<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 5)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, For Use of the
[X] Definitive Proxy Statement Commission Only (as permitted
[ ] Definitive Additional Materials by Rule 14a-6(e)(2))
[ ] Soliciting Material Pursuant to Rule
14a-11(c) or Rule 14a-12
WASTE CONNECTIONS, INC.
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
------------------------------------------------
(Name of Person(s) Filing Proxy Statement,
if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[X] Fee paid previously with preliminary materials: $10,725 (paid with
original October 26, 1998 filing).
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement no.:
(3) Filing Party:
(4) Date Filed:
<PAGE> 2
WASTE CONNECTIONS, INC.
2260 DOUGLAS BOULEVARD, SUITE 280
ROSEVILLE, CALIFORNIA 95661
January 8, 1999
Dear Stockholder of Waste Connections, Inc.:
You are invited to attend a Special Meeting of Stockholders of Waste
Connections, Inc. ("WCI") to be held on January 19, 1999, at 9:00 a.m., Pacific
Time. The Special Meeting will be held at Courtyard by Marriott, 1920 Taylor
Road, Roseville, California.
At the Special Meeting, you will be asked to approve (i) the issuance of
shares of Common Stock of WCI ("WCI Common Stock") pursuant to an Agreement and
Plan of Merger, dated as of October 22, 1998 (the "Merger Agreement"), by and
among WCI, WCI Acquisition Corporation I ("Merger Sub I"), WCI Acquisition
Corporation II ("Merger Sub II"), WCI Acquisition Corporation III ("Merger Sub
III"), WCI Acquisition Corporation IV ("Merger Sub IV"), four Washington
corporations that are wholly owned subsidiaries of WCI (collectively, the
"Merger Subs"), Murrey's Disposal Company, Inc., a Washington corporation
("Murrey's"), American Disposal Company, Inc., a Washington corporation
("American"), D.M. Disposal Co., Inc., a Washington corporation ("DM"), Tacoma
Recycling Company, Inc., a Washington corporation ("Tacoma," and collectively
with Murrey's, American and DM, the "Corporations"), the Murrey Trust UTA August
5, 1993, as amended, the Bonnie L. Murrey Revocable Trust UTA August 5, 1993, as
amended, Donald J. Hawkins and Irmgard R. Wilcox (the "Merger Proposal"); and
(ii) the amendment of WCI's 1997 Stock Option Plan to increase the number of
shares reserved for issuance under that Plan to 12% of the shares of WCI Common
Stock outstanding at any given time (the "Option Plan Proposal").
Under the Merger Agreement, Merger Subs I, II, III and IV would merge with
and into Murrey's, American, DM and Tacoma, respectively (each, a "Merger" and
collectively, the "Mergers"), and each Corporation would become a wholly owned
subsidiary of WCI. The shares of the Corporations' common stock would be
converted into 2,750,000, subject to adjustment up to 3,250,000, shares of WCI
Common Stock, of which the shareholders of Murrey's, American, DM and Tacoma
would receive 42%, 13%, 28% and 17%, respectively. The total shares of WCI
Common Stock issued to the Corporations' shareholders would represent
approximately 22.8%, or 25.9% if 3,250,000 shares are issued, of the total
shares of WCI Common Stock that would be outstanding immediately after the
Mergers.
The Mergers cannot be completed unless a number of conditions are
satisfied, including obtaining the approval of the WCI stockholders and
obtaining any necessary regulatory waivers or approvals. The accompanying Proxy
Statement includes a summary of the basic terms and conditions of the Mergers,
certain financial and other information related to WCI and the Corporations and
a copy of the Merger Agreement. The affirmative vote of a majority of the total
votes cast in person or by proxy at the Special Meeting is necessary to approve
the issuance of shares of WCI Common Stock in connection with the Mergers. If
the WCI stockholders approve the Mergers, and other conditions are satisfied,
WCI expects the Mergers to be consummated on or about January 19, 1999.
Your Board of Directors has unanimously approved the terms and conditions
of the Mergers and the Merger Agreement. The Board has also received an opinion
from BT Alex. Brown Incorporated (a copy of which is included in the
accompanying Proxy Statement) that the consideration to be paid by WCI for the
Mergers under the Merger Agreement is fair to WCI from a financial point of
view. THE BOARD OF DIRECTORS OF WCI BELIEVES THAT THE PROPOSED MERGERS WITH
MURREY'S, AMERICAN, DM AND TACOMA ARE ADVISABLE AND IN THE BEST INTERESTS OF WCI
AND ITS STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF
THE ISSUANCE OF SHARES OF WCI COMMON STOCK IN CONNECTION WITH THE MERGERS.
<PAGE> 3
The Board of Directors of WCI believes that the number of shares of WCI
Common Stock available for grant under the Waste Connections, Inc. 1997 Stock
Option Plan must be increased in order for WCI to attract and retain valuable
employees, consultants and directors through the grant of stock options. The
affirmative vote of a majority of the total votes cast in person or by proxy at
the Special Meeting is necessary to approve the Option Plan Proposal. THE BOARD
OF DIRECTORS OF WCI HAS UNANIMOUSLY APPROVED THE OPTION PLAN PROPOSAL AND
RECOMMENDS THAT YOU VOTE IN FAVOR OF THE OPTION PLAN PROPOSAL.
You should read carefully the accompanying Notice of Special Meeting of
Stockholders and the Proxy Statement for details of the Merger and Option Plan
Proposals.
Regardless of the number of shares you hold or whether you plan to attend
the Special Meeting, we urge you to complete, sign, date and return the enclosed
proxy card immediately. If you attend the Special Meeting, you may vote in
person if you wish, even if you have previously returned your proxy card.
Sincerely,
Ronald J. Mittelstaedt
Chairman of the Board
January 8, 1999
<PAGE> 4
WASTE CONNECTIONS, INC.
2260 DOUGLAS BOULEVARD, SUITE 280
ROSEVILLE, CALIFORNIA 95661
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JANUARY 19, 1999
To the Stockholders of Waste Connections, Inc.:
Notice is hereby given that a Special Meeting of Stockholders of Waste
Connections, Inc. ("WCI") will be held at Courtyard by Marriott, 1920 Taylor
Road, Roseville, California, on January 19, 1999, at 9:00 a.m., Pacific Time, to
consider and act upon the following proposals (the "Proposals"):
1. To approve the issuance of 2,750,000, subject to adjustment up to
3,250,000, shares of Common Stock of WCI ("WCI Common Stock") under the
Agreement and Plan of Merger, dated as of October 22, 1998 (the "Merger
Agreement"), by and among WCI, WCI Acquisition Corporation I ("Merger Sub
I"), WCI Acquisition Corporation II ("Merger Sub II"), WCI Acquisition
Corporation III ("Merger Sub III"), WCI Acquisition Corporation IV ("Merger
Sub IV"), four Washington corporations that are wholly owned subsidiaries
of WCI (collectively, "Merger Subs"), Murrey's Disposal Company, Inc., a
Washington corporation ("Murrey's"), American Disposal Company, Inc., a
Washington corporation ("American"), D.M. Disposal Co., Inc., a Washington
corporation ("DM"), Tacoma Recycling Company, Inc., a Washington
corporation ("Tacoma," and collectively with Murrey's, American and DM, the
"Corporations"), the Murrey Trust UTA August 5, 1993 , as amended, the
Bonnie L. Murrey Revocable Trust UTA August 5, 1993, as amended, Donald J.
Hawkins and Irmgard R. Wilcox, providing for, among other things, the
mergers of Merger Subs I, II, III and IV with and into Murrey's, American,
DM and Tacoma, respectively (the "Merger Proposal"); and
2. To approve an amendment to WCI's 1997 Stock Option Plan to increase
the number of shares reserved for issuance under that Plan to 12% of the
shares of WCI Common Stock outstanding at any given time (the "Option Plan
Proposal").
The meeting may be postponed or adjourned from time to time, and at any
reconvened meeting action may be taken on the Proposals without further notice
to WCI's stockholders unless required by WCI's Bylaws.
Only stockholders of record at the close of business on December 18, 1998
are entitled to notice of and to vote on the Proposals at the Special Meeting
and any postponements or adjournments thereof. The affirmative vote of a
majority of the total votes cast in person or by proxy at the Special Meeting is
required to approve each of the Merger Proposal and the Option Plan Proposal.
The Merger Proposal and the Option Plan Proposal and other related matters are
more fully described in the accompanying Proxy Statement and its Appendices,
which all stockholders should read carefully.
By Order of the Board of Directors,
Darrell W. Chambliss
Corporate Secretary
Roseville, California
January 8, 1999
WHETHER OR NOT YOU INTEND TO BE PRESENT AT THE SPECIAL MEETING, PLEASE SIGN AND
DATE THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED PREPAID ENVELOPE. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY VOTE EITHER IN PERSON OR BY YOUR PROXY.
<PAGE> 5
WASTE CONNECTIONS, INC.
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PROXY STATEMENT
Waste Connections, Inc., a Delaware corporation ("WCI"), is furnishing this
Proxy Statement to its stockholders in connection with the solicitation of
proxies by its Board of Directors to be voted at a special meeting of WCI
stockholders (the "Special Meeting") scheduled to be held on January 19, 1999,
at 9:00 a.m., Pacific Time, at Courtyard by Marriott, 1920 Taylor Road,
Roseville, California, and at any adjournment or postponement thereof.
At the Special Meeting, the WCI stockholders will be asked to consider and
vote upon a proposal (the "Merger Proposal") to approve the issuance of shares
of WCI Common Stock pursuant to an Agreement and Plan of Merger, dated as of
October 22, 1998 (the "Merger Agreement"), by and among WCI, WCI Acquisition
Corporation I ("Merger Sub I"), WCI Acquisition Corporation II ("Merger Sub
II"), WCI Acquisition Corporation III ("Merger Sub III"), WCI Acquisition
Corporation IV ("Merger Sub IV"), four Washington corporations that are wholly
owned subsidiaries of WCI (collectively, the "Merger Subs"), Murrey's Disposal
Company, Inc., a Washington corporation ("Murrey's"), American Disposal Company,
Inc., a Washington corporation ("American"), D.M. Disposal Co., Inc., a
Washington corporation ("DM"), Tacoma Recycling Company, Inc., a Washington
corporation ("Tacoma," and collectively with Murrey's, American and DM, the
"Corporations"), the Murrey Trust UTA August 5, 1993, as amended (the "Murrey
Trust"), the Bonnie L. Murrey Revocable Trust UTA August 5, 1993, as amended
(the "Bonnie Trust"), Donald J. Hawkins and Irmgard R. Wilcox (the Murrey Trust,
the Bonnie Trust, Donald J. Hawkins and Irmgard R. Wilcox are referred to
collectively herein as the "Shareholders"), providing for the mergers of Merger
Subs I, II, III and IV with and into Murrey's, American, DM and Tacoma,
respectively (the "Mergers"). The Mergers cannot be completed unless the WCI
stockholders approve them.
When the Mergers are completed, each of the Corporations will be a wholly
owned subsidiary of WCI. WCI will issue to the Shareholders a total of
2,750,000, subject to adjustment up to 3,250,000, shares of WCI Common Stock,
depending on the closing price of the WCI Common Stock immediately prior to the
Closing Date. The manner in which this number was calculated is described in
"Certain Terms of the Mergers" and in the Merger Agreement, which is attached to
this Proxy Statement. Based on the number of shares of WCI Common Stock
outstanding as of October 23, 1998, approximately 12.1 million, and possibly up
to approximately 12.6 million, shares of WCI Common Stock will be outstanding
after the Mergers are completed, of which approximately 22.8%, or approximately
25.9% if 3,250,000 shares are issued, will be owned by the Shareholders and
approximately 77.2%, or approximately 74.1% if 3,250,000 shares are issued, will
be owned by current WCI stockholders.
At the Special Meeting, the WCI stockholders will also be asked to vote on a
proposal to amend WCI's 1997 Stock Option Plan to increase the number of shares
of WCI reserved for issuance under that Plan to 12% of the shares of WCI Common
Stock outstanding at any given time (the "Option Plan Proposal").
This Proxy Statement and the accompanying form of proxy are first being
mailed to stockholders of WCI on or about January 8, 1999. A stockholder who has
given a proxy may revoke it at any time before its exercise.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED WITH RESPECT TO THE MERGER AND OPTION PLAN PROPOSALS.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY WCI OR THE CORPORATIONS. THIS PROXY STATEMENT DOES NOT CONSTITUTE
A SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH A SOLICITATION. THE DELIVERY OF THIS PROXY STATEMENT
SHALL NOT, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF WCI OR THE CORPORATIONS SINCE THE DATE HEREOF OR THAT
THE INFORMATION IN THIS PROXY STATEMENT IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF. ALL INFORMATION HEREIN WITH RESPECT TO WCI HAS BEEN FURNISHED
BY WCI AND ALL INFORMATION HEREIN WITH RESPECT TO THE CORPORATIONS HAS BEEN
FURNISHED BY THE CORPORATIONS.
------------------------
THE DATE OF THIS PROXY STATEMENT IS JANUARY 8, 1999.
<PAGE> 6
TABLE OF CONTENTS
<TABLE>
<S> <C>
AVAILABLE INFORMATION....................................... 1
FORWARD-LOOKING STATEMENTS.................................. 1
SUMMARY..................................................... 2
The Companies........................................ 2
The Special Meeting.................................. 3
The Mergers.......................................... 4
The Option Plan Proposal............................. 6
Market Price and Dividend Information................ 7
Comparative Unaudited Per Share Data................. 7
RISK FACTORS................................................ 9
THE MERGERS AND RELATED TRANSACTIONS........................ 11
General Description of the Mergers................... 11
Background of the Mergers............................ 11
WCI's Reasons for the Mergers........................ 13
Recommendation of the Board of Directors of WCI...... 13
The Corporations' Reasons for the Mergers............ 13
Opinion of BT Alex. Brown, Financial Advisor to
WCI................................................. 14
Material Federal Income Tax Consequences............. 19
Accounting Treatment................................. 20
Government and Regulatory Approvals.................. 20
Interests of Certain Persons in the Mergers.......... 20
Restrictions on Resales by Affiliates................ 20
MATERIAL TERMS OF THE MERGERS............................... 21
Effective Time of the Mergers........................ 21
Manner and Basis for Converting Shares............... 21
Conditions to the Mergers............................ 21
Cooperation.......................................... 22
Representations and Warranties of WCI and the Merger
Subs and the Corporations and the Shareholders...... 22
Conduct of the Business of WCI and the Corporations
Prior to the Mergers................................ 22
No Solicitation of Acquisition Transactions.......... 24
Conduct of the Business of the Combined Companies
Following the Mergers............................... 24
Termination or Amendment............................. 24
Transaction Fees..................................... 25
Indemnification...................................... 25
Other Agreements..................................... 26
AMENDMENT TO WCI'S 1997 STOCK OPTION PLAN................... 28
General.............................................. 28
Summary of 1997 Stock Option Plan.................... 28
Options Granted in 1998 under the Plan............... 29
Federal Income Tax Consequences of the Plan.......... 29
Board Recommendation................................. 30
</TABLE>
i
<PAGE> 7
<TABLE>
<S> <C>
WCI SPECIAL MEETING......................................... 31
Date, Time and Place of the Meeting.................. 31
Purpose of the Meeting............................... 31
Record Date and Outstanding Shares................... 31
Voting and Revocation of Proxies..................... 31
Vote Required for Approval........................... 31
Solicitation of Proxies.............................. 32
Other Matters........................................ 32
WCI......................................................... 33
Business............................................. 33
Selected Historical and Pro Forma Financial and
Operating Data...................................... 47
Management's Discussion And Analysis Of Financial
Condition And Results Of Operations................. 52
Management........................................... 62
Principal Stockholders............................... 64
THE CORPORATIONS............................................ 66
Introduction......................................... 66
History.............................................. 66
Business Strategy.................................... 67
Service and Customer Base............................ 67
Operations........................................... 68
Competition.......................................... 68
Risk Management, Insurance and Performance Bonds..... 68
Property, Facilities and Equipment................... 69
Employees............................................ 69
Executive Officers and Directors..................... 69
Legal Proceedings.................................... 70
Selected Historical And Operating Data............... 70
Management's Discussion And Analysis Of Financial
Condition And Results Of Operations................. 71
EXPERTS..................................................... 73
PROPOSALS OF STOCKHOLDERS FOR ANNUAL MEETING................ 74
OTHER MATTERS............................................... 74
INDEX TO FINANCIAL STATEMENTS............................... F-1
</TABLE>
ii
<PAGE> 8
AVAILABLE INFORMATION
WCI files annual, quarterly and special reports and other information with
the Securities and Exchange Commission (the "Commission"). You may read and copy
any reports, statements or other information we file at the Commission's public
reference rooms in Washington, D.C., Chicago, Illinois and New York, New York.
Please call the Commission at 1-800-732-0330 for further information on the
public reference rooms. Our Commission filings are also available to the public
from commercial document retrieval services and at the web site maintained by
the Commission at "http://www.sec.gov."
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROXY STATEMENT
TO VOTE ON THE MERGER AGREEMENT AND THE MERGERS. WE HAVE NOT AUTHORIZED ANYONE
TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS
PROXY STATEMENT. YOU SHOULD NOT ASSUME THAT THE INFORMATION IN THE PROXY
STATEMENT IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE OF THIS PROXY
STATEMENT, AND NOTHING SHOULD CREATE ANY IMPLICATION TO THE CONTRARY.
FORWARD-LOOKING STATEMENTS
This Proxy Statement contains certain forward-looking statements that
involve risks and uncertainties. Discussions that contain forward-looking
statements appear in the Summary and under the captions "The Mergers and Related
Transactions -- Background of the Mergers," "-- WCI's Reasons for the Mergers,"
and "-- Recommendation of the Board of Directors of WCI," as well as in the
Proxy Statement generally. The cautionary statements in this Proxy Statement
apply to all related forward-looking statements wherever they appear in this
Proxy Statement. WCI's actual results could differ materially from those
discussed in this Proxy Statement as a result of various factors, including
without limitation those discussed under the caption "Risk Factors" and
elsewhere in this Proxy Statement. WCI assumes no obligation to update the
forward-looking statements in this Proxy Statement to reflect actual results,
changes in assumptions or changes in other factors that affect the
forward-looking statements.
1
<PAGE> 9
SUMMARY
This summary highlights selected information from this Proxy Statement and
may not contain all of the information that is important to you. To understand
the Mergers fully and for a more complete description of the Mergers' terms, you
should read carefully this entire document and its appendices. We have included
page references in parentheses to direct you to a more complete description of
the topics presented in this summary. Unless otherwise specified, all references
to "WCI" or "Waste Connections" mean Waste Connections, Inc. and its
subsidiaries, and all references to "solid waste" mean non-hazardous solid
wastes.
THE COMPANIES
Waste Connections, Inc., and WCI Acquisition Corporations I, II, III and IV
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 January 6, 1999, WCI served more
than 230,000 commercial, industrial and residential customers in California,
Idaho, Kansas, Nebraska, Oklahoma, Oregon, South Dakota, Utah, Washington and
Wyoming. WCI currently owns and operates 27 collection operations, seven
transfer stations and two Subtitle D landfills, and operates an additional five
transfer stations, one Subtitle D landfill and five recycling facilities. See
"WCI -- Business -- Introduction" and "-- Services," at pages 33 and 38,
respectively.
Waste Connections, a Delaware corporation, was founded in September 1997 to
execute an acquisition-based growth strategy in secondary markets of the Western
U.S. WCI has acquired 43 solid waste services related businesses since its
formation and has identified more than 300 independent operators of such
businesses in the states where it currently operates, many of which it believes
may be suitable for acquisition by WCI. In addition, WCI is currently assessing
potential acquisitions of solid waste services operations in Colorado, Montana
and Texas. See "WCI -- Business -- Acquisition Program," at page 36.
WCI 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 WCI 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, WCI's senior management team has extensive experience
acquiring and operating solid waste services businesses in the Western U.S.
WCI 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"), WCI generally intends to pursue
a collection-based operating strategy. In these markets, WCI 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 WCI considers ownership of
landfills advantageous due to competitive and regulatory factors, WCI generally
intends to pursue an integrated, disposal-based strategy. See
"WCI -- Business -- Strategy," at page 34.
WCI'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. WCI believes that
the experience of the members of its senior management team and their knowledge
of and reputation in the solid waste industry in WCI's targeted markets will
provide WCI with competitive advantages as it pursues its growth strategy. See
"WCI -- Business -- Strategy," at page 34.
2
<PAGE> 10
WCI Acquisition Corporation I, WCI Acquisition Corporation II, WCI
Acquisition Corporation III and WCI Acquisition Corporation IV (collectively,
the "Merger Subs"), all Washington corporations, are wholly owned subsidiaries
of WCI organized for the purpose of effecting the Mergers. The Merger Subs have
no material assets and have not engaged in any activities except in connection
with the Mergers.
The principal executive offices of WCI and the Merger Subs are located at
2260 Douglas Boulevard, Suite 280, Roseville, California 95661. The telephone
number is (916) 772-2221.
Murrey's Disposal Company, Inc.
Murrey's Disposal Company, Inc. ("Murrey's") is a Washington corporation
that provides solid waste collection services in Pierce, Clallum and Jefferson
Counties, Washington and Olympic National Park pursuant to G certificate.
Murrey's had revenues of approximately $10,532 for the nine months ended
September 30, 1998.
American Disposal Company, Inc.
American Disposal Company, Inc. ("American") is a Washington corporation
that provides solid waste collection services in Pierce, Clallum and Jefferson
Counties, Washington and Olympic National Park, pursuant to a G certificate.
American had revenues of approximately $3,287 for the nine months ended
September 30, 1998.
D.M. Disposal Co., Inc.
D.M. Disposal Co., Inc. ("DM") is a Washington corporation that provides
solid waste collection services to cities in the Tacoma, Washington area. DM had
revenues of approximately $7,024 for the nine months ended September 30, 1998.
Tacoma Recycling Company, Inc.
Tacoma Recycling Company, Inc. ("Tacoma) is a Washington corporation that
provides solid waste recycling services in the Tacoma, Washington area. Tacoma
had revenues of approximately $3,869 for the nine months ended September 30,
1998.
The principal executive offices of Murrey's, American and DM are located at
4622 70th Avenue East, Fife, Washington 98731. The principal executive office of
Tacoma is at 2318 S. Tacoma Way, Tacoma, Washington 98402. The telephone number
for all of the Corporations is (253) 922-6681.
THE SPECIAL MEETING
The Special Meeting will be held at 9:00 a.m., Pacific Time, on January 19,
1998, at Courtyard by Marriott, 1920 Taylor Road, Roseville, California, for the
purpose of considering and acting upon the Merger Proposal and the Option Plan
Proposal and to transact such other business as may be properly brought before
the meeting or any adjournment thereof.
Only those stockholders of WCI of record at the close of business on
December 18, 1998 (the "Record Date"), are entitled to notice of, and to vote
at, the Special Meeting.
Approval of each of the Merger Proposal and the Option Plan Proposal
requires the affirmative vote of a majority of the total votes cast, in person
or by proxy, at the Special Meeting. At the close of business on the Record
Date, there were 9,314,290 shares of WCI Common Stock outstanding and entitled
to vote at the Special Meeting. Holders of WCI Common Stock are entitled to one
vote per share. All executive officers and directors of WCI who are stockholders
of WCI and who, as of the Record Date, collectively had the right to vote
approximately 1.7 million shares of WCI Common Stock, representing approximately
19% of the shares outstanding as of such date, have indicated to WCI that they
intend to vote the shares of WCI Common Stock over which they have voting
control in favor of the Merger Proposal and the Option Plan Proposal. See "The
Special Meeting -- Vote Required for Approval," at page 31.
3
<PAGE> 11
THE MERGERS
Recommendations of the Board of Directors of WCI
The Board of Directors of WCI has unanimously approved the issuance of
shares of WCI Common Stock pursuant to the Merger Agreement and has directed
that such issuance be submitted to the stockholders of WCI. The Board of
Directors of WCI recommends that the stockholders of WCI approve the issuance of
shares of WCI Common Stock pursuant to the Merger Agreement. See "The Mergers
and Related Transactions -- Background of the Mergers," "-- WCI's Reasons for
the Mergers" and "-- Recommendation of the Board of Directors of WCI," at pages
11 and 13, respectively.
Opinion of Financial Advisor
On October 13, 1998, the Board of Directors of WCI received an oral
opinion, which was confirmed in writing on October 22, 1998, from BT Alex. Brown
Incorporated ("BT Alex. Brown"), to the effect that, as of such date, the
consideration to be paid by WCI pursuant to the Merger Agreement was fair to WCI
from a financial point of view. The full text of the written opinion of BT Alex.
Brown, dated October 22, 1998, which sets forth assumptions made, matters
considered and limitations on the review undertaken in connection with the
opinion, is attached to this Proxy Statement as Annex B and is incorporated
herein by reference. WCI STOCKHOLDERS SHOULD READ SUCH OPINION IN ITS ENTIRETY.
See "The Mergers and Related Transactions -- Opinion of BT Alex. Brown,
Financial Advisor to WCI," at page 14.
Material Terms of the Mergers
Consideration. On consummation of the Mergers, Merger Subs I, II, III and
IV will merge with and into Murrey's, American, DM and Tacoma, respectively, and
each of the Corporations will become a wholly owned subsidiary of WCI. All
outstanding shares of the Corporations' common stock will be converted into
2,750,000, subject to adjustment up to 3,250,000, shares of WCI Common Stock
(the "Aggregate WCI Stock"). The shareholders of Murrey's, American, DM and
Tacoma will receive 42%, 13%, 28% and 17%, respectively, of the Aggregate WCI
Stock. At the Effective Time, each share of common stock of each of Merger Subs
I, II, III and IV will be converted into one share of common stock of the
corporation surviving that Merger (collectively, the "Surviving Corporations").
