Commission).
(1) Pursuant to the 1997 Stock Option Plan, the Company issued options in this
form to the following officers of the Company (or in certain cases to an
entity controlled by such individual) for the number of shares of Common
Stock indicated: Darrell W. Chambliss (150,000); Michael R. Foos (150,000);
Ronald J. Mittelstaedt (100,000); Eric J. Moser (85,000); Steven F. Bouck
(230,000); Eugene V. Dupreau (10,000) and Charles B. Youngclaus (10,000).
The Company also issued options in this form to the following directors of
the Company: Michael W. Harlan (15,000); and William J. Razzouk (15,000).
(2) The Company issued warrants in this form to the following directors of the
Company (or in certain cases to an entity controlled by such individual) for
the number of shares of Common Stock indicated: James N. Cutler, Jr.
(247,000); J. Bradford Bishop (247,000); Ronald J. Mittelstaedt (100,000).
The Company also issued warrants in this form as follows: warrants to
purchase 247,000 shares of Common Stock to Board consultant Frank W. Cutler;
warrants to purchase an aggregate of 200,000 shares of Common Stock to the
shareholders of Madera in connection with the Company's acquisition of
Madera; warrants to purchase 20,000 shares of Common Stock to four
consultants to the Company; and warrants to purchase 50,000 shares of Common
Stock to Steven Bouck.
(3) Each purchaser of shares in the Company's September 1997 private placement
of 2,300,000 shares of Common Stock and 2,499,998 shares of Series A
Preferred Stock entered into a Stock Purchase Agreement, Investors' Rights
Agreement and Stockholders' Agreement in these forms with respect to the
shares purchased. Subsequent holders of the Company's Common Stock have also
become parties to the Investors' Rights and Stockholders' Agreements.
<PAGE> 130
APPENDIX--DESCRIPTION OF GRAPHICAL MATERIALS
INSIDE COVER
UPPER LEFT PHOTO
Caption above: "COLLECTION" - Picture of a rear end loader.
UPPER RIGHT PHOTO
Caption above: "TRANSFER" - Picture of a transfer station and transfer trailer.
LOWER LEFT PHOTO
Caption below: "DISPOSAL" - Picture of lined landfill.
LOWER RIGHT PHOTO
Caption below: "RECYCLING" - Picture of a recycling picking line.
INSIDE GATE-FOLD
OVERVIEW
Map of western United States with areas of operations highlighted and notations
of locations of the company's facilities and types of operations. Attached to
various locations are photos depicting elements of each location.
UPPER LEFT PHOTO
Caption below: "ISSAQUAH & MALTBY, WASHINGTON - Waste Connections of Washington
has two operations east of Seattle: one in Issaquah and one in Maltby. These two
operations serve more than 20,000 customers in King and Snohomish Counties under
one "G" Certificate and twelve municipal contracts. According to the Urban
Growth Act of Washington, these Seattle suburbs are projected to have strong
population growth and development over the next 5 years."
Picture of a front end loader lifting a Company container.
UPPER RIGHT PHOTO
Caption below: "VANCOUVER, WASHINGTON - Waste Connections of Washington is the
exclusive "G" certificate provider to more than 50,000 customers in Clark
County, Washington, and also serves more than 25,000 customers in the city of
Vancouver. Clark County has been the fastest growing county in the state of
Washington over the past five years, and in 1997 was recognized as one of the
ten fastest growing counties in the nation. Clark County and the city of
Vancouver are located approximately eight miles north of Portland, Oregon and
represent the southern boundary of the state of Washington, with the Columbia
River actually separating the two states."
Picture of the Columbia River
LOWER LEFT PHOTO
Caption below: "MADERA COUNTY, CALIFORNIA - Madera County is the third fastest
growing county in the state of California. Madera Disposal Systems serves more
than 10,000 residential, commercial and industrial customers in Madera County
and the city of Chowchilla. Madera Disposal Systems is the exclusive waste
services and recycling provider within the unincorporated areas of Madera
County, with a franchise for collection, two transfer stations, a MRF, and a
landfill operating contract."
<PAGE> 131
Picture of vineyard in central California.
LOWER RIGHT PHOTO
Caption below: "IDAHO FALLS & POCATELLO, IDAHO - Waste Connections of Idaho is
the largest waste services provider in Eastern Idaho, serving approximately 65%
of the market. In 1997, Idaho Falls had a population growth of more than 12%.
Eastern Idaho is served by more than 15 municipally owned landfills. In March of
1998, Waste Connections of Idaho completed the acquisition of Hunter Enterprises
as a tuck-in to its existing operation."
Picture of roll off truck in front of residential construction site.
<PAGE> 1
Exhibit 4.1
NUMBER [LOGO] SHARES
WCN WASTE CONNECTIONS INC.
THIS CERTIFICATE IS INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN
TRANSFERABLE IN OF THE STATE OF DELAWARE DEFINITIONS AND A
BOSTON, MA OR STATEMENT AS TO RIGHTS,
NEW YORK, NY PREFERENCES, PRIVILEGES
AND RESTRICTIONS, IF ANY
This Certifies that CUSIP 941053 10 0
SPECIMEN
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK,
$0.01 PAR VALUE PER SHARE, OF
WASTE CONNECTIONS, INC.
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized Attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[SIG] [SEAL] [SIG]
CHIEF FINANCIAL OFFICER PRESIDENT AND
AND ASSISTANT SECRETARY CHIEF EXECUTIVE OFFICER
COUNTERSIGNED AND REGISTERED:
BankBoston, N.A.
TRANSFER AGENT AND REGISTRAR
BY: [SIG]
AUTHORIZED SIGNATURE
<PAGE> 2
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established, from time to time, by the Certificate
of Incorporation of the Corporation and by any certificate of determination,
the number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common UNIF GIFT MIN ACT --
TEN ENT -- as tenants by the entireties ___________Custodian__________
JT TEN -- as joint tenants with right (Cust) (Minor)
of survivorship and not as under Uniform Gifts to Minors
tenants in common Act __________________________
(State)
UNIF TRF MIN ACT --
___________Custodian (until
age _________)
________under Uniform Transfers
(Minor)
to Minors Act _________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ___________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[____________________________________]
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
__________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated _____________________________
X________________________________________
X________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By_______________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 6, 1998, in Amendment No. 2 to the Registration
Statement (Form S-1 No. 333-48029) and related Prospectus of Waste Connections,
Inc. for the registration of 2,300,000 shares of its common stock.
Our audits also included the financial statement schedule of Waste Connections,
Inc. and Predecessors listed in Item 16.b. This schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
We also consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 20, 1998, with respect to the financial
statements of Madera Disposal Systems, Inc. included in Amendment No. 2 to the
Registration Statement (Form S-1 No. 333-48029) and related Prospectus of Waste
Connections, Inc. for the registration of 2,300,000 shares of its common stock.
ERNST & YOUNG LLP
Sacramento, California
April 30, 1998