The market price of WCI Common Stock fluctuates, and the value of the Aggregate
WCI Stock on the Closing Date may be more or less than its value on the date the
Merger Agreement was signed. See "Material Terms of the Mergers -- Manner and
Basis for Converting Shares," at page 21.
Fractional Shares. WCI will not issue any certificates of scrip for
fractional shares of WCI Common Stock in the Mergers, and no WCI Common Stock
dividend, stock split or interest will relate to any fractional security. WCI
will pay each Shareholder cash in lieu of any fractional shares, in an amount
equal to the fraction of a share of WCI Common Stock that would otherwise have
been issued to the Shareholder, multiplied by the closing price of the WCI
Common Stock on the Nasdaq National Market on the last trading day before the
Closing Date.
Effective Time of the Mergers. Each of the Mergers will become effective at
the time (the "Effective Time") stated in the Plan of Merger filed with the
Secretary of State of the State of Washington (the "Plan of Merger") in
accordance with the Washington Business Corporation Act ("Washington Law").
Assuming that the WCI stockholders approve the issuance of shares of WCI Common
Stock pursuant to the Merger Agreement, WCI expects that the Effective Time of
the Mergers will occur as soon as practicable following the Special Meeting. If
all other conditions to the Mergers have not been satisfied or waived prior to
the Special Meeting, however, including obtaining the approval of the Merger
Agreement by the Bonnie Trust, WCI expects that each Merger will occur as soon
as practicable after the remaining conditions have been satisfied or waived.
4
<PAGE> 12
Conditions to the Mergers. The Mergers will be consummated only if each of
the following conditions is satisfied:
WCI Stockholder Approval. The WCI stockholders must approve the Mergers and
the issuance of the Aggregate WCI Stock as required by applicable law and the
rules of the Nasdaq National Market.
No Exercise of Dissenters' Rights. No Shareholder may exercise appraisal
rights under Washington Law with respect to any shares of any Corporation's
stock.
Accounting Treatment. WCI must have received a letter from Ernst & Young
LLP regarding that firm's concurrence with WCI's and the Corporations'
management that poolings-of-interests accounting for the Mergers is appropriate
under Opinion No. 16 of the Accounting Principles Board ("APB No. 16"), if the
Mergers are closed and consummated according to the Merger Agreement. See "The
Mergers and Related Transactions -- Accounting Treatment," at page 20.
Consents and Approvals. All parties must have received all necessary
governmental and other consents, approvals and waivers by the closing date.
No Injunction Preventing Mergers. No court or governmental or regulatory
authority may enjoin any of the transactions contemplated by the Merger
Agreement. No suit or other proceeding challenging such transactions may have
been threatened or instituted, and no governmental or regulatory authority may
have made any investigative or other demand concerning the Mergers.
Tax Matters. The Shareholders must be reasonably satisfied that the Mergers
will constitute reorganizations within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code") and that the Shareholders
will not recognize any gain or loss on the exchange of their shares of the
Corporations' stock for shares of Aggregate WCI Stock.
WCI must have delivered WCI Common Stock certificates, an opinion of legal
counsel for WCI, filed Plans of Merger, executed Employment Agreements between
WCI and each of Donald J. Hawkins and Irmgard R. Wilcox, and the Common Stock
Agreement.
Certain other conditions must also be satisfied or waived, including
conditions relating to the accuracy of each party's representations and
warranties, registration of the Aggregate WCI Stock under the Securities Act of
1933, as amended (the "Securities Act"), the listing of the Aggregate WCI Stock
in the Nasdaq National Market, title insurance commitments, and each party's
compliance with all covenants, agreements, conditions and delivery requirements
in the Merger Agreement.
No Solicitation
Under the Merger Agreement, after the date the Merger Agreement is signed
and before the Effective Time or earlier termination of the Merger Agreement,
the Corporations and the Shareholders may not initiate, solicit, negotiate,
encourage or provide information to facilitate, and each of such Corporations
and the Shareholders may not and must use his, her or its reasonable efforts to
cause any officer, director or employee of such Corporation, or any attorney,
accountant, investment banker, financial advisor or other agent retained by him,
her or it not to, initiate, solicit, negotiate, encourage or provide information
to facilitate, any proposal or offer to acquire all or any substantial part of
the business, properties or capital stock of any such Corporation, whether by
merger, purchase of assets or otherwise, and whether for cash, securities or any
other consideration.
Termination or Amendment of Merger Agreement
Termination. The Merger Agreement may be terminated under certain
circumstances, including: (a) by mutual consent of WCI and the Corporations; (b)
if the Effective Date has not occurred by March 31, 1999, unless the
Corporations have not then obtained all consents required under the Merger
Agreement, in which case the Merger Agreement will terminate 10 days after
written notice from WCI to the Corporations or 10 days after the later of (i) if
any such consent is denied, the lapse of the latest time for filing any appeal
of such denial, and (ii) if any such consent is denied and such denial is
appealed, the day the last appeal of such
5
<PAGE> 13
denial has been dismissed, refused or decided adversely to the Corporation
seeking the consent; (c) by the Corporations and the Shareholders if WCI fails
to obtain the required approval of the WCI stockholders before January 31, 1999,
or if the Shareholders or the Corporations make a material change to any
Schedule, document or other information provided by the Shareholders or the
Corporations to WCI or its agents, WCI deems the change unacceptable and the
Shareholders have not cured the problem to WCI's reasonable satisfaction by the
later of November 30, 1998, or the scheduled Closing Date; and (d) either by WCI
or by the Corporations and the Shareholders at any time prior to the Closing
Date (i) upon breach of a representation or warranty by the other party (the
"Non-Terminating Party"), which is not cured in all material respects and which
has had or is likely to have a material adverse effect and is incapable of being
satisfied by the termination date, (ii) if one or more of the Mergers are
enjoined by a final, unappealable court order not entered at the request or with
the support of the party requesting termination (the "Terminating Party") and if
the Terminating Party against which such order is entered shall have used
reasonable efforts to prevent the entry of such order, or (iii) if the
Non-Terminating Party fails to perform in any material respect any of its
covenants in the Merger Agreement and does not cure such default in all material
respects within 30 days after written notice of such default specifying such
default in reasonable detail is given to the Non-Terminating Party by the
Terminating Party. If the Merger Agreement is terminated because of WCI's
dissatisfaction with the Schedules and documents relating to the Corporations'
real property, the Shareholders and the Corporations will have no further
liability to WCI or any other party to the Merger Agreement.
Amendment. The Merger Agreement may be modified or amended only by a
written instrument signed by the Shareholders, the Corporations and WCI, duly
authorized by its Board of Directors. The Merger Agreement may be amended at any
time before the Closing Date, and, subject to applicable law, whether before or
after the WCI stockholders approve the issuance of shares of WCI Common Stock
pursuant to the Merger Agreement. See "Certain Terms of the
Mergers -- Termination or Amendment," at page 24.
Dissenters' Rights
Delaware law does not require WCI to give WCI stockholders who object to
the issuance of shares of WCI Common Stock pursuant to the Merger Agreement and
who vote against or abstain from voting in favor of such issuance any appraisal
or dissenters' rights or the right to receive cash for their shares. WCI does
not intend to make available any such rights to its stockholders.
Restrictions on Transfer of Certain Securities Issued in the Mergers
The shares of WCI Common Stock issued in connection with the Mergers have
been registered under WCI's Registration Statements on Form S-4. However,
certain affiliates of WCI or any of the Corporations will be temporarily
restricted from transferring such shares and any other shares of WCI Common
Stock they own, because of the pooling of interests requirements. See "Certain
Terms of the Mergers -- Other Agreements -- Affiliate Letter," at page 26.
THE OPTION PLAN PROPOSAL
At the Special Meeting, stockholders of WCI will also be asked to consider
and act upon the following other proposal:
Option Plan Proposal. To approve an amendment to the Waste Connections,
Inc. 1997 Stock Option Plan (the "Option Plan") to increase the number of shares
of WCI stock reserved for issuance thereunder to 12% of the outstanding shares
of WCI Common Stock. The Board of Directors of WCI believes that this amendment
is necessary for WCI to be able to attract and retain valuable employees,
consultants and directors through the grant of stock options. THE BOARD OF
DIRECTORS OF WCI RECOMMENDS THAT THE STOCKHOLDERS OF WCI VOTE FOR THE OPTION
PLAN PROPOSAL. Approval and adoption of the Option Plan Proposal requires the
affirmative vote of a majority of the total votes cast, in person or by proxy,
at the Special Meeting. Approval and adoption of the Option Plan Proposal is not
a condition to the Mergers.
6
<PAGE> 14
MARKET PRICE AND DIVIDEND INFORMATION
WCI's Common Stock is traded on the Nasdaq National Market under the symbol
"WCNX." The following table sets forth the range of high and low sale prices for
the WCI Common Stock for the period from May 22, 1998, the date of WCI's initial
public offering, through December 31, 1998.
<TABLE>
<CAPTION>
1998 HIGH LOW
---- ------- -------
<S> <C> <C>
Second Quarter (from May 22, 1998)....................... $ 20.75 $ 13.75
Third Quarter............................................ $ 23.375 $ 17.75
Fourth Quarter........................................... $ 21.125 $ 15.875
</TABLE>
On October 21, 1998, the high and low sale prices of the WCI Common Stock
as reported by the Nasdaq National Market were $17.00 and $16.50 per share,
respectively.
WCI has not paid any cash dividends on its Common Stock.
There is no established trading market for shares of any of the
Corporations' common stock. During the years ended December 31, 1995 and 1997
and the nine months ended September 30, 1998, DM paid cash dividends totaling
approximately $50,000, $83,000 and $167,000, respectively. DM paid no cash
dividends during the year ended December 31, 1996. Murrey's, American and Tacoma
did not pay cash dividends during any of those periods.
COMPARATIVE UNAUDITED PER SHARE DATA
The following table sets forth certain historical per share data for the
Corporations and WCI and certain unaudited pro forma and pro forma combined per
share data after giving effect to the business combinations involving WCI, its
predecessors, Madera Disposal Systems, Inc., Arrow Sanitary Service, Inc.,
Shrader Refuse and Recycling Service Company, Curry Transfer and Recycling Inc.,
Contractors Waste Removal, L.C., J&J Sanitation, B&B Sanitation, Amador Disposal
Service, Inc./Motherlode Sani-Hut, Inc., and Butler County Landfill, Inc./Kobus
Construction, Inc. as if such business combinations occurred on January 1, 1997
and were accounted for using the purchase method of accounting and the Mergers
on a poolings-of-interests basis as if they occurred on January 1, 1997,
assuming that 2,750,000 shares of WCI Common Stock were issued in exchange for
all of the outstanding capital stock of the Corporations (sometimes referred to
as the "Murrey Companies"). The following table also sets forth certain
unaudited equivalent pro forma per share amounts after giving effect to the
Mergers (accounted for on a poolings-of-interests basis), assuming the issuance
of 1,871 shares of WCI Common Stock for each outstanding share of the Murrey
Companies' stock (the "Exchange Ratio"). This Exchange Ratio assumes 2,750,000
shares of WCI Common Stock are issued to consummate the Mergers. The actual
number of shares of WCI Common Stock to be issued in exchange for all of the
outstanding capital stock of the Murrey Companies will be determined at the
closing date. The following WCI historical data is derived from and should be
read in conjunction with the financial statements of WCI and the Notes thereto
that are included elsewhere herein. The selected WCI pro forma and WCI and the
Murrey Companies pro forma combined financial data is derived from and should be
read in conjunction with the WCI Unaudited Pro Forma Financial Statements and
Notes thereto included elsewhere herein. The unaudited pro forma and pro forma
combined information is presented for illustrative purposes only and is not
necessarily indicative of the combined financial position or results of
operations of future periods or the results that actually would have been
realized had WCI, its predecessors, the businesses acquired using the purchase
method of accounting and the Murrey Companies
7
<PAGE> 15
been a single entity during the periods presented. No cash dividends have ever
been declared or paid on WCI Common Stock.
<TABLE>
<CAPTION>
AS OF OR FOR THE
PERIOD FROM INCEPTION NINE MONTHS
(SEPTEMBER 9, 1997) AS OF OR FOR ENDED
THROUGH THE YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 1997 DECEMBER 31, 1997 1998
--------------------- -------------------- ----------------
<S> <C> <C> <C>
WCI HISTORICAL:
Net loss per share -- basic................. $(2.99) n/a $ (0.02)
Net loss per share -- diluted............... $(2.99) n/a $ (0.02)
Book value per share(1)..................... $(0.24) n/a $ 6.50
WCI PRO FORMA:
Income (loss) per share before extraordinary
item -- basic............................. n/a $ (2.12) $ 0.08
Income (loss) per share before extraordinary
item -- diluted........................... n/a $ (2.12) $ 0.06
Book value per share(1)..................... n/a n/a $ 6.50
WCI AND THE MURREY COMPANIES
PRO FORMA COMBINED:
Income (loss) per share before extraordinary
item -- basic............................. n/a $ (0.81) $ 0.14
Income (loss) per share before extraordinary
item -- diluted........................... n/a $ (0.81) $ 0.12
Book value per share(1)..................... n/a $ n/a $ 5.14
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS
ENDED DECEMBER 31,
-----------------------
1995 1996
---------- ----------
<S> <C> <C> <C> <C> <C>
THE MURREY COMPANIES:
Historical net income per $2,193.88 $ 451.02
share(2)................ n/a $ 895.24 $ 510.88
Historical book value per $3,806.12 $4,257.14
share(3)................ n/a $ 5,095.92 $ 5,493.20
Equivalent pro forma per
share amounts(4):
Income (loss) per share n/a n/a
before extraordinary
item -- basic........ n/a $(1,515.51) $ 261.94
Income (loss) per share n/a n/a
before extraordinary
item -- diluted...... n/a $(1,515.51) $ 224.52
Book value per share.... n/a n/a n/a $ n/a $ 9,616.94
</TABLE>
- ---------------
(1) Historical book value per share is computed by dividing stockholders' equity
by the number of shares of common stock outstanding at the end of each
period. WCI and the Murrey Companies' pro forma combined book value per
share is computed by dividing WCI and Murrey Companies' pro forma combined
stockholders' equity by the pro forma combined number of shares of WCI
Common Stock that would have been outstanding had the Mergers been
consummated as of the dates presented.
(2) The historical net income per share is calculated by dividing net income by
the summation of the outstanding share amounts for each of the Murrey
Companies.
(3) The historical book value per share is computed by dividing stockholders'
equity by the summation of the outstanding share amounts for each of the
Murrey Companies.
(4) The unaudited equivalent pro forma per share amounts are calculated by
multiplying the WCI and the Murrey Companies pro forma combined per share
amounts by the Exchange Ratio.
8
<PAGE> 16
RISK FACTORS
WCI stockholders are being asked to approve the Merger Agreement. In
deciding whether to approve the Merger Agreement, WCI stockholders should
consider carefully the following risk factors in addition to the other
information in this Proxy Statement. This Proxy Statement 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 "Summary," "Risk Factors," and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business" for each of WCI
and the Corporations, as well as in the Proxy Statement generally. The
cautionary statements contained in this Proxy Statement should be read as
applying to all related forward-looking statements wherever they appear in this
Proxy Statement. WCI'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 Proxy Statement.
Integration of the Acquired Companies. The anticipated benefits of the
Mergers will not be achieved unless WCI and the Corporations are successfully
combined in a smooth and timely manner. That combination will require
integration of WCI's and the Corporations' operations and administrative
organizations, which could place a significant strain on WCI's management,
operational, financial and other resources. WCI's ability to integrate the
Corporations effectively will require it to apply its management information
systems and its operational and financial systems and controls to the Surviving
Corporations and to retain and manage additional senior managers, technical
professionals and other employees. It is possible that the process of combining
WCI and the Corporations will cause an interruption of, or a loss of, business,
which could have a material adverse effect on their combined operations, at
least in the near term.
Future Operation. In determining the terms of the proposed Mergers, WCI's
management evaluated WCI's and the Corporations' respective businesses based in
part on expectations concerning the future operations of the two businesses. The
evaluation reflects the expectation that the combination of the companies will
produce the beneficial synergistic effects described below in "The Mergers and
Related Transactions -- WCI's Reasons for the Mergers." There can be no
assurance that these expectations will be fulfilled. Moreover, although WCI
believes that beneficial synergies will result from the Mergers, there can be no
assurance that the combining of the companies' businesses, even if achieved in
an efficient and effective manner, will result in increased earnings per share.
See "WCI's Restated and Pro Forma Condensed Financial Statements."
Share Issuance; Possible Dilution. In connection with the Mergers, WCI will
issue 2,750,000, subject to adjustment up to 3,250,000, shares of WCI Common
Stock, which will increase the number of shares outstanding by approximately
29.5%, or approximately 34.9% if 3,250,000 shares are issued. In addition, WCI
intends to make a public offering of between 2,750,000 and 3,500,000 shares of
its Common Stock for cash in an underwritten public offering shortly after the
closing of the Mergers. A portion of the overallotment option granted to the
underwriters may include shares of Common Stock of certain non-management
shareholders of WCI. The net proceeds of the offering to WCI will be used to
reduce indebtedness under WCI's credit facility and for acquisitions, capital
expenditures and working capital. WCI can give no assurance that this public
offering, which can be made only by means of a prospectus filed with the
Securities and Exchange Commission, will be filed or, if filed, will be
successful. In general, the shares issued in connection with the Mergers and
such public offering will be freely tradable under the federal securities laws,
subject to restrictions, in the case of the Mergers, on transfer by certain
affiliates pursuant to the Merger Agreement. The sale of substantial amounts
these shares in the public market, or the perception that such sales could
occur, could cause dilution to existing WCI stockholders and could adversely
affect prevailing market prices of WCI Common Stock and the future ability of
WCI to issue its Common Stock to effect business acquisitions.
The exact number of shares of WCI Common Stock issued in connection with
the Mergers will depend on the closing price of the WCI Common Stock on the
Nasdaq National Market on the last trading day before the closing date.
Accordingly, the value of the consideration received by the Shareholders may
vary depending on fluctuations in the market price of the WCI Common Stock, and
may be greater or less than it was when the parties entered into the Merger
Agreement.
9
<PAGE> 17
Geographic Concentration. WCI's operations and customers are located in
California, Idaho, Kansas, Nebraska, Oklahoma, Oregon, South Dakota, Utah,
Washington and Wyoming, and WCI expects to focus its operations on the Western
U.S. for at least the foreseeable future. The Mergers, if consummated, will
increase the concentration of WCI's business in Washington. WCI estimates that
immediately after the Mergers are completed, WCI will receive more than 60% of
its total annualized revenues from customers in Washington. Therefore, WCI'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 WCI to
expand vertically in those markets. There can be no assurance that WCI will
complete a sufficient number of acquisitions in other markets to lessen its
geographic concentration. See "WCI -- Business -- Strategy."
10
<PAGE> 18
THE MERGERS AND RELATED TRANSACTIONS
The detailed terms and conditions of the Mergers, including conditions to
consummation of the Mergers, are contained in the Merger Agreement, which is
attached to this Proxy Statement as Annex A and incorporated by reference. The
description in this Proxy Statement of the terms and conditions of the Mergers
is qualified in its entirety by reference to the Merger Agreement.
GENERAL DESCRIPTION OF THE MERGERS
The Merger Agreement provides that, at the Effective Time, Merger Subs I,
II, III and IV will merge with and into Murrey's, American, DM and Tacoma,
respectively, and each of the Corporations will become a wholly owned subsidiary
of WCI. All outstanding shares of the Corporations' common stock will be
converted into 2,750,000, subject to adjustment up to 3,250,000, shares of WCI
Common Stock (the "Aggregate WCI Stock"). The actual Aggregate WCI Stock will
consist of 2,750,000 shares, increased by 55,555 shares for each whole dollar by
which the closing price of WCI Common Stock on the Nasdaq National Market on the
last trading day before the closing date (the "Closing Price") is less than
$20.50 but more than $15.99, and increased by 83,333.333 shares for each whole
dollar by which the Closing Price is less than $13.00 but more than $9.99, and
increased proportionately for any such amount less than one dollar. No more than
250,000 additional shares will be issued if the Closing Price is less than
$16.00 but more than $13.00. In no event will more than 3,250,000 shares of
Aggregate WCI Stock be issued. The table below illustrates, for various Closing
Prices, the number of shares of Aggregate WCI Stock that would be issued and the
percentages of the total shares of WCI Common Stock outstanding after the
Mergers that such shares would represent.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
NUMBER OF SHARES OF WCI STOCK OUTSTANDING
CLOSING PRICE AGGREGATE WCI STOCK AFTER THE MERGERS
- ------------- ------------------- ---------------------
<S> <C> <C>
$20.50 2,750,000 22.8%
$19.50 2,805,555 23.2
$18.50 2,861,110 23.5
$17.50 2,916,665 23.9
$16.50 2,972,220 24.2
$16.00 2,999,998 24.4
$13.00 2,999,998 24.4
$12.00 3,083,331 24.9
$11.00 3,166,664 25.4
$10.00 3,249,997 25.9
</TABLE>
The shareholders of Murrey's, American, DM and Tacoma will receive 42%,
13%, 28% and 17%, respectively, of the Aggregate WCI Stock. At the Effective
Time, each share of common stock of each Merger Sub will be converted into one
share of common stock of the corresponding Surviving Corporation.
On December 31, 1998, the last reported sale price of WCI Common Stock on
the Nasdaq National Market was $18.375 per share, and there were 9,314,290
shares of WCI Common Stock outstanding. Based on that number of shares
outstanding, the 2,750,000 to 3,250,000 shares of WCI Common Stock that WCI will
issue to the Shareholders will represent approximately 22.8% to 25.9% of the
total shares of WCI Common Stock to be outstanding immediately after the
Mergers. Immediately after the Mergers, the Murrey Trust will own approximately
15.4% to 17.5%, and the Bonnie Trust will own approximately 5.1% to 5.8%, of the
total shares of WCI Common Stock outstanding. WCI stockholders may call (800)
371-2974 for updated information as to the number of shares of Aggregate WCI
Stock to be issued, based on the most recent closing price of WCI Common Stock
on the Nasdaq National Market.
BACKGROUND OF THE MERGERS
On April 2, 1998, Ronald Mittelstaedt, President and Chief Executive
Officer of WCI, called Donald Hawkins, President of the Murrey Companies, to
introduce himself, briefly describe WCI, and ask whether Mr. Hawkins would be
interested in meeting. Mr. Hawkins agreed that he and Irmgard Wilcox would meet
with Mr. Mittelstaedt on April 24, 1998.
11
<PAGE> 19
At a meeting in Seattle, Washington on April 24, 1998, Ronald Mittelstaedt
met with Donald Hawkins and Irmgard Wilcox to discuss the history of the
Corporations and their ownership structure and market opportunities, and to
present an overview of WCI.
At a meeting on June 19, 1998, in Pasco, Washington, Mr. Mittelstaedt met
with Mr. Hawkins to discuss WCI and the due diligence that would be needed to
facilitate an offer.
On July 9, 1998, the Corporations' management met with WCI's management to
discuss the parties' financial results and a range of possible valuations and
transaction structures for a potential transaction. WCI management toured
facilities and reviewed financial results for the Corporations for the five
months ended May of 1998. Valuations were indicated based on normal multiples
for businesses with the Corporations' profile, EBITDA and outstanding debt. WCI
developed an internal model estimating the Corporations' future EBITDA from the
Corporations' historical financial results, adjusted to reflect certain future
cost savings and efficiencies that WCI expects to achieve. The consideration
initially proposed by WCI under the Merger Agreement was 2,750,000 shares of WCI
Common Stock, and was determined by applying a multiple to these EBITDA
projections. Over the course of the merger negotiations, the price of the WCI
Common Stock fluctuated significantly between approximately $15.87 and $23.00
per share. As a result, the parties agreed to establish a range of from
2,750,000 to 3,250,000 shares of WCI Common Stock to be issued to the Murrey
shareholders, which range would be consistent with the valuation established by
WCI. The parties also discussed other principal terms of the Merger Agreement.
On July 22, 1998, Mr. Mittelstaedt, Eugene Dupreau, a director of WCI, and
a representative of Alex. Brown met with Mr. Hawkins and Ms. Wilcox in Portland
and toured the facilities of Oregon Paper Fiber, a WCI subsidiary, and WCI's
Vancouver operations.
On August 6, 1998, the Corporations' management again met with WCI
management to review in detail a preliminary non-binding letter of intent. Also
included in the discussion was a timetable for completing the transaction. Based
on comments from the Corporations' management, WCI modified certain terms of the
letter. During the next three weeks, management of WCI and the Corporations
participated in several telephone conversations regarding elements of the
transaction and the letter of intent.
On August 30, 1998, the Corporations, their shareholders and WCI executed a
nonbinding letter of intent.
On September 2, 1998, the Corporations' management and David Myre, Jr.,
counsel for the Corporations, again met with WCI's management and Robert D.
Evans, counsel for WCI, in the offices of Hillis Clark Martin and Peterson
("HCMP") in Seattle. The discussion centered around timing, the completion of
due diligence, filing a proxy statement and the interests of the Corporations'
shareholders.
During the next several weeks, the parties negotiated the terms of the
Merger Agreement, including the structure of the consideration to be paid, the
substance of each party's representations and warranties, and the extent of the
indemnifications given by the parties. The parties also exchanged drafts of the
Merger Agreement and pursued due diligence, and Ernst & Young LLP initiated
audits of the Corporations' financial statements.
At a meeting held on September 22, 1998, the Executive Committee of WCI's
Board discussed the proposed Mergers, including related accounting issues. At a
meeting held on October 8, 1998, the Executive Committee of WCI's Board
discussed issues relating to the structure of the Mergers.
At a meeting held on October 11, 1998, the Executive Committee of WCI's
Board voted to recommend that the full Board approve the Merger Agreement and
the issuance of shares of WCI Common Stock in accordance with the Merger
Agreement.
At a meeting of WCI's Board on October 13, 1998, Ernst & Young LLP provided
a briefing to the Board on the progress of its audits of the Corporations'
financial statements, and the Corporations' internal controls and systems. At
that meeting, BT Alex. Brown rendered its oral opinion, which was confirmed in
writing on October 22, 1998, that, as of that date, the consideration to be paid
by WCI for the Mergers pursuant to the Merger Agreement was fair to WCI from a
financial point of view. After due consideration and questions to WCI's
management, WCI's Board approved the Merger Agreement and the issuance of shares
of WCI Common Stock in accordance with the Merger Agreement and recommended that
the WCI stockholders vote in favor of the issuance of shares of WCI Common Stock
pursuant to the Merger Agreement.
12
<PAGE> 20
At meetings held on October 22, 1998, each Corporation's Board of Directors
and Shareholders (other than the Bonnie Trust) approved the Merger Agreement.
WCI, the Merger Subs, the Corporations and the Shareholders signed the
Merger Agreement at approximately 1:15 p.m., Pacific Time, on October 22, 1998.
The parties made a joint public announcement on October 22, 1998.
On January 6, 1999, the Bonnie Trust approved the Merger Agreement.
WCI'S REASONS FOR THE MERGERS
In evaluating the Mergers, WCI's management and Board of Directors
considered a variety of factors in the context of WCI's strategic objectives. A
key element of WCI's strategy is the acquisition of solid waste collection,
transportation, disposal and recycling businesses in secondary markets in the
Western U.S. WCI's Board concluded that a combination with the Corporations
would strengthen WCI's competitive position in the important Washington market.
In evaluating the Mergers, WCI's Board also took into account the profitability
and strong history of earnings and growth of the Corporations, and the fact that
the Corporations serve the majority of their customers under exclusive G
certificates. In addition, WCI's Board and management concluded that, assuming
certain operating synergies are achieved, the Mergers would increase WCI's
earnings, and that certain of the members of the management of the Corporations
would complement WCI's existing management team.
On October 13, 1998, WCI's Board received an oral opinion from BT Alex.
Brown, which was confirmed in writing on October 22, 1998, that the
consideration to be paid for the Mergers was fair from a financial point of
view, as of that date, to WCI. See "-- Opinion of BT Alex. Brown, Financial
Advisor to WCI."
The foregoing discussion of the information and factors considered by WCI's
Board is not intended to be exhaustive. In view of the variety of factors
considered in connection with its evaluation of the Mergers, WCI's Board did not
find it practicable to and did not quantify or otherwise assign relative weights
to the specific factors considered in reaching its determination. In addition,
individual members of WCI's Board may have given different weights to the
different factors.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF WCI
For the reasons set forth under "-- WCI's Reasons for the Mergers," WCI's
Board of Directors believes that the Mergers are advisable and that the terms of
the Merger Agreement and the Mergers are fair to, and in the best interests of,
WCI and the WCI stockholders. All members of the Board of Directors approved the
Merger Agreement. THE WCI BOARD UNANIMOUSLY RECOMMENDS THAT THE HOLDERS OF WCI
COMMON STOCK VOTE "FOR" THE ISSUANCE OF SHARES OF WCI COMMON STOCK PURSUANT TO
THE MERGER AGREEMENT.
THE CORPORATIONS' REASONS FOR THE MERGERS
In evaluating the Mergers and WCI as a merger candidate, the Boards of
Directors of the Corporations considered a number of factors. These included
WCI's historic and anticipated financial performance, the depth and breadth of
WCI's growing customer base, the strength that would result from the combination
of the Corporations and WCI in the Washington market, WCI's infrastructure and
the quality of WCI's management team. In addition, the Boards noted the solid
waste service industry's rapid consolidation, and the corresponding need for
alliances with strong companies and increasing sources of financing. In
analyzing this factor, the Boards reviewed WCI's existing capital resources and
ability to access capital markets cost effectively and WCI's demonstrated
success in attracting quality acquisition candidates and likely future success
in attracting other candidates complementary to WCI and the Corporations.
Further, the Boards considered the terms and conditions of the Merger Agreement,
including the attractiveness of WCI stock as an acquisition currency and the
associated opportunity for the Shareholders to share in the anticipated growth
of the combined companies.
The foregoing discussion of the information and factors considered by the
Corporations' Boards of Directors is not intended to be exhaustive. In view of
the variety of factors considered in connection with its evaluation of the
Mergers, the Corporations' Boards did not find it practicable to and did not
quantify or
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otherwise assign relative weights to the specific factors considered in reaching
their determination. In addition, individual members of the Corporations' Boards
may have given different weights to the different factors.
OPINION OF BT ALEX. BROWN, FINANCIAL ADVISOR TO WCI
BT Alex. Brown has acted as financial advisor to WCI in connection with the
Mergers. At a meeting of the WCI Board of Directors on October 13, 1998, BT
Alex. Brown delivered its preliminary oral opinion to the WCI Board of Directors
via telephone, subject to revision following WCI's delivery of additional
financial information to BT Alex. Brown, to the effect that, as of the date of
such opinion, based upon and subject to the assumptions made, matters considered
and limits of the review undertaken by BT Alex. Brown, the Aggregate WCI Stock
plus estimated Balance Sheet Date Debt (the "Aggregate Transaction Value") was
fair, from a financial point of view, to WCI. The oral opinion of BT Alex. Brown
was subsequently revised and confirmed in writing as of October 22, 1998.
THE FULL TEXT OF BT ALEX. BROWN'S WRITTEN OPINION, DATED OCTOBER 22, 1998
(THE "BT ALEX. BROWN OPINION"), WHICH SETS FORTH, AMONG OTHER THINGS, THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITS ON THE REVIEW UNDERTAKEN BY BT
ALEX. BROWN IN CONNECTION WITH THE OPINION, IS ATTACHED AS ANNEX B TO THIS PROXY
STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. WCI STOCKHOLDERS ARE URGED TO
READ THE BT ALEX. BROWN OPINION IN ITS ENTIRETY. THE SUMMARY OF THE BT ALEX.
BROWN OPINION SET FORTH IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THE BT ALEX. BROWN OPINION.
In connection with BT Alex. Brown's role as financial advisor to WCI, and
in arriving at its opinion, BT Alex. Brown has, among other things, reviewed
certain publicly available financial information and other information
concerning WCI and the Corporations and certain internal analyses and other
information furnished to it by WCI and the Corporations. BT Alex. Brown also
held discussions with the members of the senior managements of WCI and the
Corporations regarding the businesses and prospects of their respective
companies and the joint prospects of a combined enterprise. In addition, BT
Alex. Brown (i) reviewed the reported prices and trading activity for the common
stock of WCI, (ii) compared certain financial and stock market information for
WCI and certain financial information for the Corporations with similar
information for selected companies whose securities are publicly traded, (iii)
reviewed the financial terms of selected business combinations which it deemed
comparable in whole or in part, (iv) reviewed the terms of the Merger Agreement
and certain related documents, (v) reviewed the potential pro forma effect of
the Mergers on WCI and the Corporations, and (vi) performed such other studies
and analyses and considered such other factors as it deemed appropriate.
In preparing its opinion, BT Alex. Brown did not assume responsibility for
the independent verification of, and did not independently verify, any
information, whether publicly available or furnished to it, concerning WCI or
the Corporations, including, without limitation, any financial information,
forecasts or projections, considered in connection with the rendering of its
opinion. Accordingly, for purposes of its opinion, BT Alex. Brown assumed and
relied upon the accuracy and completeness of all such information. BT Alex.
Brown did not prepare or obtain any independent evaluation or appraisal of any
of the assets or liabilities of WCI or the Corporations. With respect to the
financial forecasts and projections made available to BT Alex. Brown and used in
its analysis, including analyses and forecasts of certain cost savings,
operating efficiencies, revenue effects and financial synergies (collectively,
the "Synergies") expected by WCI and the Corporations to be achieved as a result
of the Mergers, BT Alex. Brown has assumed that they have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of the management of WCI or the Corporations as to the matters covered
thereby. In rendering its opinion, BT Alex. Brown expressed no view as to the
reasonableness of such forecasts and projections, including the Synergies, or
the assumptions on which they are based. BT Alex. Brown's preliminary oral
opinion delivered to WCI's Board of Directors was necessarily based upon
economic, market and other conditions as in effect on, and the information made
available to BT Alex. Brown as of, the date of such opinion.
The internal financial forecasts regarding the Corporations prepared by the
Corporations' management (the "Corporations Forecasts") reflected forecasted
fiscal 1998 revenue, EBITDA, EBIT and net income of approximately $32.6 million,
$5.3 million, $3.6 million and $2.0 million, respectively and 1999 revenue,
EBITDA, EBIT and net income of approximately $35.1 million, $6.2 million, $4.5
million and $2.6 million,
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respectively. The Corporations' internal financial forecasts were thereafter
grown at an internal rate of 3%. Operating margins were held approximately
constant over the forecasted period. The Corporations provided the Corporations
Forecasts to WCI and BT Alex. Brown. The Corporations Forecasts reflected
certain underlying assumptions of the Corporations' management concerning the
Corporations' internal growth and external market development during the
forecasted period.
The financial forecasts regarding WCI ("the WCI Forecasts") reflected
forecasted fiscal 1998 revenue, EBITDA, EBIT and net income of approximately
$54.2 million,, $11.7 million, $7.7 million and $3.3 million, respectively and
1999 revenue, EBITDA, EBIT and net income of approximately $113.6 million, $26.1
million, $17.8 million and $8.6 million, respectively. These forecasts were
estimates published and disseminated by BT Alex. Brown research analysts who
follow WCI, and were substantially similar to estimates published and
disseminated by several other research analysts who follow WCI.
The Forecasts for the Corporations were prepared for internal budgeting and
planning purposes only and not with a view to public disclosure or compliance
with published guidelines of the Commission or the guidelines established by the
American Institute of Certified Public Accountants regarding projections or
forecasts. While presented with numerical specificity, the forecasts are based
upon a variety of assumptions relating to the business of the respective
companies and are inherently subject to significant uncertainties and
contingencies that are beyond the control of the managements of WCI or the
Corporations, including the impact of economic conditions, the competitive
environment in which each operates and other factors. See "Forward-Looking
Statements" and "Risk Factors." Accordingly, actual results may differ
materially from those forecasted. The inclusion of the WCI and the Corporations
Forecasts herein should not be regarded as a representation by WCI, the
Corporations or any other person that such forecasts are or will prove to be
correct. As a matter of course, neither WCI nor the Corporations makes public
projections or forecasts of its anticipated financial position or results of
operations. Except to the extent required under the federal securities laws,
neither WCI nor the Corporations intends to make publicly available any update
or other revisions to any of the forecasts to reflect circumstances existing
after the respective dates of preparation of such Forecasts.
For purposes of rendering its opinion, BT Alex. Brown has assumed that, in
all respects material to its analysis, the representations and warranties of WCI
and the Corporations contained in the Merger Agreement are true and correct,
that WCI and the Corporations will each perform all of the covenants and
agreements to be performed by it under the Merger Agreement and all conditions
to the obligations of each of WCI and the Corporations to consummate the Mergers
will be satisfied without any waiver thereof. BT Alex. Brown has also assumed
that all material governmental, regulatory or other approvals and consents
required in connection with the consummation of the transactions contemplated by
the Merger Agreement will be obtained and that in connection with obtaining any
necessary governmental, regulatory or other approvals and consents, or any
amendments, modifications or waivers to any agreements, instruments or orders to
which either WCI or the Corporations is a party or subject or by which it is
bound, no limitations, restrictions or conditions will be imposed or amendments,
modifications or waivers made that would have a material adverse effect on WCI
or the Corporations or materially reduce the contemplated benefits of the
Mergers to WCI. In addition, BT Alex. Brown has been advised by WCI, and
accordingly has assumed for purposes of its opinion, that the Mergers will be
tax-free to each of WCI and the Corporations and their respective stockholders
and that the Mergers will be accounted for as a poolings-of-interests.
In connection with BT Alex. Brown's role as financial advisor to WCI and in
arriving at its opinion, BT Alex. Brown was not authorized to have discussions
or negotiate with any person, and did not have discussions or negotiate with any
person in connection with the Mergers.
Set forth below is a brief summary of all material financial analyses
performed by BT Alex. Brown in connection with its opinion and reviewed, via
telephone, with the WCI Board of Directors at its meeting on October 13, 1998.
Historical Financial Position. In rendering its opinion, BT Alex. Brown
reviewed and analyzed historical and current financial information which
included (i) the most current balance sheet, (ii) annual income statements and
cash flow statements and (iii) operating margins and growth rates of WCI and (i)
the most current balance sheet, (ii) annual income statements and (iii)
operating margins and growth rates of the Corporations.
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Historical Stock Performance. BT Alex. Brown reviewed and analyzed the
weekly closing per share market prices and trading volume for WCI Common Stock
in the period from May 22, 1998 to October 12, 1998 (the "Period"). In addition,
BT Alex. Brown also compared the movement, over the Period, of such weekly
closing prices with the movement of (i) the Standard & Poor's 500 composite
average (the "S&P 500"), (ii) the Dow Jones industrial average (the "Dow Jones
Industrials"), (iii) the NASDAQ composite average (the "NASDAQ Composite"), (iv)
an index consisting of the sum of the daily closing prices of three publicly
traded non-hazardous solid waste services companies (Casella Waste Systems,
Inc., Superior Services, Inc. and Waste Industries, Inc.) (the "Mid-cap Index"),
and (v) an index consisting of the sum of the daily closing prices of four
publicly traded non-hazardous solid waste services companies (Allied Waste
Industries, Inc., Browning-Ferris Industries, Inc., Republic Services, Inc. and
Waste Management, Inc.) (the "Large-cap Index"). BT Alex. Brown noted that, on a
relative basis, WCI outperformed each of the S&P 500, the Dow Jones Industrials,
the NASDAQ Composite, the Mid-cap Index and the Large-cap Index, over the
Period. This information was presented to give the WCI Board background
information regarding the stock price performance of WCI over the Period.
Analysis Of Selected Publicly Traded Companies. BT Alex. Brown compared
certain financial information and commonly used valuation measurements for the
Corporations and WCI to corresponding information and measurements for a group
of seven publicly traded non-hazardous solid waste services companies
(consisting of Allied Waste Industries, Inc., Browning-Ferris Industries, Inc.,
Casella Waste Systems, Inc., Republic Services, Inc., Superior Services, Inc.,
Waste Industries, Inc., and Waste Management, Inc. (collectively, the "Selected
Companies")). Such financial information and valuation measurements included,
among other things, (i) common equity market valuation; (ii) operating
performance; (iii) ratios of common equity market value as adjusted for debt and
cash ("Enterprise Value") to revenues, earnings before interest expense, income
taxes and depreciation and amortization ("EBITDA"), and earnings before interest
expense and income taxes ("EBIT"); (iv) ratios of common equity market prices
per share ("Equity Value") to earnings per share ("EPS"); and (v) ratios of
common market equity value to book value. To calculate the trading multiples for
WCI and the Selected Companies, BT Alex. Brown used publicly available
information concerning historical and projected financial performance, including
published historical financial information and earnings estimates reported by
the Institutional Brokers Estimate System ("IBES"). IBES is a data service that
monitors and publishes compilations of earnings estimates by selected research
analysts regarding companies of interest to institutional investors. In the case
of the Corporations, BT Alex. Brown also computed such ratios using the
Corporations' equity value as implied in the Mergers (the "Equity Merger Value")
and enterprise value as implied in the Mergers (the "Enterprise Merger Value")
where each was appropriate.
BT Alex. Brown calculated that, on a trailing twelve month basis, the
multiple of Enterprise Value to revenues was 6.8x for WCI (and the multiple of
Enterprise Merger Value to revenues was 1.8x for the Corporations), compared to
a range of 1.3x to 3.9x, with a median of 2.7x, for the Selected Companies; the
multiple of Enterprise Value to EBITDA was 37.9x for WCI (and the multiple of
Enterprise Merger Value to EBITDA was 36.3x for the Corporations), compared to a
range of 5.8x to 14.7x, with a median of 10.7x, for the Selected Companies; and
the multiple of Enterprise Value to EBIT was 60.1x for WCI (and the multiple of
Enterprise Merger Value to EBIT was 21.5x for the Corporations), compared to a
range of 10.2x to 34.9x, with a median of 17.8x, for the Selected Companies. BT
Alex. Brown further calculated that the multiple of Equity Value to trailing
twelve month EPS was 59.9x for WCI (and the multiple of Equity Merger Value to
net income was 35.8x for the Corporations), compared to a range of 17.2x to
57.4x, with a median of 30.5x, for the Selected Companies; the multiple of
Equity Value to estimated calendar year 1998 EPS was 50.7x for WCI (and the
multiple of Equity Merger Value to calendar year 1998 projected net income was
24.8x for the Corporations), compared to a range of 15.5x to 53.4x, with a
median of 21.0x, for the Selected Companies; and the multiple of Equity Value to
estimated calendar year 1999 EPS was 25.4x for WCI (and the multiple of Equity
Merger Value to calendar year 1999 projected net income was 19.7x for the
Corporations), compared to a range of 12.9x to 35.9x, with a median of 16.6x,
for the Selected Companies.
None of the companies utilized as a comparison are identical to the
Corporations or WCI. Accordingly, BT Alex. Brown believes the analysis of
publicly traded comparable companies is not simply mathematical. Rather, it
involves complex considerations and qualitative judgments, reflected in BT Alex.
Brown's opinion,
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concerning differences in financial and operating characteristics of the
comparable companies and other factors that could affect the public trading
value of the comparable companies.
Analysis of Selected Precedent Transactions. BT Alex. Brown reviewed the
financial terms, to the extent publicly available, of twenty proposed, pending
or completed mergers and acquisition transactions since January 24, 1994
involving companies in the non-hazardous solid waste services industry (the
"Selected Transactions"). BT Alex. Brown calculated various financial multiples
and premiums over market value (for certain of the Selected Transactions) based
on certain publicly available information for each of the Selected Transactions
and compared the financial multiples to corresponding financial multiples for
the Mergers, based on the Aggregate Transaction Value. The transactions reviewed
were: Waste Management, Inc./Eastern Environmental Environmental Services, Inc.
(announced 8/17/98), Allied Waste Services, Inc./American Disposal Services,
Inc. (announced 8/10/98), Superior Services, Inc./Geowaste, Inc. (announced
7/6/98), Allied Waste Industries, Inc./Rabanco Companies (announced 4/23/98),
USA Waste Services, Inc./Waste Management, Inc. (announced 3/11/98), Republic
Industries, Inc./Silver State Disposal Services, Inc. (announced 7/31/97), USA
Waste Services, Inc./United Waste Systems, Inc. (announced 4/14/97), Republic
Industries, Inc./AAA Disposal (announced 2/4/97), USA Waste Services,
Inc./Mid-American Waste Systems, Inc. (announced 1/21/97), USA Waste Services,
Inc./Allied Waste Industries, Inc.'s Canadian Operations (announced 1/5/97),
Allied Waste Industries, Inc./Laidlaw Waste Systems (announced 9/18/96), USA
Waste Services, Inc./Sanifill, Inc. (announced 6/24/96), Republic Industries,
Inc./ Addington Resources (announced 5/31/96), Republic Industries,
Inc./Continental Waste Industries (announced 5/20/96), Allied Waste Services,
Inc./Container Corporation of Carolina (announced 5/17/96), USA Waste Services,
Inc./Western Waste Industries, Inc. (announced 12/19/95), Republic Industries,
Inc./ Southland (announced 10/17/95), USA Waste Services, Inc./Chambers
Development Co., Inc. (announced 11/28/94), Browning-Ferris Industries,
Inc./Attwoods PLC (announced 9/20/94), USA Waste Services, Inc.,/Envirofil, Inc.
(announced 1/24/94). BT Alex. Brown calculated that the multiple of Enterprise
Merger Value to trailing twelve month revenues was 1.8x for the Mergers compared
to a range of 1.4x to 7.3x, with a median of 2.4x, for the Selected
Transactions; the multiple of Enterprise Merger Value to trailing twelve month
EBITDA was 12.9x for the Mergers compared to a range of 6.3x to 23.9x, with a
median of 13.3x, for the Selected Transactions; the multiple of Enterprise
Merger Value to trailing twelve month EBIT was 21.5x for the Mergers compared to
a range of 14.1x to 43.6x, with a median of 22.5x, for the Selected
Transactions. BT Alex. Brown further calculated that the multiple of Equity
Merger Value to trailing twelve month net income was 36.3x for the Mergers
compared to a range of 25.2x to 63.2x, with a median of 36.3x, for the Selected
Transactions. All multiples for the Selected Transactions were based on public
information available at the time of announcement of such transaction, without
taking into account differing market and other conditions during the five-year
period during which the Selected Transactions occurred.
Because the reasons for, and circumstances surrounding, each of the
precedent transactions analyzed were so diverse, and due to the inherent
differences between the operations and financial conditions of the Corporations
and WCI and the companies involved in the Selected Transactions, BT Alex. Brown
believes that a comparable transaction analysis is not simply mathematical.
Rather, it involves complex considerations and qualitative judgments, reflected
in BT Alex. Brown's opinion, concerning differences between the characteristics
of these transactions and the Mergers that could affect the value of the subject
companies and businesses and the Corporations and WCI.
Contribution Analysis. BT Alex. Brown analyzed the relative contributions
of the Corporations and WCI, as compared to WCI's relative ownership of
approximately 79.0% of the outstanding capital of the combined company on a
fully-diluted basis, to the pro forma income statement of the combined company.
Published BT Alex. Brown Research estimates were used for WCI contributions with
the concurrence of WCI management. 1998 projections for the Corporations were
based on annualized preliminary unaudited income statement data for the six
months ended June 30, 1998. The Corporations' 1999 projected net income was
estimated by the Corporations' management. This analysis showed that on a pro
forma combined basis (excluding (i) the effect of any Synergies that may be
realized as a result of the Mergers, and (ii) non-recurring expenses relating to
the Mergers), based on the calendar year ending December 31, 1998, the
Corporations and WCI would account for approximately 37.2% and 62.8%,
respectively, of the combined company's pro forma revenue and approximately
31.0% and 69.0%, respectively, of the combined company's
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pro forma EBITDA, and approximately 31.5% and 68.5%, respectively, of the
combined company's pro forma EBIT, and approximately 38.0% and 62.0%,
respectively, of the combined company's pro forma net income. BT Alex. Brown
also noted that, based on the calendar year ending December 31, 1999, the
Corporations and WCI would account for approximately 23.1% and 76.9%,
respectively, of the combined company's pro forma net income.
Discounted Cash Flow Analysis. BT Alex. Brown performed a discounted cash
flow analysis for the Corporations. BT Alex. Brown calculated the discounted
cash flow values for the Corporations as the sum of the net present values of
(i) the estimated future cash flow that the the Corporations, as the case may
be, will generate for the years 1999 through 2003, plus (ii) the value of the
Corporations at the end of such period. The estimated future cash flows were
based on the financial projections for the Corporations for the years 1999
through 2003 prepared by the Corporations' management. The terminal values of
the Corporations were calculated based on projected EBITDA for 2003 and a range
of multiples of 8.0x to 12.0x. BT Alex. Brown used discount rates ranging from
12% to 16%. BT Alex. Brown used such discount rates based on its judgment of the
estimated weighted average cost of capital of the Selected Companies, and used
such multiples based on its review of the trading characteristics of the common
stock of the Selected Companies. This analysis indicated a range of equity
values of approximately $39.7 million to $66.2 million, with a midpoint of $51.9
million.
Pro Forma Combined Earnings Analysis. BT Alex. Brown analyzed certain pro
forma effects of the Mergers. Based on such analysis, BT Alex. Brown computed
the resulting dilution/accretion to the combined company's EPS estimate for the
calendar years ending December 31, 1998 and December 31, 1999, before and after
taking into account any potential cost savings and other Synergies identified by
management that the Corporations and WCI could achieve if the Mergers were
consummated and before non-recurring costs relating to the Mergers. BT Alex.
Brown noted that before taking into account any potential cost savings and other
Synergies and before such non-recurring costs, the Mergers would be
approximately 23.5% accretive and 5.4% accretive to the combined company's EPS
for the calendar years ending December 31, 1998 and December 31, 1999,
respectively, assuming that approximately 2,930,554 shares were issued as the
Aggregate WCI stock. BT Alex. Brown also noted that after taking into account
$1.2 million in potential cost savings and other Synergies for the calendar year
ending December 31, 1999, and before such non-recurring costs, the Mergers would
be approximately 12.2% accretive to the combined company's EPS assuming that
approximately 2,930,554 shares were issued as the Aggregate WCI Stock.
The foregoing summary describes all analyses and factors that BT Alex.
Brown deemed material in its presentation to WCI's Board of Directors, but is
not a comprehensive description of all analyses performed and factors considered
by BT Alex. Brown in connection with preparing its opinion. The preparation of a
fairness opinion is a complex process involving the application of subjective
business judgment in determining the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances and, therefore, is not readily susceptible to summary description.
BT Alex. Brown believes that its analyses must be considered as a whole and that
considering any portion of such analyses and of the factors considered without
considering all analyses and factors could create a misleading view of the
process underlying the opinion. In arriving at its fairness determination, BT
Alex. Brown did not assign specific weights to any particular analyses.
In conducting its analyses and arriving at its opinions, BT Alex. Brown
utilized a variety of generally accepted valuation methods. The analyses were
prepared solely for the purpose of enabling BT Alex. Brown to provide its
opinion to the WCI Board of Directors as to the fairness to WCI of the Aggregate
Transaction Value and does not purport to be appraisals or necessarily reflect
the prices at which businesses or securities actually may be sold, which are
inherently subject to uncertainty. In connection with its analyses, BT Alex.
Brown made, and was provided by WCI management with, numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond WCI's or the Corporations' control.
Analyses based on estimates or forecasts of future results are not necessarily
indicative of actual past or future values or results, which may be
significantly more or less favorable than suggested by such analyses. Because
such analyses are inherently subject to uncertainty, being based upon numerous
factors or events beyond the control of WCI, the Corporations or their
respective advisors, neither
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WCI nor BT Alex. Brown nor any other person assumes responsibility if future
results or actual values are materially different from these forecasts or
assumptions.
The terms of the Mergers were determined through negotiations between WCI
and the Corporations and were approved by the WCI Board of Directors. Although
BT Alex. Brown provided limited financial advice to WCI during the course of
these negotiations, the decision to enter into the Mergers was solely that of
the WCI Board of Directors. As described above, the preliminary oral opinion and
presentation of BT Alex. Brown to the WCI Board of Directors was only one of a
number of factors taken into consideration by the WCI Board of Directors in
making its determination to approve the Mergers. BT Alex. Brown's opinion was
provided to the WCI Board of Directors to assist it in connection with its
consideration of the Mergers and does not constitute a recommendation to any
holder of WCI Common Stock as to how to vote with respect to the Mergers.
WCI selected BT Alex. Brown as financial advisor in connection with the
Mergers based on BT Alex. Brown's qualifications, expertise, reputation and
experience in mergers and acquisitions. WCI has retained BT Alex. Brown pursuant
to a letter agreement dated September 25, 1998 (the "Engagement Letter"). As
compensation for BT Alex. Brown's services in connection with the Mergers, WCI
has agreed to pay BT Alex. Brown a cash fee of $250,000. Regardless of whether
the Mergers are consummated, WCI has agreed to reimburse BT Alex. Brown for
reasonable fees and disbursements of BT Alex. Brown's counsel and all of BT
Alex. Brown's reasonable travel and other out-of-pocket expenses incurred in
connection with the Mergers or otherwise arising out of the retention of BT
Alex. Brown under the Engagement Letter. WCI has also agreed to indemnify BT
Alex. Brown and certain related persons to the full extent lawful against
certain liabilities, including certain liabilities under the federal securities
laws arising out of its engagement or the Mergers. The terms of the compensation
to be paid by WCI to BT Alex. Brown were determined through arms-length
negotiations based on customary transactions of this nature.
BT Alex. Brown is an internationally recognized investment banking firm
experienced in providing advice in connection with mergers and acquisitions and
related transactions. BT Alex. Brown has provided financial advisory and
investment banking services to WCI in the past for which it has received
compensation, including acting as the managing underwriter in an initial public
offering of WCI Common Stock in May, 1998. BT Alex. Brown was paid $991,047.93
in its capacity as lead managing underwriter of the WCI initial public offering.
BT Alex. Brown and its affiliates may actively trade securities of WCI for their
own account or the account of their customers and, accordingly, may from time to
time hold a long or short position in such securities.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes all material federal income tax
consequences of the Mergers to WCI , the Merger Subs, the Corporations and the
Shareholders under the Code, but does not discuss all tax consequences of the
Mergers that may be relevant a party in light of its particular circumstances.
Furthermore, the discussion does not address any foreign, state or local tax
considerations.
The Merger Agreement contemplates that the Mergers will constitute a
reorganization within the meaning of Section 368(a) of the Code. Qualification
of the Mergers as a reorganization under Section 368(a) of the Code will have
the following federal income tax consequences:
(a) WCI, the Merger Subs and the Corporations will not recognize any
gain or loss as a result of the Mergers;
(b) the Shareholders will not recognize any gain or loss on their
exchange of the Corporations' stock solely for shares of WCI Common Stock;
(c) the tax basis of the shares of WCI Common Stock a Shareholder
receives in the Mergers will be the same as that Shareholder's tax basis in
the shares of common stock of the Corporations surrendered in exchange for
those shares; and
(d) the holding period of the shares of WCI Common Stock received by a
Shareholder in the Mergers will include the holding period of the shares of
common stock of the Corporations surrendered in exchange for such shares,
if the Shareholder held the shares surrendered as capital assets at the
Effective Time.
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There can be no assurance that the Mergers will constitute a reorganization
under Section 368(a) of the Code.
ACCOUNTING TREATMENT
WCI anticipates that the Mergers will be accounted for using the "pooling
of interests" method of accounting pursuant to APB No. 16. The pooling of
interests method assumes that the combining companies have been merged since
inception. The historical financial statements for periods prior to consummation
of the Mergers are restated as though the companies had been combined from
inception.
A condition to the closing of the Mergers is that Ernst & Young LLP must
have delivered to WCI a letter addressed to WCI regarding that firm's
concurrence with WCI's and the Corporations' management that
poolings-of-interests accounting under APB No. 16 for the Mergers is appropriate
if the Mergers are closed and consummated in accordance with the Merger
Agreement.
GOVERNMENT AND REGULATORY APPROVALS
The Antitrust Division of the Department of Justice (the "Antitrust
Division") and the Federal Trade Commission (the "FTC") review transactions such
as the Mergers to determine whether they comply with applicable antitrust laws.
Under the provisions of the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), the Mergers may not be consummated until the
waiting period requirements of the HSR Act have been satisfied. WCI and the
Corporations filed notification reports with the Antitrust Division and the FTC
under the HSR Act on October 28, 1998, and the Antitrust Division and the FTC
terminated the waiting period on November 17, 1998.
The FTC and the Antitrust Division frequently scrutinize the legality under
the antitrust laws of transactions such as the Mergers. At any time before or
after the Mergers, the Antitrust Division or the FTC could take such action
under the antitrust laws as it deems necessary or desirable in the public
interest, including seeking to enjoin the Mergers or seeking divestiture of
substantial assets of WCI or any Corporation. Private parties and state
attorneys general may also bring actions under the antitrust laws under certain
circumstances. There can be no assurance that a challenge to the Mergers on
antitrust grounds will not be made.
The Mergers cannot be consummated until all governmental and other waivers,
consents, orders and approvals legally required have been obtained and are in
effect. All material governmental and other approvals have been obtained.
INTERESTS OF CERTAIN PERSONS IN THE MERGERS
In connection with the Mergers, Donald J. Hawkins and Irmgard R. Wilcox,
currently executive officers of the Corporations, will enter into new Employment
Agreements with WCI, which will entitle them to specified salaries, benefits and
other compensation. See "Other Agreements -- Employment Agreements."
RESTRICTIONS ON RESALES BY AFFILIATES
Under the Merger Agreement, after the Effective Time, no Shareholder and
none of certain affiliates of a Corporation or WCI may sell or otherwise reduce
such person's risk relative to any shares of WCI Common Stock held at the
Effective Time or received pursuant to the Merger Agreement until financial
results covering at least 30 days of the combined operations of WCI and the
Surviving Corporations have been published. Under Commission guidelines
interpreting generally accepted accounting principles, if any Shareholder or any
affiliate of WCI or a Corporation sells or otherwise acts to reduce that
person's risk relative to any shares of WCI Common Stock, the Mergers may not be
accounted for using the pooling of interests method.
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MATERIAL TERMS OF THE MERGERS
The following summary of the terms of the Merger Agreement is qualified in
its entirety by reference to the Merger Agreement, a copy of which is attached
to this Proxy Statement as Annex A. Certain capitalized terms used in this Proxy
Statement without definition have the meanings assigned to them in the Merger
Agreement.
EFFECTIVE TIME OF THE MERGERS
Each of the Mergers will become effective at the time specified in the Plan
of Merger. Assuming that the WCI stockholders approve the issuance of shares of
WCI Common Stock pursuant to the Merger Agreement, WCI expects that the
Effective Time of the Mergers will occur as soon as practicable following the
Special Meeting. If all other conditions to the Mergers have not been satisfied
or waived prior to the Special Meeting, however, WCI expects that the Mergers
will occur as soon as practicable after such conditions have been satisfied or
waived.
MANNER AND BASIS FOR CONVERTING SHARES
At the Effective Time, Merger Subs I, II, III and IV will merge with and
into Murrey's, American, DM and Tacoma, respectively, and each of the
Corporations will become a wholly owned subsidiary of WCI. All outstanding
shares of the Corporations' common stock will be converted into 2,750,000,
subject to adjustment up to 3,250,000, shares of WCI Common Stock (the
"Aggregate WCI Stock"). The number of shares of Aggregate WCI Stock will be
determined at the Closing Date, and will consist of 2,750,000 shares, increased
by 55,555 shares for each whole dollar by which the closing price of WCI Common
Stock on the Nasdaq National Market on the last trading day before the closing
date (the "Closing Price") is less than $20.50 but more than $15.99, and
increased by 83,333.333 shares for each whole dollar by which the Closing Price
is less than $13.00 but more than $9.99, and increased proportionately for any
such amount less than one dollar. No more than 250,000 additional shares will be
issued if the Closing Price is less than $16.00 but more than $13.00. In no
event will more than 3,250,000 shares of Aggregate WCI stock be issued. The
shareholders of Murrey's, American, DM and Tacoma will receive 42%, 13%, 28% and
17%, respectively, of the Aggregate WCI Stock. At the Effective Time, each share
of common stock of each of Merger Subs I, II, III and IV will be converted into
one share of common stock of the corresponding Surviving Corporation.
WCI will not issue any certificates of scrip for fractional shares of WCI
Common Stock in the Mergers, and no WCI Common Stock dividend, stock split or
interest will relate to any fractional security. WCI will pay each Shareholder
cash in lieu of any fractional shares, in an amount equal to the Closing Price,
multiplied by the fraction of a share of WCI Common Stock that would otherwise
have been issued to the Shareholder.
CONDITIONS TO THE MERGERS
WCI, the Merger Subs, the Corporations and the Shareholders are obligated
under the Merger Agreement to complete the Mergers only if the following
conditions are satisfied at or before the Closing Date: (a) all necessary
governmental and other consents, approvals and waivers must have been received;
(b) no court or governmental or regulatory authority may have enjoined any of
the transactions contemplated by the Merger Agreement, no suit or other
proceeding challenging such transactions may have threatened or instituted, and
no governmental or regulatory authority may have made any investigative or other
demand concerning the Mergers; (c) WCI's Registration Statements on Form S-4
covering the shares of Aggregate WCI Stock must then be effective under the
Securities Act; (d) WCI must have filed an additional listing application with
the Nasdaq National Market with respect to the shares of Aggregate WCI Stock;
(e) WCI must have received a letter from Ernst & Young LLP regarding that firm's
concurrence with WCI's and the Corporations' management's conclusions as to the
appropriateness of pooling of interests accounting for the Mergers, (f) the
Corporations must have entered into the Disposal Agreement, and (g) other
conditions relating to the accuracy of each party's representations and
warranties and compliance with all covenants, agreements and conditions in the
Merger Agreement must have been satisfied.
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In addition, WCI and the Merger Subs are obligated to complete the Mergers
only if the following additional conditions are satisfied or waived at or before
the Closing Date: (a) the Shareholders must have delivered an opinion of legal
counsel for the Shareholders, Employment Agreements executed by each of Donald
J. Hawkins and Irmgard R. Wilcox, evidence that the required consents have been
obtained, estoppel certificates from each of the Corporations' landlords,
resignations of and a general release from the Corporations' officers and
directors, Plans of Merger executed by the Corporations, the executed Affiliate
Letter, and the executed Common Stock Agreement; (b) First American Title
Insurance Company must be irrevocably committed to issue appropriate title
insurance with respect to the Corporations' properties; (c) there must have been
no material adverse change in the financial condition, business, properties or
assets of any Corporation since the date the Merger Agreement was signed; (d)
the WCI stockholders must have approved the Mergers; (e) no Shareholder may have
exercised appraisal rights under Washington Law with respect to any shares of a
Corporation's stock; and (f) WCI shall have reviewed and found reasonably
satisfactory any amended schedules to the Merger Agreement and other documents
relating to real property owned or leased by the Corporations.
In addition, the Corporations and the Shareholders are obligated to
complete the Mergers only if the following additional conditions are satisfied
or waived at or before the Closing Date: (a) WCI must have delivered an opinion
of legal counsel for WCI, Employment Agreements between WCI and each of Donald
J. Hawkins and Irmgard R. Wilcox executed by WCI, the Common Stock Agreement
executed by WCI, and Plans of Merger executed by WCI and the Merger Subs; (b)
there must not have been any material adverse change in the condition (financial
or otherwise), business, properties or assets of WCI since the date the Merger
Agreement was signed; and (c) the Shareholders must be reasonably satisfied that
the Mergers will constitute reorganizations within the meaning of Section
368(a)of the Code and that the Shareholders will not recognize any gain or loss
upon the exchange of their shares of the Corporations' stock for shares of the
Aggregate WCI Stock.
COOPERATION
Under the Merger Agreement, each of the parties has agreed to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by the Merger
Agreement.
REPRESENTATIONS AND WARRANTIES OF WCI AND THE MERGER SUBS AND THE CORPORATIONS
AND THE SHAREHOLDERS
In the Merger Agreement, WCI and the Merger Subs and the Corporations and
the Shareholders have made various representations and warranties relating to,
among other things, the respective businesses and financial condition of WCI and
the Corporations, the accuracy of WCI's filings with the Commission, the
satisfaction of certain legal requirements for the Mergers and the absence of
contractual restrictions or required consents in connection with the
consummation of the Mergers and related transactions.
CONDUCT OF THE BUSINESS OF WCI AND THE CORPORATIONS PRIOR TO THE MERGERS
Under the Merger Agreement, each Corporation has agreed that, after the
date of the Merger Agreement and prior to the Effective Time, it will (a) carry
on its business in substantially the same manner as it has before and not
introduce any material new method, or discontinue any existing material method,
of operation or accounting; (b) maintain its equipment, assets, Corporate
Properties and Facilities, including those held under leases, in as good working
order and condition as at present, except for ordinary wear and tear; (c)
perform all of its material obligations under agreements relating to or
affecting its assets, Corporate Properties, Facilities, business operations and
rights; (d) keep in full force and effect present insurance policies or other
comparable insurance coverage; (e) use its commercially reasonable efforts to
maintain and preserve its business organization intact, retain its present
employees and maintain its relationships with suppliers, customers and others
having business relations with it; (f) file on a timely basis all notices,
reports or other filings required to be filed with or reported to any federal,
state, municipal or other governmental department, commission, board, bureau or
agency with respect to the continuing operations of such Corporation; (g)
maintain material compliance with all Governmental Permits and all laws, rules,
regulations
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and consent orders; (h) file on a timely basis all complete and correct
applications or other documents necessary to maintain, renew or extend any site
assessment, permit, license, variance or any other approval required by any
governmental authority necessary and/or required for the continuing operation of
each Corporation's business operations, whether or not such approval would
expire before or after the Effective Time; (i) advise WCI promptly in writing of
any material change in any document, Schedule, Exhibit or other information
delivered pursuant to the Merger Agreement; (j) promptly make all filings and
take all steps reasonably necessary to obtain all approvals and consent required
to be obtained by the Corporation or its Shareholders to consummate the
transactions contemplated by the Merger Agreement; and (k) not, without the
prior written consent of WCI, (i) change its Articles of Incorporation or
Bylaws, (ii) authorize, issue, transfer or distribute any of its securities
(including issuance of any option, warrant or right), (iii) declare or pay any
dividend or make any distribution in respect of its capital stock outstanding,
or purchase, redeem or otherwise acquire or retire for value any shares of its
or any other Corporation's capital stock, (iv) except in accordance with any
contracts or commitments entered into before date the Merger Agreement was
signed or in the ordinary course of business after that date, enter into any
contract or commitment or incur or agree to incur any liability other than in
the ordinary course of business other than the transactions contemplated by the
Merger Agreement, borrow funds, or make any single capital expenditure in excess
of $10,000 or in excess of $25,000 in the aggregate during any consecutive
thirty day period without regard to whether such capital expenditure is in the
ordinary course of business, (v) except as set forth in Schedule 5.3 to the
Merger Agreement, change or promise to change the compensation payable or to
become payable to any director, officer, employee or agent, or make or promise
to make any bonus payment to any such person, (vi) create, assume or otherwise
permit the imposition of any mortgage, pledge or other lien (except for current
property taxes) or encumbrance upon or grant any option or right of first
refusal with respect to any assets or properties whether now owned or hereafter
acquired, (vii) sell, assign, lease or otherwise transfer or dispose of any
property or equipment other than in the ordinary course of business, (viii)
merge or consolidate or agree to merge or consolidate with or into any firm,
corporation or other entity, (ix) waive any material rights or claims, (x) amend
or terminate any material agreement or any site assessment, permit, license or
other rights, (xi) enter into any other transaction outside the ordinary course
of such Corporation's business or prohibited under the Merger Agreement, (xii)
revoke any S corporation election by any of the Corporations, (xiii) take any
action or suffer or permit any event to occur that would cause any
representation or warranty of any Corporation or any Shareholder to become
untrue as of the Closing Date, (xix) take any action that would jeopardize the
treatment of the Mergers as a pooling of interests under APB No. 16; or (xx)
take or fail to take any action which action or failure to take action is
reasonably likely to cause the Corporations or the Shareholders (except to the
extent of stockholders in special circumstances) to recognize gain or loss for
federal income tax purposes as a result of the consummation of the Mergers or
otherwise or that otherwise is reasonably likely to cause the Mergers not to
qualify as a reorganization under Section 368(a) of the Code.
Under the Merger Agreement, each Shareholder has agreed that, after the
date of the Merger Agreement and before the Effective Time, such Shareholder
will not (a) take any action or permit any event to occur that would cause any
representation or warranty of any Corporation or any Shareholder to become
untrue as of the Closing Date; (b) take any action that would jeopardize the
treatment of the Mergers as a pooling of interests under APB No. 16; or (c) take
or fail to take any action which action or failure to take action is reasonably
likely to cause the Corporations or the Shareholders (except to the extent of
stockholders in special circumstances) to recognize gain or loss for federal
income tax purposes as a result of the consummation of the Mergers or otherwise
or that otherwise is reasonably likely to cause the Mergers not to qualify as a
reorganization under Section 368(a) of the Code.
The Merger Agreement provides that it does not give WCI, directly or
indirectly, the right to control or direct any Corporation's operations before
the Effective Time, and that, before the Effective Time, each Corporation will
exercise complete control and supervision of its operations, consistent with the
terms and conditions of the Merger Agreement.
The Merger Agreement further provides that between the date of the Merger
Agreement and the Effective Time, there will be no change in voting structure or
relative ownership of any Corporation without the prior consent of WCI.
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NO SOLICITATION OF ACQUISITION TRANSACTIONS
The Merger Agreement provides that, after the date of the Merger Agreement
and before the Effective Time or earlier termination of the Merger Agreement,
the Corporations and the Shareholders will not initiate, solicit, negotiate,
encourage or provide information to facilitate, and each of such Corporations
and the Shareholders will not and will use his, her or its reasonable efforts to
cause any officer, director or employee of such Corporation, or any attorney,
accountant, investment banker, financial advisor or other agent retained by him,
her or it not to, initiate, solicit, negotiate, encourage or provide information
to facilitate, any proposal or offer to acquire all or any substantial part of
the business, properties or capital stock of any such Corporation, whether by
merger, purchase of assets or otherwise, and whether for cash, securities or any
other consideration.
CONDUCT OF THE BUSINESS OF THE COMBINED COMPANIES FOLLOWING THE MERGERS
Following the Mergers, each of the Corporations will be a wholly owned
subsidiary of WCI. Pursuant to the Merger Agreement, the Articles of
Incorporation and Bylaws of each of the Corporations, as in effect immediately
prior to the Effective Time, will be the Articles of Incorporation and Bylaws of
the respective Surviving Corporation until amended in accordance with their
terms and applicable law. Also pursuant to the Merger Agreement, the officers
and directors of the Merger Subs immediately prior to the Effective Time will be
the officers and directors of the respective Surviving Corporations and will
hold office until their respective successors are duly elected and qualified or
their earlier death, resignation or removal.
TERMINATION OR AMENDMENT
Termination. The Merger Agreement may be terminated under certain
circumstances, including (a) by mutual consent of WCI and the Corporations; (b)
if the Effective Date has not occurred by March 31, 1999, unless the
Corporations have not then obtained all consents required under the Merger
Agreement, in which event the Merger Agreement will terminate 10 days after
written notice from WCI to the Corporations or 10 days after the later of (i) if
any such consent is denied, the lapse of the latest time for filing any appeal
of such denial, and (ii) if any such consent is denied and such denial is
appealed, the day the last appeal of such denial has been dismissed, refused or
decided adversely to the Corporation seeking the consent; (c) by WCI if WCI
fails to obtain the required approval of the WCI stockholders before January 31,
1999, or if the Shareholders or the Corporations make a material change to any
Schedule, document or other information provided by the Shareholders or the
Corporations to WCI or its agents, WCI deems the change unacceptable and the
Shareholders have not cured the problem to WCI's reasonable satisfaction by the
later of November 30, 1998, or the scheduled Closing Date; and (d) either by WCI
or by the Corporations and the Shareholders at any time before the Closing Date
(i) upon breach of a representation or warranty by the other party (the
"Non-Terminating Party"), which is not cured in all material respects and which
has had or is likely to have a material adverse effect and is incapable of being
satisfied by the Termination Date, (ii) if one or more of the Mergers are
enjoined by a final, unappealable court order not entered at the request or with
the support of the party requesting termination (the "Terminating Party") and if
the Terminating Party against which such order is entered used reasonable
efforts to prevent the entry of such order, or (iii) if the Non-Terminating
Party fails to perform in any material respect any of its covenants in the
Merger Agreement and does not cure such default in all material respects within
30 days after written notice of such default specifying such default in
reasonable detail is given to the Non-Terminating Party by the Terminating
Party. If the Merger Agreement is terminated because of WCI's dissatisfaction
with the Schedules and documents relating to the Corporations' real property,
the Shareholders and the Corporations will have no further liability to WCI or
any other party to the Merger Agreement.
Amendment. The Merger Agreement may be modified or amended only by a
written instrument signed by the Shareholders, the Corporations and WCI, duly
authorized by its Board of Directors. The Merger Agreement may be amended at any
time before the Closing Date, and, subject to applicable law, whether before or
after the WCI stockholders approve the issuance of shares of WCI Common Stock
pursuant to the Merger Agreement. See "Certain Terms of the
Mergers -- Termination or Amendment."
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TRANSACTION FEES
Under the Merger Agreement WCI, the Merger Subs, the Corporations and the
Shareholders will each pay their own fees, expenses and disbursements incurred
in connection with the Merger Agreement, whether or not the Mergers and related
transactions are consummated, although WCI will pay for the audits of the
Corporations by Ernst & Young LLP and will pay all filing fees under the
Securities Act, the Securities Exchange Act of 1934, as amended, and the HSR
Act.
INDEMNIFICATION
The Merger Agreement provides that, subject to certain limitations
described below, after the date of the Merger Agreement, the Shareholders,
jointly and severally, and as to each of the Corporations in which they are
shareholders, severally, will indemnify and hold harmless WCI, the Surviving
Corporations, their respective directors, officers and agents and their
successors and assigns (the "WCI Indemnitees") from and against any and all
losses, damages, assessments, fines, penalties, adjustments, liabilities,
claims, deficiencies, costs and expenses (including reasonable attorneys' fees
and investigation expenses), including any Environmental Site Losses resulting
from activities prior to the Closing Date, identified by a WCI Indemnitee in a
Claims Notice or asserted by a WCI Indemnitee in a litigation commenced against
the Shareholders with respect to:
(a) any misrepresentation, breach of warranty or nonfulfillment of any
agreement or covenant of the Shareholders or the Corporations under the
Merger Agreement or any misrepresentation in or omission from any Exhibit,
Schedule, list, certificate or other instrument furnished to WCI pursuant
to the Merger Agreement, regardless of whether, in the case of a breach or
a representation or warranty, WCI relied on the truth of such
representation or warranty or had any knowledge of any breach thereof;
(b) the design, development, installation, construction or operation
by any of the Corporations of any facility, underground storage tank, or
other waste storage, processing, treatment or disposal facility owned,
leased, controlled or operated by a Corporation or its predecessor on or
prior to the Closing Date;
(c) any claim that the execution and delivery of the Merger Agreement
and consummation of the transactions contemplated by the Merger Agreement
did not comply with or otherwise breached the LeMay Agreement; or
(d) all actions, suits, proceedings, demands, assessments,
adjustments, costs and expenses (including reasonable attorneys' fees and
investigation expenses) incident to any of the foregoing.
The Merger Agreement provides that, subject to certain limitations
described below, after the date of the Merger Agreement, WCI will indemnify and
hold harmless the Shareholders and their heirs, trustees, beneficiaries,
successors and assigns (the "Shareholder Indemnitees") from and against any and
all losses, damages, assessments, fines, penalties, adjustments, liabilities,
claims, deficiencies, costs and expenses (including reasonable attorneys' fees
and investigation expenses), identified by a WCI Indemnitee in a Claims Notice
or asserted by a WCI Indemnitee in a litigation commenced against the
Shareholders with respect to:
(a) any misrepresentation, breach of warranty or nonfulfillment of any
agreement or covenant of WCI or any Merger Sub under the Merger Agreement
or any misrepresentation in or omission from any Exhibit, Schedule, list,
certificate or other instrument furnished to the Shareholders pursuant to
the Merger Agreement; and
(b) all actions, suits, proceedings, demands, assessments,
adjustments, costs and expenses (including reasonable attorneys' fees and
investigation expenses) incident to any of the foregoing.
Claims for indemnification made under the Merger Agreement are subject to
the following limitations:
(a) The Shareholders are obligated to indemnify the WCI Indemnitees
with respect the amount by which the cumulative amount of all amounts
subject to indemnity by the Shareholders exceeds $1,000,000 in the
aggregate with respect to all of the Corporations. WCI is obligated to
indemnify the Shareholder Indemnitees with respect to the amount by which
the cumulative amount of all amounts
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subject to indemnity by WCI exceeds $1,000,000. Indemnities arising with
respect to representations, warranties or covenants in Sections 2.1, 3.1
through 3.5, 3.22, 4.4 through 4.7, 9.6 and 9.11 of the Merger Agreement
are not subject to these requirements.
(b) The maximum amount that the Shareholders can recover is equal to
50% of the Aggregate Merger Consideration;
(c) The maximum amount that WCI can recover for claims relating to
each Corporation is equal to the following percentages of the Aggregate
Merger Consideration: Murrey's -- 21%; American -- 6.5%; DM -- 14%; and
Tacoma -- 8.5%.
(d) The obligations of WCI and the Shareholders with respect to claims
subject to indemnification will expire unless a Claims Notice with all
required information is given or litigation is commenced by filing a
complaint on or before the earlier to occur of (irrespective of the date of
the discovery of the event subject to indemnity) (i) the first anniversary
of the Effective Time, or (ii) the date the first audit report after the
Effective Time of the financial statements that contain the combined
results of WCI and the Surviving Corporations is issued;
(d) Neither WCI nor the Shareholders will be required to indemnify the
other party for any claim to the extent such claim has been reimbursed or
is reimbursable through insurance proceeds receivable by the indemnified
party, except to the extent such claim directly results in an increase in
insurance premiums on a prospective basis;
(e) All claims for which indemnification is due will be deemed
adjustments to the consideration for the Mergers; and
(f) Any obligation of the Shareholders to indemnify WCI will be
expressed in dollar amounts but satisfied first by the delivery to WCI of a
number of shares of WCI Common Stock, each of which will be deemed to have
a value equal to its closing price on the Closing Date, and then by the
payment of cash by the Shareholders.
OTHER AGREEMENTS
Employment Agreements
The Merger Agreement provides that, at the Closing, WCI will enter into an
Employment Agreement with each of Donald J. Hawkins and Irmgard R. Wilcox. Under
the Employment Agreements, WCI will pay annual compensation of $80,000 to each
of Mr. Hawkins and Ms. Wilcox in consideration of each of their performance of
certain duties on behalf of WCI. Each will be eligible for an annual bonus of up
to 60% of base salary, and will receive the use of a WCI vehicle, reimbursement
of business-related expenses, and standard benefits provided to other WCI
management employees. Mr. Hawkins and Ms. Wilcox will each receive a signing
bonus of $2,000,000 on entering into his or her respective Employment Agreement.
Both of the Employment Agreements contain non-competition provisions
pursuant to which Mr. Hawkins and Ms. Wilcox are prohibited from competing with
WCI in Washington for five years after the Closing Date of the Mergers, except
for participation in certain named companies with which they have existing
relationships.
The term of each Employment Agreement is three years, and each Employment
Agreement may be terminated by WCI at any time, with or without cause, or by the
employee. On a termination without cause, the employee will be paid an amount
equal to the greater of one year's base salary or the amount of base salary that
would accrue from the employee's termination until the fifth anniversary of the
Closing Date of the Mergers. A change in control of WCI will be deemed a
termination of the employee without cause.
Affiliate Letter
The Shareholders will agree in writing (the "Affiliate Letter") that, until
WCI publishes financial results covering at least 30 days of post-Mergers
combined operations of WCI and the Corporations, they will not sell,
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transfer or otherwise dispose of any shares of WCI Common Stock that they own.
The Shareholders will also agree in the Affiliate Letter to sell shares of WCI
Common Stock issued to them pursuant to the Mergers only (i) in accordance with
Rule 145 under the Securities Act, (ii) pursuant to an effective registration
statement, (iii) after WCI's receipt of a legal opinion satisfactory to WCI that
no registration would be required in connection with the proposed sale, or (iv)
after the Shareholders' receipt of written advice from the Commission that the
Commission would not take action with respect to the proposed sale.
Common Stock Agreement
WCI and the Shareholders will enter into an agreement (the "Common Stock
Agreement") describing the Shareholders' registration rights with respect to the
Aggregate WCI Stock they receive pursuant to the Mergers. Under the Common Stock
Agreement, WCI agrees to maintain, for one year after the Effective Time, an
effective registration statement or statements filed pursuant to the Securities
Act, that include all of the Aggregate WCI Stock. WCI may suspend the
Shareholders' use of such registration statements if WCI determines that they
are untrue in any material respect or omit material information.
Under the Common Stock Agreement, WCI and each of the Shareholders will
indemnify each other for losses that arise out of or are based on untrue
statements or material omissions in a WCI registration statement or prospectus,
for which statements or omissions the indemnifying party is responsible.
Disposal Agreement
WCI and the Corporations will enter into an agreement (the "Disposal
Agreement") under which WCI agrees that, after the Mergers, the Surviving
Corporations will continue to dispose of all solid waste they collect in Pierce
County, Washington through Land Recovery, Inc., in the same manner and on the
same terms as the Corporations did before the Mergers. The Murrey Trust owns
one-third of the outstanding capital stock of Land Recovery, Inc.
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AMENDMENT TO WCI'S 1997 STOCK OPTION PLAN
GENERAL
The WCI stockholders are also being asked to approve an amendment to WCI's
1997 Stock Option Plan that increases the number of shares of WCI Common Stock
authorized for issuance pursuant to that plan. A copy of the 1997 Stock Option
Plan is attached to this Proxy Statement as Annex C. Currently, up to 1,200,000
shares of WCI Common Stock may be issued under the plan. WCI's Board of
Directors has amended the 1997 Stock Option Plan to allow for the grant of
options to acquire up to 12% of the shares of WCI Common Stock outstanding any
given time and directed that such an amendment be submitted to the WCI
stockholders for their approval. Since inception of the 1997 Stock Option Plan
on October 1, 1997, and through January 5, 1999, options to purchase 1,039,550
shares of Common Stock have been granted (net of cancellations), 60,786 shares
have been issued on exercise of options and 160,250 shares are reserved for
issuance on exercise of currently outstanding options.
WCI's Board believes that WCI's continued success depends upon its ability
to attract and retain highly competent persons as employees, consultants and
directors. The Board believes that one of the best ways to attain this objective
is to give such persons the opportunity to acquire an ownership interest in WCI
by purchasing shares of WCI Common Stock through the exercise of options granted
under the 1997 Stock Option Plan.
Approval of the amendment, which will be submitted at the Special Meeting
in the form of the following resolution, requires the affirmative vote of a
majority of the shares of WCI Common Stock represented in person or by proxy at
the Special Meeting.
"RESOLVED, that the first sentence of Section 3 of the 1997 Stock Option
Plan is amended and restated in its entirety to provide as follows:
Subject to adjustment as provided in section 6 for changes in Stock, the
Stock that may be sold pursuant to Options shall not exceed in the aggregate 12%
of the number of shares of Stock outstanding at any given time; and
RESOLVED further, that Section 6(a) of the 1997 Stock Option Plan shall be
deleted."
SUMMARY OF 1997 STOCK OPTION PLAN
The 1997 Stock Option Plan (the "Plan") is intended to give employees,
consultants and directors additional incentives by increasing their proprietary
interests in WCI. Employees, consultants and directors of WCI are eligible to
participate in the Plan. As of January 6, 1999, approximately 650 employees,
three consultants and four directors were eligible to participate in the Plan.
The Plan is administered by the Compensation Committee of WCI's Board of
Directors. That committee determines the employees, consultants and directors to
whom options are granted, the type, size and term of the options, the grant
date, the exercise price, the expiration date, the vesting schedule and other
terms and conditions of the options. The Compensation Committee currently
consists of William Razzouk, Eugene Dupreau and Michael Harlan.
The Plan provides for the grant of incentive stock options ("ISOs") as
defined in Section 422 of the Code, and nonqualified stock options. Only
employees of WCI may receive ISOs. The aggregate fair market value, as of the
grant date, of the WCI Common Stock subject to ISOs that become exercisable by
any employee in any calendar year may not exceed $100,000. Options generally
become exercisable in installments according to a vesting schedule in the option
agreement. No option may be granted after September 30, 2007. No option will be
exercisable more than 10 years after the grant date (or five years in the case
of ISOs granted to an optionee who owns more than 10% of the combined voting
power of all classes of WCI's outstanding capital stock (a "Ten Percent
Stockholder")). The exercise price of ISOs granted under the Plan must at least
equal the fair market value of a share of WCI Common Stock on the grant date (or
110% of such fair market value, in the case of an ISO granted to a Ten Percent
Stockholder).
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<PAGE> 36
If an optionee with outstanding options retires or becomes disabled and
does not die within the three months after retirement or disability, the
optionee may exercise his or her options, but only during the period ending
(subject to the discretion of the Compensation Committee) on the earlier of six
months after retirement or disability, or the expiration date in the option
agreement. If an optionee with outstanding options dies while an employee,
consultant or director or within three months after termination of such status
because of disability or retirement, the optionee's estate may exercise the
optionee's options, but only during the period ending on the earlier of one year
after the optionee's death, or the expiration date in the option agreement.
Options not exercised within the periods specified above will terminate, and the
shares of WCI Common Stock subject to the options will become available for
issuance under the Plan. If an optionee's engagement by WCI as an employee,
consultant or director ends because of a reason other than the optionee's death,
retirement or disability, his or her options terminate on the date such
engagement terminates, subject to the discretion of the Compensation Committee,
and the shares of WCI Common Stock subject to the options become available for
issuance under the Plan. Each option agreement may include WCI's right to
repurchase, when the optionee's engagement by WCI terminates, any shares of WCI
Common Stock the optionee acquired on exercise of options.
The Plan provides that the total number of shares covered by the Plan, the
number of shares covered by each option, and the exercise per share under each
option will be proportionately adjusted if a stock or other non-cash dividend,
recapitalization, reorganization, reclassification, stock split or reverse stock
split, liquidating dividend, combination or exchange of shares, merger or
consolidation, offering of shares at a price substantially below fair market
value or similar capital adjustment occurs.
WCI's Board of Directors may amend the Plan at any time, but no amendment
may alter or impair rights and obligations under any option granted before such
amendment unless the optionee consents in writing, and the Board will seek the
consent of WCI stockholders to any amendment to the extent required by law.
OPTIONS GRANTED IN 1998 UNDER THE PLAN
The following table sets forth the options granted under the Plan in 1998
to certain executive officers, all executive officers as a group, all
non-employee directors, and all employees who were not executive officers.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING OPTIONS
NAME AND POSITION GRANTED(1)
----------------- ------------------
<S> <C>
Steven F. Bouck............................................. 200,000
Chief Financial Officer
All executive officers as a group (8 persons)............... 270,000
All directors who were not executive officers............... 30,000
All employees who were not executive officers, as a group... 211,050
</TABLE>
- ---------------
(1) All options were issued at at least 100% of fair market value on the grant
date and expire ten years after the grant date.
On December 31, 1998, the last reported sale price of WCI Common Stock on
the Nasdaq National Market was $18.375 per share.
FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
Incentive Stock Options
The following federal income tax rules generally apply to holders of ISOs
and to WCI under current law:
(a) The optionee does not realize any taxable income when granted or
exercising an ISO, and WCI does not receive a tax deduction.
(b) If the optionee holds the shares acquired on exercise of an ISO
for at least two years after the date the ISO is granted and one year after
the optionee exercises the ISO, the difference between the
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<PAGE> 37
amount the optionee realizes when he or she later sells the shares and the
price the optionee paid to exercise the ISO is generally treated as capital
gain or loss to the optionee.
(c) If the optionee sells the shares before both of those periods have
elapsed (a "disqualifying disposition"), the optionee in most cases
recognizes as ordinary income in the year of the sale the lesser of his or
her actual gain on the sale, or the excess of the fair market value of the
shares on the exercise date over the exercise price. WCI generally may
deduct the same amount.
(d) If the optionee makes a disqualifying disposition, he or she
recognizes as capital gain the excess of the amount received on such sale
over the sum of the exercise price plus the amount of ordinary income the
optionee recognized on the sale.
(e) The amount by which the fair market value of the WCI Common Stock
the optionee acquires on exercise of the ISO exceeds the exercise price may
be taxable to the optionee under the "alternative minimum tax" provisions
of the Code.
Nonqualified Stock Options
The following federal income tax rules generally apply to holders of
nonqualified stock options and to WCI under current law:
(a) The optionee does not realize any taxable income when granted a
nonqualified option, and WCI does not receive a tax deduction.
(b) When the optionee exercises a nonqualified option, he or she
recognizes ordinary income equal to the excess of the fair market value on
the exercise date of the shares of WCI Common Stock purchased on exercise
of the option over the exercise price. WCI may deduct the same amount.
BOARD RECOMMENDATION
The WCI Board of Directors recommends a vote FOR approval of the amendment
to WCI's 1997 Stock Option Plan.
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<PAGE> 38
WCI SPECIAL MEETING
DATE, TIME AND PLACE OF THE MEETING
The Special Meeting will be held at 9:00 a.m., Pacific Time, on January 19,
1999, at Courtyard by Marriott, 1920 Taylor Road, Roseville, California.
PURPOSE OF THE MEETING
The purpose of the Special Meeting is to consider and act upon the Merger
Proposal and the Option Plan Proposal. Any other proper business may be
transacted at the Special Meeting or any adjournments thereof. WCI stockholder
approval of the issuance of shares of WCI Common Stock pursuant to the Merger
Agreement is required in accordance with Nasdaq rules, because the number of
shares of Aggregate WCI Stock to be issued in connection with the Mergers will
exceed 20% of the number of shares of WCI Common Stock outstanding immediately
before such issuance.
RECORD DATE AND OUTSTANDING SHARES
Only holders of record of WCI Common Stock at the close of business on
December 18, 1998 (the "Record Date") are entitled to notice of, and to vote at,
the Special Meeting.
On the Record Date, there were approximately 107 holders of record of WCI
Common Stock and approximately 9,314,290 shares of WCI Common Stock issued and
outstanding. Each share of WCI Common Stock entitles the holder to one vote on
each matter submitted for stockholder approval.
WCI will use an automated system administered by WCI's transfer agent to
tabulate the votes at the Special Meeting. Abstentions, directions to withhold
authority, and broker-non-votes count as shares present in determining whether
enough shares of WCI Common Stock are represented at the meeting to constitute a
quorum. Abstentions will count as part of the total number of votes cast in
determining whether a majority of the votes cast approve the Merger Proposal and
the Option Plan Proposal. Broker non-votes, however, will not count as part of
the total number of votes cast on the Proposals. Thus, abstentions will have the
same effect as votes against a Proposal, while broker non-votes will have no
effect in determining whether the WCI stockholders have approved either
Proposal.
VOTING AND REVOCATION OF PROXIES
All properly executed proxies that are not revoked will be voted at the
Special Meeting according to the instructions on such proxies. If a WCI
stockholder executes and returns a proxy and does not specify otherwise, the
shares represented by the proxy will be voted FOR approval and adoption of the
Merger Proposal and FOR approval and adoption of the Option Plan Proposal. A WCI
stockholder who has executed and returned a proxy may revoke it at any time
before it is voted at the Special Meeting by (a) executing and returning a proxy
bearing a later date, (b) filing a written notice of such revocation with the
Secretary of WCI stating that the proxy is revoked, or (c) attending the meeting
and voting in person.
Delaware law does not require WCI to give WCI stockholders who object to
the issuance of shares of WCI Common Stock in connection with the Mergers and
who vote against or abstain from voting in favor the Merger Proposal any
appraisal rights or the right to receive cash for their shares. WCI does not
intend to make any such rights available to its stockholders.
VOTE REQUIRED FOR APPROVAL
The presence at the Special Meeting, in person or by proxy, of holders of a
majority of the outstanding shares of WCI Common Stock entitled to vote at the
meeting will constitute a quorum for the transaction of business. Under rules of
the Nasdaq National Market, approval of the Merger Proposal requires the
affirmative vote of a majority of the shares of WCI Common Stock voted, in
person or by proxy, at the Special Meeting. Approval and adoption of the Option
Plan Proposal also requires the affirmative vote of a majority of
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<PAGE> 39
the total votes cast, in person or by proxy, at the Special Meeting. Approval
and adoption of the Option Plan Proposal is not a condition to the Mergers.
On the Record Date, the directors and officers of WCI and their affiliates
held approximately 1.7 million shares of WCI Common Stock, representing
approximately 19% of the outstanding shares. Such persons have indicated to WCI
that they intend to vote their shares in favor of the Merger Proposal and the
Option Plan Proposal.
SOLICITATION OF PROXIES
In addition to solicitation by mail, the directors, officers and employees
of WCI may solicit proxies from WCI's stockholders by personal interview,
telephone, facsimile or otherwise. WCI has engaged Corporate Investor
Communications, a proxy solicitation firm, to assist in the solicitation of
proxies from WCI stockholders. WCI will pay the fees in connection with the
solicitation by such firm, which are anticipated to be approximately $2,000,
plus such firm's out-of-pocket expenses. Arrangements will be made with
brokerage firms and other custodians, nominees and fiduciaries who hold WCI
Common Stock of record for the forwarding of solicitation materials to the
beneficial owners thereof. WCI will reimburse, brokers, custodians, nominees and
fiduciaries for the reasonable out-of-pocket expenses they incur in connection
therewith.
OTHER MATTERS
At the date of this Proxy Statement, the Board of Directors of WCI does not
know of any business to be presented at the Special Meeting other than as
described in the notice that accompanies this Proxy Statement.
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<PAGE> 40
WCI
BUSINESS
INTRODUCTION
WCI 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 January 6, 1999, WCI served more than 230,000
commercial, industrial and residential customers in California, Idaho, Kansas,
Nebraska, Oklahoma, Oregon, South Dakota, Utah, Washington and Wyoming. WCI
currently owns and operates 27 collection operations, seven transfer stations
and two Subtitle D landfills and operates an additional five transfer stations,
one Subtitle D landfill and five recycling facilities.
WCI was founded in September 1997 to execute an acquisition-based growth
strategy in secondary markets of the Western U.S. WCI has acquired 43 solid
waste services related businesses since its formation and has identified more
than 300 independent operators of such businesses in the states where it
currently operates, many of which it believes may be suitable for acquisition by
WCI. In addition, WCI is currently assessing potential acquisitions of solid
waste services operations in Colorado, Montana and Texas.
WCI 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 WCI 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, WCI 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. WCI 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.
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
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<PAGE> 41
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. WCI 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. WCI 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 WCI
providing such services in their area.
WCI operates three landfills, of which it owns two, and may acquire or
operate others in the future. WCI 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. WCI 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 WCI to consolidate existing solid waste services
businesses in this region.
STRATEGY
WCI's objective is to build a leading integrated solid waste services
company in secondary markets of the Western U.S. WCI'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. WCI's
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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 WCI's targeted markets. WCI intends to implement its
strategy as follows:
Expansion Through Acquisitions
WCI 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.
WCI 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 WCI in that area. WCI then seeks to strengthen the acquired
operation's presence in that market by providing additional services, adding new
customers and making tuck-in acquisitions.
WCI can then broaden its regional presence by adding additional operations
in markets adjacent to the new location. WCI is currently examining
opportunities to expand its presence in the Western U.S. in states other than
California, Idaho, Kansas, Nebraska, Oklahoma, Oregon, South Dakota, Utah,
Washington and Wyoming and is assessing potential acquisitions of solid waste
services operations in Colorado, Montana and Texas.
WCI believes that numerous "tuck-in" acquisition opportunities exist within
its current and targeted market areas. For example, WCI has identified more than
300 independent entities that provide collection and disposal services in the
states where it currently operates. WCI believes that throughout the Western
U.S., many independent entities are suitable for acquisition by WCI and would
provide WCI opportunities to improve market share and route density.
Franchise Agreements, Municipal Contracts and Governmental Certificates
WCI 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, WCI's management team draws on
its experience in the waste industry and its knowledge of local service areas in
existing and target markets. WCI'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, WCI will focus on increasing market
penetration in its current and adjacent markets, soliciting new commercial,
industrial, and residential customers in markets where such customers may elect
whether or not to receive waste collection services, marketing upgraded or
additional services (such as compaction or automated collection) to existing
customers and, where appropriate, raising prices. Where possible, WCI intends to
leverage its franchise-based platforms to expand its customer base beyond its
exclusive market territories. As customers are added in existing markets, WCI's
revenue per routed truck increases, which generally increases WCI's collection
efficiencies and profitability. In markets in which it has exclusive contracts,
franchises and certificates, WCI expects internal growth to at least track
population and business growth.
WCI expects to use transfer stations as an important part of its internal
growth strategy, by extending the direct-haul reach of WCI and linking disparate
collection operations with WCI-owned, operated or contracted disposal capacity.
WCI currently owns and/or operates 12 transfer stations. By operating transfer
stations, WCI also engages in direct communications with municipalities and
private operators that deliver waste to its transfer stations. This better
positions WCI to gain additional business in its markets in the event any
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<PAGE> 43
municipality privatizes its solid waste operations or rebids existing contracts,
and it increases WCI's opportunities to acquire private collection operations.
Operating Enhancements
WCI has developed company-wide operating standards, which are tailored for
each of its markets based on industry standards and local conditions. Using
these standards, WCI 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. WCI has installed a wide area network, implemented advanced management
information systems and financial controls, and consolidated accounting,
insurance and employee benefit functions, customer service, productivity
reporting and dispatching systems. WCI 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, WCI applies the same operating standards,
information systems and financial controls to acquired businesses as are
employed at WCI's existing operations. Moreover, if WCI 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, WCI 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
WCI currently operates in California, Idaho, Kansas, Nebraska, Oklahoma,
Oregon, South Dakota, Utah, Washington and Wyoming and believes that these and
other markets in the Western U.S. with similar characteristics offer significant
opportunities for achieving its objective. WCI focuses on markets that are
generally characterized by: (i) a geographically dispersed population, which WCI
believes deters competition from larger, established waste management companies;
(ii) a potential revenue base of at least $15 million; (iii) the opportunity for
WCI to acquire a significant market share; (iv) the availability of adequate
disposal capacity, either through acquisition by WCI or through agreements with
third parties; (v) a favorable regulatory environment; or (vi) strong projected
economic or population growth rates. WCI 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.
WCI 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. WCI has developed a
set of financial, geographic and management 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 WCI; (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 WCI's market area or
ability to attract other acquisition candidates; (vi) whether the acquisition
will augment or increase WCI's market share or help protect WCI's existing
customer base; (vii) any potential synergies that may be gained by combining the
candidate with WCI's existing operations; and (viii) the liabilities of the
candidate.
Before completing an acquisition, WCI performs extensive environmental,
operational, engineering, legal, human resources and financial due diligence.
All acquisitions are subject to initial evaluation and approval by WCI's
management. Ronald J. Mittelstaedt is authorized to approve acquisitions with
aggregate consideration of up to $1 million; the Executive Committee of the
Board of Directors must approve all other acquisitions. WCI seeks to integrate
each acquired business promptly and to minimize disruption to the ongoing
operations
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of both WCI and the acquired business, and generally attempts to retain the
senior management of acquired businesses. WCI believes its senior management
team has a proven track record in integrating acquisitions.
The following table sets forth WCI's acquisitions completed from its
inception in September 1997 through January 6, 1999:
<TABLE>
<CAPTION>
ACQUIRED BUSINESS MONTH ACQUIRED PRINCIPAL BUSINESS LOCATION MARKET AREA
----------------- -------------- ------------------ -------- -----------
<S> <C> <C> <C> <C>
Butler County Landfill, January 1999 Landfill David City, NE Eastern Nebraska
Inc. and Kobus
Construction, Inc.
City Sanitation, Inc. December 1998 Collection Layton, UT Central Utah
Amador Disposal Service, December 1998 Collection Ione, CA North Central California
Inc. and Motherlode
Sani-Hut, Inc.
Heartland Waste December 1998 Collection Arkansas City, KA Southern Kansas
Management, Inc.
Columbia Sanitary November 1998 Collection Portland, OR Northern Oregon and
Services, Inc. and Southwestern
Moreland Sanitary Washington
Service, Inc.
B&G Sanitation November 1998 Collection Cottage Grove, OR Southwestern Oregon
Veneta Garbage Service November 1998 Collection Veneta, OR Southwestern Oregon
Siuslaw Disposal, Inc. November 1998 Collection Florence, OR Southwestern Oregon
R&N, LLC October 1998 Collection Mountain Home, ID Southwestern Idaho
Westlane Disposal September 1998 Collection Florence, OR Southwestern Oregon
Harrell's Septic Service September 1998 Septic Services Crescent City, CA Northwestern California
and Southwestern
Oregon
Evergreen Waste Systems, September 1998 Collection Washougal, WA Southwestern Washington
Inc. and Northwestern
Oregon
Wolff's Trashmasher and September 1998 Collection Stanton, NE Eastern Nebraska
Haul It All Sanitary
Service
Country Garbage September 1998 Collection Salt Lake City, UT Central Utah
Services, Inc.
Youngclaus Enterprises September 1998 Collection Madera, CA North Central California
Affiliated Waste LLC September 1998 Collection Norfolk, NE Eastern Nebraska
J&J Sanitation, Inc. August 1998 Collection O'Neill, NE Eastern Nebraska
Contractors Waste, Inc. August 1998 Collection Salt Lake City, UT Central Utah
Big Red Roll Off, Inc. August 1998 Collection O'Neill, NE Eastern Nebraska
ABC Waste, Inc. August 1998 Collection Salt Lake City, UT Central Utah
Miller Containers, Inc. July 1998 Collection Salt Lake City, UT Central Utah
Shrader Refuse and July 1998 Collection Papillion, NE Eastern Nebraska
Recycling Service
Company
Red Carpet Landfill, June 1998 Landfill Enid, OK Western Oklahoma
Inc.
B&B Sanitation, Inc. June 1998 Collection Enid, OK Western Oklahoma
Darlin Equipment, Inc. June 1998 Equipment Leasing Enid, OK Western Oklahoma
Oregon Waste Technology June 1998 Collection Brookings, OR Southwestern Oregon
Curry Transfer and June 1998 Collection Brookings, OR Southwestern Oregon
Recycling
Contractors' Waste June 1998 Collection Orem, UT Central Utah
Removal, L.C
Arrow Sanitary Services, June 1998 Collection Portland, OR Northwestern Oregon and
Inc. Southwestern
Washington
T&T Disposal, Inc. May 1998 Collection Gillette, WY Northeastern Wyoming
Sunshine Sanitation May 1998 Collection Spearfish, SD Western South Dakota
Incorporated
Sower's Sanitation, Inc. May 1998 Collection Belle Fourche, SD Western South Dakota
</TABLE>
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<TABLE>
<CAPTION>
ACQUIRED BUSINESS MONTH ACQUIRED PRINCIPAL BUSINESS LOCATION MARKET AREA
----------------- -------------- ------------------ -------- -----------
<S> <C> <C> <C> <C>
Jesse's Disposal April 1998 Collection Gillette, WY Northeastern Wyoming
A-1 Disposal, Inc. April 1998 Collection Gillette, WY Northeastern Wyoming
Hunter Enterprises, Inc. March 1998 Collection Shelley, ID Eastern Idaho
Madera Disposal Services February 1998 Collection and Madera, CA North Central California
Inc. Landfill
Waste Connections of January 1998 Collection Idaho Falls, ID Eastern Idaho
Idaho, Inc.
Fibres International, September 1997 Collection Issaquah, WA North Central Washington
Inc. and Central Oregon
Browning-Ferris September 1997 Collection Clark County, WA Southwestern Washington
Industries of
Washington, Inc.
</TABLE>
SERVICES
Commercial, Industrial and Residential Waste Services
WCI serves more than 230,000 commercial, industrial and residential
customers. Of these, more than 49,000 are served under G certificates that grant
WCI rights, which are generally perpetual and exclusive, to provide services
within specified areas, more than 26,500 are served under exclusive franchise
agreements with remaining terms ranging from seven to 18 years, and more than
98,700 are served under exclusive municipal contracts with generally shorter
contract terms.
WCI'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 WCI's operating efficiencies, and consolidation
of these volumes allows WCI to negotiate more favorable disposal prices. WCI's
commercial and industrial customers use portable containers for storage,
enabling WCI to service many customers with fewer collection vehicles.
Commercial and industrial collection vehicles normally require one operator. WCI
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.
WCI'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
WCI has an active program to acquire, develop, own and operate transfer
stations in markets proximate to its operations. Currently, WCI operates three
transfer stations in California, two transfer stations in Nebraska, one transfer
station in Washington and six transfer stations in Oregon, which receive,
compact, and transfer solid waste to larger vehicles for transport to landfills.
WCI believes that the transfer stations benefit WCI by: (i) concentrating the
waste stream from a wider area, which increases the volume of disposal at
Company-operated landfills and gives WCI 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.
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Landfills
WCI operates the Fairmead Landfill and owns and operates the Red Carpet
Landfill and the Butler County Landfill. All are Subtitle D landfills.
WCI operates the Fairmead Landfill under an operating agreement with Madera
County with a remaining term of 11 years. As of December 1, 1998, the Fairmead
Landfill consisted of 160 total acres, of which 20 acres were permitted for
disposal. As of that date, the Fairmead Landfill had approximately 550,000 tons
of unused permitted capacity remaining, with approximately 3.5 million
additional tons of capacity in various stages of permitting, and was estimated
to have a remaining life of 26 years. The Fairmead Landfill is currently
permitted to accept up to 395 tons per day of municipal solid waste.
As of January 8, 1999, the Red Carpet Landfill consisted of 82 total acres,
of which 40 acres were permitted for disposal. As of that date, the Red Carpet
Landfill had approximately 625,000 tons of unused permitted capacity remaining,
with approximately 1.7 million additional tons of capacity in various stages of
permitting, and was estimated to have a remaining life of 40 years. The Red
Carpet Landfill is currently permitted to accept up to 350 tons per day of
municipal solid waste.
As of January 8, 1999, the Butler County Landfill consisted of
approximately 200 acres, of which 80 acres were permitted for disposal. As of
that date, the Butler County Landfill had approximately 4.2 million tons of
unused permitted capacity remaining, and was estimated to have a remaining life
of 25 years at current disposal rates.
WCI monitors the available permitted in-place disposal capacity of the
Fairmead, Red Carpet and Butler County Landfills on an ongoing basis and
evaluates whether to seek to expand this capacity. In making this evaluation,
WCI 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 WCI 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. WCI 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.
WCI 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. WCI believes that in
some markets, acquiring landfills would provide opportunities to vertically
integrate its collection, transfer and disposal operations while improving
operating margins. WCI 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 WCI'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, WCI pursues long term disposal contracts with
facilities located in proximity to its markets.
Recycling and Other Services
WCI 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.
WCI operates five recycling processing facilities and sells other collected
recyclable materials to third parties for processing before resale. The profits
from WCI's resale of recycled materials are often shared between WCI and the
other parties to its recycling contracts. For example, certain of WCI's
municipal recycling contracts in Washington and Idaho, which were negotiated
before WCI acquired those businesses, specify certain benchmark resale prices
for recycled commodities. To the extent the prices WCI actually receives for the
processed recycled commodities collected under the contract exceed the prices
specified in the contract, WCI 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, WCI has adopted a
pricing strategy of charging collection and processing fees for recycling volume
collected from third parties. WCI believes that
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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.
WCI also provides other waste management services, most of which are
project-based, including transporting and disposing of non-hazardous
contaminated soils and similar materials, transporting special waste products,
including asbestos, and arranging for the transportation of construction and
demolition waste and disposal of soil and special waste products and providing
portable toilet and septic pumping services.
OPERATIONS
WCI is managed on a decentralized basis, which places decision-making
authority close to the customer, enabling WCI to identify customers' needs
quickly and to address those needs in a cost-effective manner. WCI believes that
decentralization provides a low-overhead, highly efficient operational structure
that allows WCI to expand into geographically contiguous markets and operate in
relatively small communities that larger competitors may not find attractive.
WCI believes that this structure gives WCI a strategic competitive advantage,
given the relatively rural nature of much of the Western U.S., and makes WCI an
attractive buyer to many potential acquisition candidates.
WCI currently delivers its services from 27 operating locations serving ten
market areas, or districts. Each district has a district manager, who has
autonomous service and decision-making authority for that district and is
responsible for maintaining service quality, promoting safety in the district's
operations, implementing marketing programs, and overseeing day-to-day
operations, including contract administration. District managers also assist in
identifying acquisition candidates. Once WCI begins the acquisition process,
business development managers, under the supervision of district and executive
managers, obtain the permits and other governmental approvals required for WCI
to operate the acquired business, including those related to zoning,
environmental and land use.
WCI'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. WCI 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,
WCI's senior officers monitor district operations and require adherence to WCI's
accounting, purchasing, marketing and internal control policies, particularly
with respect to financial matters. WCI's executive officers review the
performance of district managers and operations on a regular basis.
G CERTIFICATES
A substantial portion of WCI'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 generally
grant the holder the perpetual right to provide specified solid waste collection
and transportation services in a specified territory. The WUTC has repeatedly
determined that, in enacting the statute authorizing G certificates, the
Washington Legislature intended to favor grants of exclusive, rather than
overlapping, service rights for conventional solid waste services. Accordingly,
most G certificates currently grant exclusive solid waste collection and
transportation rights for conventional solid waste services in their specified
territories.
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, generally with a minimum term of seven years, to continue
to provide services in the affected area, or to negotiate with the
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certificate holder some other compensation for the collection rights in the
affected area. The statute expressly permits the certificate holder to sue the
annexing municipality for measurable damages that exceed the value of a
seven-year franchise agreement to provide services in the affected area. Under
one of the contracts with a municipality in Washington acquired by a predecessor
of WCI, 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 often resulted in
more frequent rate adjustments in response to material cost shifts.
SALES AND MARKETING
In most of WCI'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 WCI's growth to date has primarily been through acquisitions, WCI has
generally assumed existing franchise agreements, municipal contracts and G
certificates from the acquired companies, rather than obtaining new contracts.
For these reasons, WCI's sales and marketing efforts to date have been narrowly
focused. WCI 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.
WCI has a diverse customer base. Its largest single contract, with the City
of Vancouver, accounted for approximately 18.1% of WCI's revenues during the
period from inception (September 9, 1997) through December 31, 1997, and 10.1%
during the nine months ended September 30, 1998. Under this contract, WCI 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 7.1% of WCI's revenues during the period from inception
(September 9, 1997) through December 31, 1997 or more than 5.0% during the nine
months ended September 30, 1998.
COMPETITION
The solid waste services industry is highly competitive and fragmented and
requires substantial labor and capital resources. The industry presently
includes four large national waste companies: Allied Waste Industries, Inc.,
Browning-Ferris Industries, Inc., Republic Services Inc., and Waste Management,
Inc. Several other public companies have annual revenues in excess of $100
million, including Casella Waste Systems, Inc., Superior Services, Inc. and
Waste Industries, Inc. Certain of the markets in which WCI 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. WCI also competes with operators of alternative disposal facilities,
including incinerators, and with counties, municipalities, and solid waste
districts that maintain their own waste collection and disposal operations.
Public sector operations may have financial advantages over WCI, because of
their access to user fees and similar charges, tax revenues and tax-exempt
financing.
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WCI 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 WCI to reduce the price of its services or, if it elects not to do so,
to lose business. WCI 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 WCI'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. WCI generally competes for
acquisition candidates with publicly owned regional and large national waste
management companies.
REGULATION
Introduction
WCI's landfill operations and non-landfill operations, including waste
transportation, transfer stations, vehicle maintenance shops and fueling
facilities, are all 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
WCI are administered by the EPA and other federal, state and local
environmental, zoning, health and safety agencies. A substantial portion of
WCI's collection business in Washington is performed under G certificates
awarded by the Washington Utilities and Transportation Commission, which
generally grant WCI perpetual and exclusive collection rights in certain areas.
WCI 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).
WCI anticipates that regulation, legislation and regulatory enforcement actions
related to the solid waste services industry will continue to increase. WCI
attempts to anticipate future regulatory requirements and to plan in advance as
necessary to comply with them.
The principal federal, state and local statutes and regulations that apply
to WCI's operations are described below. All of the federal statutes described
below 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. Enforcement actions under these statutes may include both civil
and criminal penalties, as well as injunctive relief in some instances.
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 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
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action, facility closure, post-closure and financial responsibility. Most states
have promulgated regulations modeled on some or all of the Subtitle C provisions
issued by the EPA. Some state regulations impose different, additional and more
stringent obligations, and may regulate certain materials as hazardous wastes
that are not so regulated under the federal Subtitle C Regulations. From the
date of inception through January 8, 1999, WCI did not, to its knowledge,
transport hazardous wastes under circumstances that would subject WCI to
hazardous waste regulations under RCRA. Some of WCI's ancillary operations
(e.g., vehicle maintenance operations) may generate hazardous wastes, which WCI
manages in substantial compliance with applicable laws.
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 WCI 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.
RCRA also regulates underground storage of petroleum and other regulated
materials. RCRA requires tank registration, compliance with technical standards
for tanks, release detection and reporting, and corrective action, among other
things. Certain of WCI's facilities and operations are subject to these
requirements.
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 WCI's transfer stations or run-off or
collected leachate from WCI's owned or operated landfills is discharged into
streams, rivers or other surface waters, the Clean Water Act would require WCI
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. WCI
believes that its facilities comply in all material respects with the Clean
Water Act requirements. Various states in which WCI operates or in which it may
operate in the future have been delegated authority to implement the Clean Water
Act permitting requirements, and some of these states have adopted regulations
that are more stringent than the federal requirements. For example, states often
require permits for discharges to ground water as well as surface water.
The Comprehensive Environmental Response, Compensation, and Liability Act of
1980 ("CERCLA")
CERCLA established a regulatory and remedial program intended to provide
for the investigation and cleanup of facilities where or from which a release of
any hazardous substance into the environment has occurred or is threatened.
CERCLA's primary mechanism for remedying such problems is to impose strict joint
and several liability for cleanup of facilities on current owners and operators
of the site, former owners and operators of the site at the time of the disposal
of the hazardous substances, any person who arranges for the transportation,
disposal or treatment of the hazardous substances, and the transporters who
select the disposal
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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 WCI were found to
be a responsible party for a CERCLA cleanup, the enforcing agency could hold
WCI, 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. WCI's ability to obtain reimbursement from others for their allocable
shares of such costs would be limited by WCI's ability to find other responsible
parties and prove the extent of their responsibility and by the financial
resources of such other parties. Various state laws also impose liability for
investigation, cleanup and other damages associated with hazardous substance
releases.
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 factors such as the date of the landfill construction and tons per year of
emissions of regulated pollutants. Larger landfills and landfills located in
areas where the ambient air does not meet 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 potential air emissions. State air regulatory programs may
implement the federal requirements but may also impose additional restrictions.
For example, some state air programs uniquely regulate odor and the emission of
toxic air pollutants.
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 WCI'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 or transfer station to accepting waste that
originates from specified geographic areas, restrict the importation of
out-of-state waste or wastes originating outside the local jurisdiction or
otherwise discriminate against non-local waste. These restrictions, generally
known as flow control restrictions, are controversial, and some courts have held
that some flow control schemes violate constitutional limits on state or local
regulation of interstate commerce. From time to time, federal legislation is
proposed that would allow some local flow control restrictions. Although no such
federal legislation has been enacted to date, if such federal legislation should
be enacted in the future, states in which WCI 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 WCI's
landfills. These restrictions may also result in higher disposal costs for WCI's
collection operations. If WCI were unable to pass such higher costs through to
its customers, WCI's business, financial condition and results of operations
could be adversely affected.
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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, WCI may elect not to
challenge such restrictions based on various considerations. These restrictions
could result in reduced volumes of waste going to landfills in certain areas,
which may adversely affect WCI's ability to operate its landfills at their full
capacity and/or reduce the prices that WCI can charge for landfill disposal
services. These restrictions may also result in higher disposal costs for WCI's
collection operations. If WCI were unable to pass such higher costs through to
its customers, WCI's business, financial condition and results of operations
could be adversely affected.
State and Local Regulation
Each state in which WCI 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. State and local permits and approval for these generations may be
required and may be subject to periodic renewal, modification or revocation by
the issuing agencies. 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 or restrict 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 WCI'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.
Public Utility Regulation
The rates that landfill operators may charge are regulated in many states
by public authorities. The rates that WCI 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 WCI owns or operates landfills could have an
adverse effect on WCI'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
WCI maintains an environmental and other risk management programs
appropriate for its business. WCI's environmental risk management program
includes evaluating existing facilities and potential acquisitions for
environmental law compliance. WCI does not presently expect environmental
compliance costs to increase
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above current levels, but WCI cannot predict whether future acquisitions will
result in an increase in such costs. WCI 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. WCI's facilities comply in all material respects
with applicable federal and state regulations.
WCI carries a broad range of insurance, which WCI's management considers
adequate to protect WCI'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 WCI's limited landfill operations, WCI has not obtained such
coverage. If WCI were to incur liability for environmental cleanups, corrective
action or damage, its financial condition could be materially and adversely
affected. WCI will continue to investigate the possibility of obtaining
environmental impairment liability insurance, particularly if it acquires or
operates landfills other than the Fairmead Landfill and the Red Carpet Landfill.
WCI 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. WCI has not experienced
difficulty in obtaining performance bonds or letters of credit for its current
operations. At January 6, 1999, WCI had provided customers and various
regulatory authorities with surety bonds and letters of credit in the aggregate
amount of approximately $1.9 million to secure its obligations. WCI's credit
facility provides for the issuance of letters of credit in an amount up to $15
million, but any letters of credit issued reduce the availability of borrowings
for acquisitions and other general corporate purposes. If WCI were unable to
obtain surety bonds or letters of credit in sufficient amounts or at acceptable
rates, it could be precluded from entering into additional municipal solid waste
collection contracts or obtaining or retaining landfill operating permits.
PROPERTY AND EQUIPMENT
As of January 6, 1999, WCI owned and operated 27 collection operations,
seven transfer stations and two Subtitle D landfills and operated an additional
five transfer stations, one Subtitle D landfill and five recycling facilities.
WCI leases various offices and facilities, including its corporate offices in
Roseville, California. The real estate owned by WCI is not subject to material
encumbrances. WCI owns various equipment, including waste collection and
transportation vehicles, related support vehicles, carts, containers, and heavy
equipment used in landfill operations. WCI believes that its existing facilities
and equipment are generally adequate for its current operations. However, WCI
expects to make substantial investments in property and equipment for expansion
and replacement of assets and in connection with future acquisitions. See
"WCI -- Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
EMPLOYEES
At January 6, 1999, WCI employed approximately 650 full-time employees,
including approximately 40 persons classified as professionals or managers,
approximately 550 employees involved in collection, transfer, disposal and
recycling operations, and approximately 60 sales, clerical, data processing or
other administrative employees.
Approximately 55 drivers and mechanics at WCI's Vancouver, Washington
operation are represented by the Teamsters Union, with which Browning-Ferris
Industries of Washington, Inc., WCI's predecessor in Vancouver, entered a
four-year collective bargaining agreement in January 1997. Approximately 11
drivers at Arrow are currently represented by the Teamsters Union, with which
Arrow entered a three-year collective bargaining agreement in March 1998. In
addition, in July 1997, the employees at WCI's facility in Issaquah, Washington,
adopted a measure to select a union to represent them in labor negotiations with
management. The union and management operated under a one-year negotiating
agreement that ended on July 27, 1998. Since that date, negotiations have
continued between the union and WCI, although the union is permitted to call a
strike or call for arbitration of the outstanding issues. The employees at
Issaquah have filed to decertify the union, and the union has filed a claim with
the National Labor Relations Board to attempt to block the
46
<PAGE> 54
decertification. WCI 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, WCI 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 WCI or to revoke or deny renewal of an operating permit held by WCI.
From time to time, WCI 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 WCI operates.
In addition, WCI 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 WCI that WCI believes will have a material adverse impact
on WCI's business, financial condition, results of operations or cash flows.
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following tables present selected historical and pro forma financial
and operating data for WCI and its predecessors and selected historical
financial and operating data for the Murrey Companies.
The entities WCI acquired in September 1997 from BFI are collectively
referred to herein as WCI'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 WCI'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 Proxy Statement. The selected financial information of WCI 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 Proxy Statement. The selected financial information of WCI'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 September 30, 1998
and for the nine months ended September 30, 1998 has been derived from unaudited
financial statements included elsewhere in this Proxy Statement. In the opinion
of WCI's management, the unaudited financial data includes 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. WCI's operating results for the nine months ended September
30, 1998 are not necessarily indicative of the results that may be expected for
the year ending 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 WCI and its predecessor operations.
The selected pro forma financial and operating data for the year ended
December 31, 1997 and for the nine months ended September 30, 1998, gives effect
to WCI's acquisitions of Shrader Refuse and Recycling Service Company
("Shrader"), Arrow Sanitary Services, Inc. ("Arrow"), B&B Sanitation, Inc., Red
Carpet Landfill, Inc. and Darlin Equipment, Inc. (together with B&B Sanitation,
Inc. and Red Carpet Landfill, Inc., "B&B"), J&J Sanitation, Inc. and Big Red
Roll Off, Inc. (together with J&J Sanitation, Inc., "J&J"), Contractor's Waste
Removal, L.C. ("Contractors"), Curry Transfer & Recycling, Inc. ("Curry"),
Amador Disposal Service, Inc./Mother Lode Sani-Hut, Inc. ("Amador"), Butler
County Landfill, Inc./Kobus Construction, Inc. ("Butler"), Madera Disposal
Services, Inc. ("Madera") and WCI'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 Proxy Statement. The selected WCI and
Murrey Companies pro forma combined financial and operating data for the year
ended December 31, 1997 and for the nine months ended September 30, 1998, gives
effect to WCI's acquisitions of Shrader, Arrow, B&B, J&J, Contractors, Curry,
Amador, Butler, Madera and WCI's predecessors as of the dates and for the
periods indicated, and gives effect
47
<PAGE> 55
to the mergers with the Murrey Companies (accounted for as
poolings-of-interests), and has been derived from unaudited pro forma financial
statements included elsewhere in this Proxy Statement. The unaudited pro forma
financial information does not purport to represent what WCI'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 WCI for any future period.
The selected historical and pro forma financial and operating data 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 WCI and its predecessors and the Murrey
Companies, and the unaudited pro forma financial statements and notes thereto
included elsewhere in this Proxy Statement.
48
<PAGE> 56
WASTE CONNECTIONS, INC. AND PREDECESSORS
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FIBRES
INTERNATIONAL,
THE THE INC.
FIBRES DISPOSAL FIBRES DISPOSAL PERIOD FROM
INTERNATIONAL GROUP INTERNATIONAL, GROUP JANUARY 1, PREDECESSORS
INC. COMBINED INC. COMBINED 1995 ONE MONTH
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, NOVEMBER 30, DECEMBER 31,
1993 1993 1994 1994 1995 1995
------------- ------------ -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA(1):
Revenues.................... $3,787 $20,794 $5,610 $22,004 $7,340 $595
Cost of operations.......... 2,737 16,775 4,432 18,298 5,653 527
Selling, general and
administrative.......... 553 3,559 552 3,320 823 72
Depreciation and
amortization............ 428 520 642 606 715 74
------ ------- ------ ------- ------ ----
Income (loss) from
operations.............. 69 (60) (16) (220) 149 (78)
Interest expense.......... (78) (390) (191) (548) (162) (1)
Other income (expense),
net..................... 1 684 (2) 871 98 5
------ ------- ------ ------- ------ ----
Income (loss) before
income taxes............ (8) 234 (209) 103 85 (74)
Income tax (provision)
benefit................. -- (77) -- -- (29) --
------ ------- ------ ------- ------ ----
Net income (loss)........... $ (8) $ 157 $ (209) $ 103 $ 56 $(74)
====== ======= ====== ======= ====== ====
<CAPTION>
THE
DISPOSAL
GROUP
COMBINED
THE PERIOD
DISPOSAL FROM PREDECESSORS
GROUP JANUARY 1, COMBINED
COMBINED 1996 PERIOD
YEAR ENDED THROUGH ENDED
DECEMBER 31, JULY 31, DECEMBER 31,
1995 1996 1996
------------ ---------- ------------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA(1):
Revenues.................... $19,660 $8,738 $13,422
Cost of operations.......... 16,393 6,174 11,420
Selling, general and
administrative.......... 3,312 2,126 1,649
Depreciation and
amortization............ 628 324 962
------- ------ -------
Income (loss) from
operations.............. (673) 114 (609)
Interest expense.......... (206) (12) (225)
Other income (expense),
net..................... -- 2,661 (147)
------- ------ -------
Income (loss) before
income taxes............ (879) 2,763 (981)
Income tax (provision)
benefit................. 298 (505) --
------- ------ -------
Net income (loss)........... $ (581) $2,258 $ (981)
======= ====== =======
</TABLE>
49
<PAGE> 57
<TABLE>
<CAPTION>
WASTE
CONNECTIONS, INC.
PREDECESSORS PERIOD FROM
COMBINED INCEPTION PRO FORMA
NINE MONTHS (SEPTEMBER 9, PRO FORMA COMBINED
ENDED 1997) THROUGH YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1997(2) 1997(3)
------------- ----------------- ------------ ------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA(1):
Revenues...................................... $18,114 $ 6,237 $ 61,347 $ 90,221
Cost of operations............................ 14,753 4,703 44,561 67,694
Selling, general and administrative........... 3,009 619 7,412 9,735
Depreciation and amortization................. 1,083 354 4,339 5,710
Start-up and integration...................... -- 493 493 493
Stock compensation............................ -- 4,395 4,395 4,395
------- ---------- ---------- ----------
Income (loss) from operations................. (731) (4,327) 147 2,194
Interest expense.............................. (456) (1,035) (6,049) (6,429)
Other income (expense), net................... 14 (36) 313 596
------- ---------- ---------- ----------
Income (loss) before income taxes............. (1,173) (5,398) (5,589) (3,639)
Income tax (provision) benefit................ -- 332 402 (232)
------- ---------- ---------- ----------
Income (loss) before extraordinary item....... (1,173) (5,066) (5,187) (3,871)
Extraordinary item -- early extinguishment of
debt, net of income tax benefit of $165..... -- -- -- --
------- ---------- ---------- ----------
Net income (loss)............................. $(1,173) $ (5,066) $ (5,187) $ (3,871)
======= ========== ========== ==========
Redeemable convertible preferred stock
accretion................................... (531) (531) (531)
---------- ---------- ----------
Net income (loss) applicable to common
stockholders................................ $ (5,597) $ (5,718) $ (4,402)
========== ========== ==========
Basic earnings per common share:
Income (loss)before extraordinary item...... $ (2.99) $ (2.12) $ (0.81)
Extraordinary item.......................... -- -- --
========== ---------- ----------
Net income (loss) per common share.......... $ (2.99) $ (2.12) $ (0.81)
========== ========== ==========
Diluted earnings per common share:
Income (loss) before extraordinary item..... $ (2.99) (2.12) (0.81)
Extraordinary item.......................... -- -- --
---------- ---------- ----------
Diluted net income (loss) per common
share..................................... $ (2.99) $ (2.12) $ (0.81)
========== ========== ==========
Shares used in calculating basic earnings
(loss) per share............................ 1,872,567 2,700,306 5,450,306
Shares used in calculating diluted earnings
per
share....................................... 1,872,567 2,700,306 5,450,306
Pro forma basic net income (loss) per
share(4).................................... $ (1.16)
==========
Shares used in calculating pro forma basic net
income (loss) per share..................... 4,372,565
Pro forma diluted net income per share(4).....
Shares used in calculating pro forma diluted
net income per share........................
<CAPTION>
WASTE CONNECTIONS, INC.
NINE MONTHS ENDED
SEPTEMBER 30, 1998
---------------------------------------
PRO PRO FORMA
ACTUAL FORMA(2) COMBINED(3)
---------- ------------ -----------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA(1):
Revenues...................................... $ 35,336 $ 51,019 $ 75,551
Cost of operations............................ 24,007 34,518 53,855
Selling, general and administrative........... 3,518 5,545 7,415
Depreciation and amortization................. 2,693 4,038 5,678
Start-up and integration...................... -- -- --
Stock compensation............................ 561 561 561
---------- ---------- -----------
Income (loss) from operations................. 4,557 6,357 8,042
Interest expense.............................. (1,427) (3,862) (4,285)
Other income (expense), net................... -- 157 60
---------- ---------- -----------
Income (loss) before income taxes............. 3,130 2,652 3,817
Income tax (provision) benefit................ (1,513) (1,245) (1,659)
---------- ---------- -----------
Income (loss) before extraordinary item....... 1,617 1,407 2,158
Extraordinary item -- early extinguishment of
debt, net of income tax benefit of $165..... (815) (815) (815)
---------- ---------- -----------
Net income (loss)............................. $ 802 $ 592 $ 1,343
========== ========== ===========
Redeemable convertible preferred stock
accretion................................... (917) (917) (917)
---------- ---------- -----------
Net income (loss) applicable to common
stockholders................................ $ (115) $ (325) $ 426
========== ========== ===========
Basic earnings per common share:
Income (loss)before extraordinary item...... $ 0.13 $ 0.08 $ 0.14
========== ===========
Extraordinary item.......................... (0.15)
==========
Net income (loss) per common share.......... $ (0.02)
==========
Diluted earnings per common share:
Income (loss) before extraordinary item..... $ 0.09 $ 0.06 $ 0.12
========== ===========
Extraordinary item.......................... (0.11)
----------
Diluted net income (loss) per common
share..................................... $ (0.02)
==========
Shares used in calculating basic earnings
(loss) per share............................ 5,476,532 6,069,350 8,819,350
Shares used in calculating diluted earnings
per
share....................................... 7,438,658 7,654,186 10,404,186
Pro forma basic net income (loss) per
share(4).................................... $ 0.11
==========
Shares used in calculating pro forma basic net
income (loss) per share..................... 7,117,557
Pro forma diluted net income per share(4)..... $ 0.09
==========
Shares used in calculating pro forma diluted
net income per share........................ 8,702,393
==========
</TABLE>
(See footnotes on following page)
50
<PAGE> 58
<TABLE>
<CAPTION>
FIBRES THE DISPOSAL FIBRES THE DISPOSAL THE DISPOSAL
INTERNATIONAL, GROUP INTERNATIONAL, GROUP PREDECESSORS GROUP
INC. COMBINED INC. COMBINED COMBINED COMBINED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1993 1994 1994 1995 1995
-------------- ------------ -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash and equivalents......... $ 3 $ 196 $ 321 $ 203 $ 184 $ 961
Working capital (deficit).... 494 (1,497) 155 (4,279) 90 2,498
Property and equipment,
Net........................ 1,454 2,440 3,810 2,771 4,035 2,221
Total assets................. 3,325 7,455 6,317 7,318 9,151 6,942
Long-term debt(7)............ 1,167 1,258 2,353 90 149 6,890
Redeemable convertible
Preferred stock............ -- -- -- -- -- --
Total stockholders' equity
(deficit).................. 991 (163) 3,045 (1,486) -- (2,067)
<CAPTION>
WASTE CONNECTIONS, INC.
------------------------------------------------
PREDECESSORS SEPTEMBER 30, 1998
COMBINED ---------------------------------
DECEMBER 31, DECEMBER 31, PRO PRO FORMA
1996 1997 ACTUAL FORMA(5) COMBINED(6)
------------ ------------ -------- -------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(1):
Cash and equivalents......... $ 102 $ 820 $ 1,090 $ 1,376 $ 1,781
Working capital (deficit).... 695 836 (1,482) (1,073) (10,922)
Property and equipment,
Net........................ 5,069 4,185 18,438 28,123 42,494
Total assets................. 15,291 18,880 114,495 131,140 151,048
Long-term debt(7)............ 89 6,762 40,404 55,850 59,897
Redeemable convertible
Preferred stock............ -- 7,523 -- -- --
Total stockholders' equity
(deficit).................. -- (551) 59,822 59,822 61,397
</TABLE>
- ---------------
(1) The entities WCI acquired in September 1997 from BFI are collectively
referred to herein as WCI'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 WCI and its
predecessors.
(2) Assumes WCI's acquisitions of Arrow, Shrader, J&J, B&B Contractors, Curry,
Amador, Butler, Madera and the WCI predecessors occurred as of the beginning
of the periods presented. See "Unaudited Pro Forma Financial Statements"
included elsewhere herein.
(3) Assumes WCI's acquisitions of Arrow, B&B, J&J, Contractors, Curry, Amador,
Butler, Shrader, Madera and the WCI predecessors occurred as of the
beginning of the periods presented and reflects the mergers with the Murrey
Companies (accounted for as poolings-of-interests). See "Unaudited Pro Forma
Financial Statements" included elsewhere herein.
(4) 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 nine months ended
September 30, 1998, as if such conversions had occurred as of the first day
of each of the periods presented. See Note 11 of Notes to WCI's Financial
Statements included elsewhere herein for an explanation of the pro forma
historical per share calculations.
(5) Assumes WCI's acquisitions of Amador and Butler occurred on September 30,
1998. See "Unaudited Pro Forma Financial Statements" included elsewhere
herein.
(6) Assumes WCI's acquisitions of Amador and Butler occurred on September 30,
1998 and reflects the mergers of WCI and the Murrey Companies as
poolings-of-interests. See "Unaudited Pro Forma Financial Statements"
included elsewhere herein.
(7) Excludes redeemable convertible Preferred Stock.
51
<PAGE> 59
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the WCI
Unaudited Pro Forma Financial Statements and Notes thereto, the audited and
unaudited Financial Statements and Notes thereto of WCI and its predecessors,
Madera's audited Financial Statements and Notes thereto, and other financial
information included elsewhere in this Proxy Statement. This Proxy Statement
contains forward-looking statements that involve risks and uncertainties. WCI'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 Proxy Statement
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 January 6, 1999, WCI served more
than 230,000 commercial, industrial and residential customers in California,
Idaho, Kansas, Nebraska, Oklahoma, Oregon, South Dakota, Utah, Washington and
Wyoming. WCI currently owns and operates 27 collection operations, seven
transfer stations and two Subtitle D landfills and operates an additional five
transfer stations, one Subtitle D landfill and five recycling facilities.
WCI generally intends to pursue an acquisition-based growth strategy and
has acquired 43 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 WCI's financial
statements only from the respective dates of acquisition. WCI 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 WCI's operating results. In connection with WCI's growth
strategy, WCI expects to invest in collection vehicles and equipment,
maintenance of existing equipment, and management information systems, which
should enable WCI to expand internally and through acquisitions based on its
existing infrastructure. WCI 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 WCI's Common Stock and/or seller financing. As
of January 6, 1999, WCI had consummated the following acquisitions:
Initial Acquisitions. In September 1997, WCI joined with two other parties
to bid on certain solid waste and recycling businesses offered for sale by BFI.
WCI 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 southwestern 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 north central Washington. The acquired companies subsequently
changed their names to Waste Connections of Washington, Inc. and Waste
Connections International, Inc., respectively. The two other parties acquired
selected BFI solid waste collection and transportation assets and operations in
Idaho, and BFI's recycling assets and operations in Washington, Idaho and
Oklahoma.
California Acquisitions. Effective February 1, 1998, WCI acquired the stock
of Madera, an integrated solid waste services company operating in north central
California. In connection with the Madera acquisition, WCI acquired one
franchise agreement and one municipal contract, pursuant to which it serves more
than 9,000 commercial, industrial and residential customers, and agreements to
operate two transfer stations, one Subtitle D landfill and one recycling
facility. On September 9, 1998, WCI acquired certain collection assets from
Youngclaus Enterprises, which "tuck in" to its Madera operations. On September
22, 1998, Curry Transfer and Recycling, a wholly owned subsidiary of WCI,
acquired certain business assets of Harrell's Septic Service, which provides
portable toilet and septic services in northwestern California and southwestern
Oregon (see "Oregon Acquisitions" below). On December 30, 1998, WCI acquired the
stock of Amador Disposal Service, Inc. and Mother Lode Sani-Hut, Inc., which
provide solid waste collection, transportation and disposal services to
approximately 11,000 customers in north central California.
Idaho Acquisitions. On January 30, 1998, WCI acquired the stock of Waste
Connections of Idaho, Inc., which provides solid waste collection services to
more than 10,000 customers in eastern Idaho through
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<PAGE> 60
subscription agreements with residential customers and seven municipal
contracts. Waste Connections of Idaho, Inc., was formed in September 1997 by
affiliates of WCI for the purpose of acquiring certain assets of Browning-Ferris
Industries of Idaho, Inc. Effective March 1, 1998, WCI acquired certain solid
waste collection assets from Hunter Enterprises, Inc., a solid waste services
company located in eastern Idaho. These assets "tuck in" to WCI's Idaho
operations and serve approximately 2,800 residential and commercial customers.
On October 15, 1998, WCI acquired R&N, LLC, which provides solid waste
collection and transportation services to approximately 4,300 customers in
southwestern Idaho.
Kansas Acquisition. On December 21, 1998, a wholly owned subsidiary of WCI
acquired the assets of Heartland Waste Management, Inc., which provides solid
waste collection services to approximately 2,500 customers in southern Kansas.
These assets "tuck in" to WCI's western Oklahoma operations.
Nebraska Acquisitions. On July 31, 1998, a wholly owned subsidiary of WCI
merged into Shrader, which provides solid waste and recyclables collection
services to more than 22,500 customers in eastern Nebraska. On August 3, 1998,
WCI acquired the stock of J&J, which serves more than 9,500 customers in eastern
Nebraska. On September 18, 1998, Waste Connections of Nebraska, Inc., a wholly
owned subsidiary of WCI, acquired substantially all the assets of Affiliated
Waste Services, L.L.C., which provides solid waste collection and transportation
services to approximately 4,700 customers in eastern Nebraska. On the same date,
Waste Connections of Nebraska, Inc. acquired substantially all of the assets of
Wolff's Trashmasher and Haul It All Sanitary Service, two sole proprietorships
that provide solid waste collection and transportation services to approximately
1,400 customers in eastern Nebraska.
In addition, on January 6, 1999, WCI purchased the stock of Butler County
Landfill, Inc. and a wholly owned subsidiary of WCI purchased certain business
assets of Kobus Construction, Inc. These entities provide solid waste disposal
and transportation services to approximately 200 customers in eastern Nebraska.
Oklahoma Acquisitions. On June 5, 1998, WCI acquired the stock of B&B,
which provides solid waste and recyclables collection and transportation,
landfill, and equipment leasing services to more than 2,600 customers in western
Oklahoma.
Oregon Acquisitions. On June 17, 1998, WCI acquired the stock of Arrow,
which provides solid waste and recyclables collection, transportation and
handling services to more than 2,000 customers in northwestern Oregon and
southwestern Washington. On June 25, 1998, WCI acquired the stock of Curry and
certain real estate located in Curry County, Oregon and used in that business.
Curry provides solid waste and recyclables collection and transportation
services to more than 5,400 customers in southwestern Oregon. On September 25,
1998, Curry acquired certain business assets of Westlane Disposal, which
provides solid waste collection and transportation services to approximately
2,200 customers in southwestern Oregon. On November 5, 1998, WCI acquired the
stock of Siuslaw Disposal, Inc., which provides solid waste collection services
to approximately 1,800 customers in southwestern Oregon. On November 12, 1998,
Curry acquired certain business assets of Veneta Garbage Service, which provides
solid waste collection services to approximately 1,800 customers in southwestern
Oregon. On November 13, 1998, Curry acquired certain assets of B&G Sanitation,
which provides solid waste collection services to approximately 1,000 customers
in southwestern Oregon. On November 23, 1998, WCI acquired the stock of Columbia
Sanitary Services, Inc. and Moreland Sanitary Service, Inc., which provide solid
waste collection services to an aggregate of approximately 4,800 customers in
northwestern Oregon and southwestern Washington.
Utah Acquisitions. On June 1, 1998, WCI acquired substantially all of the
business assets of Contractors, which provides solid waste collection and
transportation services to more than 450 customers in central Utah. On July 27,
August 10 and August 21, 1998, WCI acquired certain business assets of Miller
Containers, Inc., ABC Waste, Inc., and Contractors Waste, Inc., respectively,
which together provide solid waste collection services to approximately 290
customers in central Utah and "tuck in" to WCI's Utah operations. On September
21, 1998, Waste Connections of Utah, Inc., a wholly owned subsidiary of WCI,
acquired certain assets of Country Garbage Services, Inc., which provides solid
waste collection and transportation services in central Utah. On December 30,
1998, WCI acquired the stock of City Sanitation, Inc., which provides solid
waste collection services to more than 4,200 customers in central Utah.
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Wyoming and South Dakota Acquisitions. On April 8, 1998, WCI acquired
certain solid waste collection assets from A-1 Disposal, Inc. and Jesse's
Disposal, both unrelated parties operating in northeastern Wyoming, and together
serving approximately 2,300 customers. On May 11, 1998, WCI acquired T&T
Disposal, Inc., a provider of solid waste and recyclables collection services to
more than 500 customers in northeastern Wyoming. On May 8, 1998, WCI acquired
Sowers' Sanitation, Inc. and Sunshine Sanitation Incorporated, providers of
solid waste and recyclables collection services to an aggregate of more than
7,000 customers in western South Dakota. On August 3, 1998, WCI acquired certain
assets of a South Dakota waste collection business owned by the shareholders of
J&J, which "tucks in" to WCI's Wyoming and South Dakota operations. (See
"Nebraska Acquisitions" above.).
Washington Acquisitions. On September 21, 1998, a wholly owned subsidiary
of WCI merged into Evergreen Waste Systems, Inc. As a result of this merger,
Evergreen Waste Systems, Inc. became a wholly owned subsidiary of WCI that
provides solid waste and recyclables collection and transportation services to
more than 6,500 customers in southwestern Washington and northwestern Oregon.
WCI's management does not believe that consummation of any acquisition
other than the Murrey's transaction is probable as of the date of this proxy
statement.
GENERAL
WCI's revenues are attributable primarily to fees charged to customers for
solid waste collection, transfer, disposal and recycling services. WCI 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. WCI's existing franchise agreement and all of its existing municipal
contracts give WCI 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 WCI's residential collection services are also
performed on a subscription basis with individual households. A substantial
portion of WCI's collection business in Washington is performed under G
certificates awarded by the Washington Utilities and Transportation Commission,
which grant WCI 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 WCI. WCI'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 WCI under contract with the County of Madera,
California and the landfills owned and operated by WCI in Major County, Oklahoma
and Butler County, Nebraska. The majority of WCI's transfer and landfill
customers are under one to ten year disposal contracts, most of which provide
for annual cost of living increases.
WCI'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. WCI'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.
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. WCI owns and/or operates ten transfer stations, which reduce WCI's
costs by improving its utilization of collection personnel and equipment and by
consolidating the waste stream to gain more favorable disposal rates.
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Selling, general and administrative ("SG&A") expenses include management,
clerical and administrative compensation and overhead costs associated with
WCI'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.
WCI 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. WCI's policy
is to charge against net income any unamortized capitalized expenditures and
advances (net of any portion thereof that WCI 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. WCI routinely evaluates
all capitalized costs, and expenses those related to projects WCI believes are
not likely to be successful. As of September 30, 1998, WCI had no capitalized
expenditures relating to landfill development projects and $32,610 in
capitalized expenditures relating to acquisitions and pending acquisitions.
WCI accrues for estimated landfill closure and post-closure maintenance
costs at the Red Carpet Landfill it owns in Major County, Oklahoma and the
Butler County Landfill it owns in Butler County, Nebraska. Under regulations
pursuant to which the permit for the Fairmead Landfill was issued, WCI and
Madera County, as operator and owner, respectively, are jointly liable for
closure and post-closure liabilities with respect to the landfill. WCI 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
WCI does not believe Madera had any financial obligation for closure and
post-closure costs for the Fairmead Landfill as of September 30, 1998. WCI will
have additional material financial obligations relating to closure and
post-closure costs of any disposal facilities it may own or operate in the
future, and in such case WCI 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 WCI acquired in September 1997 from BFI are collectively
referred to herein as WCI'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 WCI'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 WCI'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 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 which WCI's management believes are reasonable.
During the periods prior to their acquisition by BFI, WCI's predecessors
operated as separate stand-alone businesses. The acquisitions of the
predecessors by BFI were accounted for using the purchase method of
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accounting, and the respective purchase prices were allocated to the fair values
of the assets acquired and liabilities assumed. Similarly, WCI'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 WCI 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>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995:
- -----------------------------
<S> <C>
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)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996:
- -----------------------------
<S> <C>
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)
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997:
- -----------------------------
<S> <C>
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.
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 Proxy Statement.
WASTE CONNECTIONS, INC. -- NINE MONTHS ENDED SEPTEMBER 30, 1998 VS.
PREDECESSORS COMBINED -- NINE MONTHS ENDED SEPTEMBER 30, 1997
Revenues. Revenues for the nine months ended September 30, 1998 increased
$17.2 million, or 95.1% to $35.3 million from $18.1 million for the nine months
ended September 30, 1997. The increase was primarily attributable to the
inclusion of the acquisitions closed since the beginning of 1998 ($16.2 million)
and growth in the base business ($964,000).
Cost of Operations. Cost of operations for the nine months ended September
30, 1998 increased $9.3 million, or 62.7%, to $24.0 million in 1998 from $14.8
million for the nine months ended September 30, 1997. The increase was primarily
attributable to acquisitions closed since the beginning of 1998 and a decline in
expenses in the core business as a result of cost reduction measures.
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1997 VS. 1996
Revenue. WCI's total revenue for 1997 was $6.2 million. The total revenue
was attributable to the purchase of WCI's predecessors on September 30, 1997.
Revenues related to WCI's Predecessors Combined for the nine months ended
September 30, 1997 were $18.1 million. WCI'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 for WCI and WCI's Predecessors Combined
remained relatively unchanged in 1997 versus 1996.
Cost of Operations. WCI'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 WCI's predecessors on September 30, 1997. Cost of operations of
WCI's Predecessors Combined for the nine months ended September 30, 1997 was
$14.8 million, or 81.4% of revenue. WCI'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. WCI's cost of
operations as a percentage of revenue in 1997 declined from WCI'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. WCI'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. WCI'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. WCI'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
WCI's predecessors declined in 1996 from 1995 because of the expiration of a
municipal contract and a reduction in revenue from sales of recyclable materials
due to a reduction in prices of recyclable materials.
Cost of Operations. WCI'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 WCI'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.
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Madera General
Effective February 1, 1998, WCI 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, WCI
acquired one franchise agreement and one municipal contract, pursuant to which
it serves more than 9,000 commercial, industrial and residential customers, and
agreements to operate two transfer stations, one Subtitle D landfill and one
recycling facility. Selected historical financial data for Madera follows (in
thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
STATEMENTS OF INCOME DATA:
Revenues....................................... $7,008 $7,770 $7,845
Operating expenses:
Cost of operations.......................... 5,288 5,512 5,289
Selling, general and administrative......... 996 969 1,041
Depreciation and amortization............... 467 585 627
------ ------ ------
Income from operations......................... 257 704 888
Interest expense............................... (237) (259) (280)
Other income, net.............................. 68 113 173
------ ------ ------
Net income..................................... $ 88 $ 558 $ 781
====== ====== ======
Pro forma income taxes(1)...................... $ (30) $ (208) $ (295)
------ ------ ------
Pro forma net income(1)........................ $ 58 $ 350 $ 486
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents..................................... $1,064 $1,527
Working capital.......................................... 622 942
Property and equipment, net.............................. 3,800 3,636
Total assets............................................. 6,004 6,297
Long-term obligations, net of current portion............ 2,194 1,894
Total shareholders' equity............................... 2,264 2,800
</TABLE>
- ---------------
(1) Prior to its acquisition by WCI, Madera operated under Subchapter S of the
Code and was not subject to corporate federal and state income tax. The
Subchapter S election was terminated upon its acquisition by WCI. 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.
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
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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 WCI'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
WCI's business is capital intensive. WCI'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. WCI plans to meet its capital needs through various
financing sources, including internally generated funds and debt and equity
financing.
As of September 30, 1998, WCI had a working capital deficit of $1.5
million, including cash and cash equivalents of $1.0 million. WCI'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. WCI finances its
working capital requirements from internally generated funds and bank
borrowings.
At inception, WCI sold 2,300,000 shares of Common Stock at $0.01 per share
to its founders and 2,499,998 shares of Series A Preferred Stock at $2.80 per
share. In May and June 1998, WCI received approximately $23.9 million in net
proceeds from the sale of 2,300,000 shares in its initial public offering
(including exercise by the underwriters of that offering of their overallotment
option). As of January 4, 1999, WCI had sold or issued an additional 2,214,292
shares of Common Stock at a weighted average value of $10.38 per share, and had
outstanding options and warrants to purchase 2,442,699 shares of Common Stock at
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a weighted average exercise price of $4.94 per share. The weighted average value
at which shares were issued, and the weighted average exercise price of the
outstanding options and warrants, are significantly below the $12.00 initial
public offering price per share of Common Stock. WCI's liquidity and capital
resources would be greater if WCI had sold shares at higher prices and issued
options and warrants with higher exercise prices. In addition, WCI's results of
operations on a per share basis would be more favorable if there were fewer
shares outstanding. See "Risk Factors -- Share Issuance; Possible Dilution."
WCI has a $125.0 million revolving credit facility with a syndicate of
banks for which BankBoston, N.A. acts as agent, which is secured by all assets
of WCI, including WCI's interest in the equity securities of its subsidiaries.
The credit facility matures in 2003 and bears interest at a rate per annum equal
to, at WCI's discretion, either: (i) the BankBoston Base Rate plus applicable
margin; or (ii) the Eurodollar Rate plus applicable margin. The credit facility
requires WCI to maintain certain financial ratios and satisfy other
predetermined requirements, such as minimum net worth, net income and limits on
capital expenditures. It also requires the lenders' approval of acquisitions in
certain circumstances. See "Risk Factors -- Potential Inability to Finance WCI's
Potential Growth." As of December 31, 1998, an aggregate of approximately $57.3
million was outstanding under WCI's credit facility, and the interest rate on
outstanding borrowings under the current credit facility was approximately 6.7%.
For the nine months ended September 30, 1998, net cash provided by
operations was approximately $4.4 million, of which $3.5 million was provided by
operating results for the period exclusive of non-cash charges, and $839,000 was
provided by a decrease in working capital (net of acquisitions) for the period.
For the nine months ended September 30, 1998, net cash used by investing
activities was $46.1 million. Of this, $44.2 million was used to fund the cash
portion of acquisitions. The remaining cash uses were investments in management
information systems, trucks and containers.
For the nine months ended September 30, 1998, net cash provided by
financing activities was $42.0 million, which was provided by net borrowings
under WCI's various debt arrangements and $23.5 million in proceeds from the
sale of Common Stock in an initial public offering.
WCI 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.
WCI intends to fund its planned 1999 capital expenditures principally
through existing cash, internally generated funds, and borrowings under its
existing credit facility. In addition, WCI anticipates that it may require
substantial additional capital expenditures to facilitate its growth strategy of
acquiring solid waste collection and disposal businesses. If WCI is successful
in acquiring additional landfill disposal facilities, WCI 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. WCI believes that the credit facility, the funds expected to be generated
from operations, and the net proceeds of its initial public offering will
provide adequate cash to fund WCI's working capital and other cash needs for the
foreseeable future.
Goodwill represents the excess of the purchase price over the fair value of
the net assets of the acquired entity and is amortized on a straight line basis
over the period of expected benefit of 40 years. Within the purchase price of an
acquired company, WCI first assigns value to the tangible assets, followed by
intangible assets, including covenants not to compete and certain contracts and
customer lists that are determinable both in terms of size and life. Value of
the other intangible assets is determined by considering, among other things,
the present value of the cash flows associated with those assets.
WCI continually evaluates the value and future benefits of its intangible
assets. WCI assesses the recoverability from future operations using income from
operations of the related acquired businesses as a measure. Under this approach,
the carrying value would be reduced if it becomes probable that WCI's best
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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. As of September 30, 1998, there have been no adjustments to the carrying
amounts of intangibles resulting from these evaluations. As of September 30,
1998, WCI's goodwill represented approximately 71% of its total assets and 136%
of stockholders' equity.
WCI derives a substantial portion of its revenues from exclusive municipal
contracts and franchise agreements. Its single largest contract, with the City
of Vancouver, accounted for approximately 18.1% of WCI's revenues during the
period from inception (September 9, 1997) through December 31, 1997, and 10.1%
during the nine months ended September 30, 1998. There are approximately nine
years remaining under that contract. No other single contract or customer
accounted for more than 7.1% of WCI's revenues during the period from inception
(September 9, 1997) through December 31, 1997, or more than 5.0% during the nine
months ended September 30, 1998 or is material to its liquidity and cash flow.
INFLATION
To date, inflation has not had a significant effect on WCI's operations.
Consistent with industry practice, many of WCI's contracts provide for a
pass-through of certain costs, including increases in landfill tipping fees and,
in some cases, fuel costs. WCI believes, therefore, that it should be able to
implement price increases to offset many cost increases resulting from
inflation. However, competitive pressures may require WCI to absorb at least
part of these cost increases, particularly during periods of high inflation.
SEASONALITY
Based on historic trends experienced by the businesses WCI has acquired,
WCI'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 Western U.S. In addition, certain of WCI'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
WCI'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
WCI 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. WCI expects to complete those modifications and
upgrades during 1999. The total Year 2000 project cost is estimated to be
approximately $100,000. WCI has spent part of its Year 2000 budget on replacing
its billing systems in Maltby and Vancouver. Because WCI's operations rely
primarily on mechanical systems such as trucks to collect solid waste, WCI does
not expect its operations to be significantly affected by Year 2000 issues.
WCI's customers may need to make Year 2000 modifications to software and
hardware that is used to generate records, bills and payments relating to WCI.
WCI does not rely on vendors on a routine basis except for providers of disposal
services. WCI brings waste to a site and is normally billed based on tonnage
received. WCI believes that if its disposal vendors encounter Year 2000
problems, they will convert to manual billing based on scale recordings until
they resolve those issues.
In assessing WCI's exposure to Year 2000 issues, WCI's management believes
its biggest challenges lie in the following areas: Year 2000 issues at WCI's
banks, large (typically municipal) customers, and acquired business between the
time WCI acquires them and the time WCI implements its own systems. WCI is
obtaining Year 2000 compliance certifications from its vendors, banks and
customers. If WCI and its vendors, banks and customers do not complete the
required Year 2000 modifications on time, the Year 2000 issue could materially
affect WCI's operations. WCI believes, however, that in the most reasonably
likely worst case, the effects of Year 2000 issues on its operations would be
brief and small relative to WCI's overall
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<PAGE> 69
operations. WCI has not established a contingency plan to minimize operational
problems if WCI and its customers do not timely complete all required Year 2000
modifications.
MANAGEMENT
COMPENSATION OF DIRECTORS
Directors who are officers or employees of WCI do not currently receive any
compensation for attending meetings of the Board of Directors. Each independent
director receives 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 WCI 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 WCI Common Stock at the time
of his or her initial election or appointment. WCI has granted to each of
Michael W. Harlan and William J. Razzouk, its two independent directors, options
to purchase 15,000 shares of Common Stock at $3.00 per share, which are
currently exercisable.
Beginning in 1999, WCI 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 WCI Common Stock. All such options will have an exercise price
equal to the fair market value of WCI 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.
EXECUTIVE COMPENSATION
Summary Compensation Information
WCI was incorporated in September 1997. The following table sets forth
information with respect to the annual and long-term compensation earned in 1997
and 1998 by Ronald J. Mittelstaedt, WCI's Chief Executive Officer and the other
executive officers who were paid or earned more than $100,000. The persons named
in the table are sometimes referred to herein as the "named executive officers."
No officer other than Mr. Mittelstaedt was paid or earned more than $100,000 in
1997. Mr. Mittelstaedt 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
YEAR SALARY(1) BONUS(1) OTHER STOCK GRANTED(2) COMPENSATION(3)
---- --------- -------- ------- ---------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ronald J. Mittelstaedt.... 1997 $39,903 $25,000 -- $ 0 200,000 $10,000
Ronald J. Mittelstaedt.... 1998 176,577 100,000 $10,254 -- -- --
Steven F. Bouck........... 1998 92,887 150,000 -- -- 250,000 --
Darrell W. Chambliss...... 1998 89,972 76,822 -- -- -- --
Michael R. Foos........... 1998 89,809 67,039 -- -- -- --
Eric J. Moser............. 1998 74,115 31,563 -- -- -- --
</TABLE>
- ---------------
(1) Mr. Mittelstaedt's salary and bonus figures for 1997 reflect employment from
October 1, 1997 through December 31, 1997. His bonus figure for 1997
reflects portion earned during 1997; such bonus was paid in 1998.
(2) See "Option and Warrant Grants" below.
(3) Consists of consulting fees for services rendered prior to WCI's formation.
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<PAGE> 70
Stock Options and Warrants
Option and Warrant Grants. The following table contains information
concerning the grant during 1998 to the named executive officers of options and
warrants to purchase shares of WCI's Common Stock. No options or warrants were
granted to Messrs. Mittelstaedt, Chambliss, Foos or Moser in 1998.
1998 OPTION AND WARRANT GRANTS
<TABLE>
<CAPTION>
NUMBER OF % OF TOTAL POTENTIAL REALIZABLE VALUE
SHARES OPTIONS AND AT ASSUMED ANNUAL RATES OF
UNDERLYING WARRANT STOCK PRICE APPRECIATION FOR
OPTIONS AND GRANTED TO OPTION/WARRANT TERM(3)
WARRANT EMPLOYEES IN EXERCISE PRICE EXPIRATION -----------------------------
NAME OF BENEFICIAL OWNER GRANTED(1) 1998 PER SHARE(2) DATE 5% 10%
------------------------ ----------- ------------ -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Steven F. Bouck........... 150,000 29.4 $ 2.80 Jan. 31, 2008 $3,873,956 $6,134,140
50,000 9.8 $ 9.50 Jan. 31, 2008 $ 956,319 $1,709,713
50,000 9.8 $12.50 Jan. 31, 2008 $ 806,319 $1,559,713
</TABLE>
- ---------------
(1) All options vested $33% on October 1, 1998, and will vest 33% on October 1,
1999, and 34% on October 1, 2000.
(2) The options and warrant were granted at or above fair market value as
determined by the Board of Directors on the date of grant.
(3) 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 WCI Common Stock over the term of the options and warrant. 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 WCI 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 Commission
and do not represent WCI's estimate or projection of the future price of WCI
Common Stock on any date. There is no representation, either express or
implied, that the stock price appreciation rates for WCI Common Stock
assumed for purposes of this table will actually be achieved.
(4) Warrant vested immediately on date of grant.
Option and Warrant Values. The following table sets forth information about
the value of the named executive officers' exercises of options and warrants
during 1998 and the value of their unexercised options and warrants outstanding
as of December 31, 1998.
AGGREGATED OPTION EXERCISES IN 1998 AND YEAR-END OPTION AND WARRANT VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AND WARRANT AT AND WARRANT AT
SHARES DECEMBER 31, 1998 DECEMBER 31, 1998(1)
ACQUIRED IN VALUE --------------------------- ---------------------------
EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ronald J. Mittelstaedt.... -- -- 133,000 67,000 $2,071,475 $1,043,525
Steven F. Bouck........... 92,919 $861,311 23,749 133,332 160,711 1,529,985
Darrell W. Chambliss...... -- -- 50,000 100,000 650,422 1,300,828
Michael R. Foos........... -- -- 50,000 100,000 650,422 1,300,828
Eric J. Moser............. -- -- 28,334 56,666 351,466 702,909
</TABLE>
- ---------------
(1) Based on the WCI Common Stock's closing price of $18.375 on the Nasdaq
National Market on December 31, 1998.
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<PAGE> 71
Employment Agreements
WCI entered into an employment agreement with Ronald J. Mittelstaedt, WCI's
President and the Chief Executive Officer, on October 1, 1997. The initial
annual base salary was $170,000, which was adjusted to $200,000 on October 1,
1998.
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 WCI
or extended further by the Board. WCI or Mr. Mittelstaedt may at any time
terminate the agreement, with or without cause, provided that if WCI 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), WCI is
required to make certain severance payments, and all of Mr. Mittelstaedt's
unvested options, warrants and rights relating to capital stock of WCI will
immediately vest. The agreement also provides that a change of control of WCI
(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, WCI sold Mr. Mittelstaedt 617,500
shares of WCI's Common Stock for $0.01 per share and 357,143 shares of WCI's
Series A Preferred Stock for $1,000,000. Mr. Mittelstaedt may recommend nominees
for election to WCI'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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
WCI's 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 WCI 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 WCI.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of WCI Common Stock as of the Record Date, by: (i) each person or
entity known to WCI to beneficially own more than 5% of WCI's Common Stock; (ii)
Mr. Mittelstaedt and each director of WCI; and (iii) all current directors and
executive officers of WCI as a group.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENTAGE
--------------------------- --------- ----------
<S> <C> <C>
James N. Cutler, Jr.(2)(3).................................. 977,322 10.2%
J. Bradford Bishop(2)(3).................................... 916,607 9.6
Ronald J. Mittelstaedt(2)(4)................................ 1,058,376 11.2
Frank W. Cutler(2)(3)....................................... 672,246 7.0
Eugene V. Dupreau(2)(5)..................................... 402,000 4.3
Kieckhefer Partnership 84-1(2).............................. 562,104 6.0
Michael W. Harlan(2)(6)..................................... 20,000 0.2
William J. Razzouk(2)(7).................................... 15,000 0.2
Eugene P. Polk(2)(8)........................................ 749,470 8.1
All executive officers and directors as a group (10
persons).................................................. 2,235,603 22.8
</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 WCI 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, WCI believes that the persons named in this
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<PAGE> 72
table, based on information provided by such persons, have sole voting and
investment power with respect to the shares of WCI Common Stock shown.
(2) The address of Mr. Mittelstaedt is 2260 Douglas Boulevard, Suite 280,
Roseville, California 95661. The address of J. Bradford Bishop and James N.
Cutler, Jr. is 6950 S.W. Hampton Street, Suite 200, Portland, Oregon 97223.
The address of Kieckhefer Partnership 84-1 and Eugene P. Polk is P.O. Box
1151, Prescott, Arizona 86302. The address of Frank W. Cutler is 711 North
Bayfront, Newport Beach, California 92662. The address of Eugene V. Dupreau
is Madera Disposal Systems, Inc., 21739 Road 19, Chowchilla, California
93610. The address of Michael W. Harlan is 2777 Allen Parkway, Suite 700,
Houston, Texas 77019. The address of William J. Razzouk is 5915 River Oaks
Road, Memphis, Tennessee 38120.
(3) Includes 247,000 shares purchasable under currently exercisable warrants.
(4) Includes 100,000 shares purchasable under currently exercisable warrants and
33,333 shares purchasable under currently exercisable options. Also includes
567,900 shares held by the Mittelstaedt Family Trust dated 6/18/97, of which
Mr. Mittelstaedt is the Trustee.
(5) Includes 66,667 shares purchasable under immediately exercisable warrants
and 5,000 shares purchasable under immediately exercisable options.
(6) Includes 5,000 shares purchasable under immediately exercisable warrants and
15,000 shares purchasable under immediately exercisable options.
(7) Includes 15,000 shares purchasable under immediately exercisable options.
(8) Includes 297,704 shares beneficially owned through three trusts for which
Eugene Polk serves as a trustee (190,562 shares -- Eugene P. Polk and
Barbara J. Polk Revocable Trust U/A 11/18/68; 53,571 shares -- Margaret T.
Morris Trust U/A 5/1/67; and 53,571 shares -- Margaret T. Morris Trust U/A
4/19/69); and 170,714 shares held by the Polk Investment Partnership 93-1,
for which Eugene Polk serves as a Manager; and 281,052 shares held by
Kieckhefer Trust Partnership, for which Eugene Polk serves as Manager.
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THE CORPORATIONS
INTRODUCTION
Murrey's Disposal Company, Inc. ("Murrey's"), American Disposal Company,
Inc. ("American"), D. M. Disposal Co., Inc. ("DM") and Tacoma Recycling Company,
Inc. ("Tacoma") are four privately held regional solid waste service companies.
The four companies combined (the "Corporations") operate under centralized
management and administration based in the Corporations' Fife, Washington
offices. As of October 1, 1998, the Corporations provided solid waste collection
and recycling services to over 65,000 commercial, residential and industrial
customers in the counties in and surrounding the Seattle-Tacoma, Washington
basin. The Corporations own and operate five solid waste collection operations,
one transfer station and two recycling processing facilities, and operate a
second transfer station.
Murrey's predecessor was founded by David Murrey in 1959 as a single truck
operation. The Corporations have since grown to become one of the largest
independent solid waste collection operations in the State of Washington. Their
growth was the result of high service and operating standards combined with
occasional acquisitions. The Corporations currently hold two G certificates,
serving portions of the unincorporated areas in the counties of Jefferson,
Clallam, Pierce and King, Washington. With the death of David Murrey in 1994,
current management continued to expand the Corporations through a combination of
internal growth and acquisitions. Management's strategy continues to be to grow
the Corporations by providing the highest possible level of customer service at
competitive rates and taking advantage of opportunities to acquire smaller
businesses that complement the Corporations' operations. Management believes
that the Corporations' strong cash flow has allowed them to pursue opportunities
not available to smaller competitors. The Corporations' existing senior
management have extensive operating and financial experience in the solid waste
business and numerous contacts throughout the region based on over twenty-five
years of service to the Corporations.
HISTORY
Murrey's Disposal Company, Inc.
Murrey's predecessor was founded in 1959 by David J. Murrey, who originally
purchased Points Garbage Service, a sole proprietorship in Pierce County,
Washington. The company was incorporated as David Murrey Garbage Service, Inc.
in 1963 when David Murrey acquired a second G certificate. In 1981, the company
changed its name to Murrey's Disposal Company, Inc. With the acquisition of the
assets of Olympic Disposal in 1997, Murrey's extended its service area to the
Olympic Peninsula in Washington. As of October 1, 1998, Murrey's served
approximately 30,600 customers in unincorporated Pierce, Clallam and Jefferson
counties pursuant to a G certificate for those areas.
American Disposal Company, Inc.
In 1966, Mr. Murrey purchased American, which had an overlapping authority
and customer base serving portions of Pierce County. In May 1997, American
purchased the assets of Vashon Island Disposal, the only solid waste collection
company serving Vashon Island in King County, Washington. As of October 1, 1998,
American served approximately 14,500 customers in unincorporated Pierce and King
Counties pursuant to a G Certificate for that area.
D. M. Disposal Co., Inc.
DM was incorporated by Mr. Murrey in July 1979 to provide solid waste
collection services to municipalities in Pierce County. DM was created to
service competitively bid municipal contracts and has grown to serve
approximately 19,800 customers in Pierce and Clallam Counties, Washington, under
municipal contracts with cities and towns including Puyallup, Buckley,
Carbonado, Bonney Lake, Orting, Sumner and Milton, Washington. The largest
single contract of the Corporations is the Puyallup City Agreement, which
represents approximately 8% of the combined revenues of the Corporations. In
July 1982, Mr. Murrey
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founded American Portable Storage, Inc., a wholly-owned DM subsidiary that
rented portable storage units. Mr. Murrey continued DM's expansion in November
1982 by adding recycling services to DM through D.M. Recycling, Inc., another
wholly-owned DM subsidiary. Both subsidiaries were merged into DM in December
1995 and continue to operate as separate DM divisions. In 1997, DM acquired
certain assets of Environmental Waste Systems, Inc., the parent company of
Olympic Disposal, Inc., to extend its service area to the Olympic Peninsula in
Washington.
Tacoma Recycling Company, Inc.
In January 1990, Mr. Murrey incorporated D.M. Tacoma, Inc., which acquired
the assets of Tacoma Recycling, an existing recycling company that had been
operating in Tacoma, Washington for approximately 10 years. D.M. Tacoma, Inc.
changed its name to Tacoma Recycling Company, Inc. on April 1990. It owns and
operates a recycling center, serving customers in Tacoma and surrounding areas,
including the City of Tacoma. Tacoma recovers glass, metals, waste paper,
plastics and corrugated boxes from source separated and commingled streams. In
addition to the processing and recovery for sale, Tacoma also performs
collection services and has a certified document destruction service.
BUSINESS STRATEGY
Over the past 35 years, the Corporations have sought to increase revenue
and profitability through internal growth in existing markets and expansion into
new geographic areas. Elements of the Corporations' growth strategy included:
(1) acquiring collection and recycling operations in existing, established
markets, including Tacoma, Olympic Disposal and Vashon Island Disposal, (2)
securing additional municipal contracts and expanding the range of their G
Certificates, (3) generating internal growth in existing markets by adding
services to existing operations such as recycling, portable storage rental and
yard waste hauling, and (4) incorporating operational enhancements to improve
operating efficiency and customer service (e.g. consolidating managerial and
accounting functions, implementing company-wide quality and operational
standards, acquiring real property,and acquiring and modernizing facilities and
equipment). As the Corporations have acquired additional G certificates, the
WTUC has generally merged the additional certificates into the existing
certificates held by the Corporations.
SERVICES AND CUSTOMER BASE
Commercial, Residential and Industrial Solid Waste Services
The Corporations serve more than 65,000 commercial, residential and
industrial customers in unincorporated Pierce, King, Clallam and Jefferson
Counties, Washington, and various cities and towns in those counties. Murrey's
and American serve approximately 45,000 customers under generally exclusive G
Certificates (see "WCI -- Business -- G Certificates"), with most of the
remaining 20,000 customers served by DM under competitively bid municipal
contracts. Fees under G Certificates and municipal contracts are generally based
on a variety of factors including collection frequency, level of service, route
density, the type, volume and weight of waste collected, the equipment involved,
and the distance between collection and the disposal or processing facility.
Recycling and Other Services
Tacoma offers customers in the City of Tacoma and its surrounding areas
recycling services for a variety of recyclable materials, including cardboard,
office paper, plastic, glass, and ferrous and aluminum metals. Tacoma's
customers may either contract with Tacoma for recyclable collection or deposit
recyclables at Tacoma's collection center. Tacoma then sorts and sells its
collected recyclables to third parties for processing. Under certain municipal
contracts Tacoma is paid a fixed fee per ton for processing recyclable
materials. It is paid a small incentive fee based upon being able to sell the
sorted commodities for amounts different from the posted average price. Because
of the structure of the municipal contracts, Tacoma's management believes that
it has minimized its exposure to commodity pricing risk. For commercial
accounts, Tacoma buys and sells all grades of recyclable materials and obtains a
spread from which it covers its processing costs and may earn a
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profit. Commodity price exposure is reduced because Tacoma both buys and sells;
however, this spread tends to narrow as commodity prices decline.
The Corporations also provide other waste management services, most of
which are project based, including the collection and hauling of medical waste
and construction and demolition waste.
OPERATIONS
The Corporations are each operated as separate entities with common senior
management. The Corporations' financial management, accounting, environmental
compliance, risk management and personnel functions are centralized and shared.
For expense control and operational efficiencies, the Corporations occasionally
share equipment and personnel. The Corporations each maintain separate
accounting records and charge the costs of any shared equipment and personnel
among the various Corporations based upon usage. The Corporations also share the
transfer station at the Corporations' principal business offices, storage areas
and the equipment maintenance areas. The costs of all such items are allocated
among the Corporations based upon usage.
The Corporations' principal business offices are located in Fife,
Washington. Murrey's also has offices in Port Angeles, Washington through which
it operates its Olympic Disposal division. The management located at the Fife,
Washington office centrally manages each of the business offices. The disposal
of waste collected in Pierce County by the Corporations is handled by Land
Recovery Inc. ("LRI"). The waste is either disposed of at LRI's Hidden Valley
landfill or long hauled to the Klickitat County landfill. The Hidden Valley
landfill is scheduled to close December 31, 1998; after which all the waste will
be long hauled to Klickitat County. LRI has been in the process of obtaining
permits for a new municipal solid waste landfill in Pierce County, Washington,
which is projected to open in November 1999. If LRI is successful, Pierce County
waste will be disposed of at that facility.
COMPETITION
As described in "WCI-Business", the solid waste services industry is highly
competitive and fragmented, and requires substantial labor and capital
resources. Within the four counties served by the Corporations, the
Corporations' competitors include the large national waste company Waste
Management Inc. (see "WCI -- Business -- Competition") and a smaller private
company, Western Waste, each of which shares overlapping service areas in
Clallam County, and Harold LeMay Enterprises, Inc., a private company that
serves areas of Pierce County under a separate G Certificate and other southwest
Washington counties. A second large national waste company, Allied Waste
Industries Inc., serves King County and many of the counties adjacent to the
Corporations' existing service area through the Rabanco Companies, a large
family of companies that Allied acquired earlier this year from private owners.
Competition within the markets served by the Corporations is based on price
and quality of service. From time to time, the competitors listed above or
others new to the western Washington market may reduce the price of their
services to expand market share or service areas or to win competitively bid
municipal contracts.
RISK MANAGEMENT, INSURANCE AND PERFORMANCE BONDS
The Corporations maintain environmental and other risk management programs
appropriate for their business. The Corporations' environmental risk management
program includes evaluating existing facilities and potential acquisitions for
environmental law compliance. The Corporations do not presently expect
environmental compliance costs to increase above current levels. The
Corporations also maintain worker safety programs that encourage safe workplace
practices. The Corporations' facilities generally comply in all material aspects
with applicable federal and state regulations.
The Corporations carry a broad range of insurance, which the management
believes to be adequate to protect the Corporations' assets and operations. The
Corporations' coverage includes general liability, comprehensive property
damage, workers' compensation and other coverage customary in the industry.
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Municipal solid waste collection contracts may require performance bonds or
other means of financial assurance to secure contractual performance. To date,
the Corporations have not had difficulty obtaining surety bonds if required by
their customers.
PROPERTY, FACILITIES AND EQUIPMENT
The Corporations' executive offices, solid waste collection operations,
transfer station, maintenance facilities and storage facilities (encompassing
more than 12 acres) are centrally located in Fife, Washington. The Corporations
collectively own the majority of these facilities, together with several
improved and unimproved parcels, some of which are adjacent to such facilities,
and lease the remaining facilities. The Corporations lease approximately four
acres in the Port of Port Angeles that serves as a collection facility and
remote office. The Corporations own approximately two and a half acres on Vashon
Island, which houses their collection operations on the island and a satellite
office. The Corporations also own approximately three acres in the city of
Lakewood with 6,000 square feet of modern office space and a 44,000 square foot
warehouse that is currently being vacated. The Corporations are considering
relocating their executive offices to this facility. The Corporations own
approximately 131 acres of undeveloped and agricultural property near Orting,
Washington. The Corporations have no plans to develop this property at this
time. The Corporations own approximately four acres of warehouse space in the
city of Tacoma, which houses the recycling processing operations and offices of
Tacoma.
The Corporations own the majority of their equipment, including
approximately 157 pieces of rolling stock, including waste collection and
hauling vehicles, and related support vehicles, as well as numerous carts and
containers. The American Portable Storage division of DM has approximately 990
portable storage containers ranging from 12 to 26 feet long. The primary use of
the containers is for temporary storage on construction sites. The Corporations
believe that their existing facilities and equipment are adequate for their
current operations.
EMPLOYEES
As of October 1, 1998, the Corporations employed approximately 199
full-time employees, consisting of approximately two employees classified as
managers or professionals, 162 employees involved in waste collection, hauling
and recycling operations, and 35 employees involved in sales, clerical, data
processing or other administrative functions. Approximately 44 refuse drivers
are represented by Teamsters Local 313 under a three-year collective bargaining
agreement dated August 15, 1996 with Murrey's and American. The Corporations are
not aware of any other organizational efforts among their employees and believe
that relations with their employees are excellent.
EXECUTIVE OFFICERS AND DIRECTORS
Pursuant to the Merger Agreement, upon consummation of the Mergers a
designee of the Corporations will become a director of the combined companies.
The current management of the Corporations is as follows:
<TABLE>
<S> <C> <C>
Donald J. Hawkins..................... 50 President, CEO and Director
Irmgard R. Wilcox..................... 56 Chief Financial Officer, Secretary,
Treasurer and Director
Bonnie L. Murrey...................... 60 Vice President and Director
</TABLE>
Donald J. Hawkins has been President and CEO since May of 1995. Previously
Mr. Hawkins served as Vice President of Operations from 1984 to 1995. Mr.
Hawkins originally joined the Corporations as a driver in 1971 and worked in a
variety of progressively more responsible positions. Mr. Hawkins is active in
the local community and industry. He has served as a member of the Pierce County
Solid Waste Advisory Council for fifteen years, the last three as its chairman.
Mr. Hawkins is also a member of the Board of Directors of the Washington Refuse
and Recycling Association. Mr. Hawkins attended Tacoma Community College.
Irmgard R. Wilcox has been Chief Financial Officer, Secretary and Treasurer
since 1982. Prior to 1982, Ms. Wilcox served as controller and office manager
since 1979. Ms. Wilcox originally joined the Corporations
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in 1975. Between 1976 and 1979 she worked for the U.S. Government Central
Accounting Office in Germany. Ms. Wilcox has served the Corporations for
approximately 21 years in a variety of positions. Ms. Wilcox has a B.A. in
Business Administration from Pacific Lutheran University with a concentration in
accounting.
Bonnie L. Murray has been Vice President and a Director since 1994.
LEGAL PROCEEDINGS
In the normal course of their business and as a result of the extensive
governmental regulation of the solid waste industry, the Corporations 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 or to revoke or deny renewal of an operating permit held by
the Corporations. From time to time, the Corporations may also become parties to
various claims or suits for alleged damages to persons and property, alleged
violations of certain laws and alleged liabilities arising out of matters
occurring during the normal course of operating a waste management business.
However, there is no current proceeding or litigation involving the Corporations
that the Corporations believe will have a material adverse impact on the
Corporations' business, financial condition, results of operations or cash
flows.
SELECTED HISTORICAL AND OPERATING DATA
The selected financial and operating data of the Murrey Companies as of
December 31, 1996 and 1997, and for the years ended December 31, 1995, 1996 and
1997 has been derived from audited financial statements included elsewhere in
this Proxy Statement. The selected financial and operating data as of September
30, 1998 and for the nine months ended September 30, 1997 and 1998 has been
derived from unaudited financial statements included elsewhere in this Proxy
Statement. In the opinion of the Murrey Companies' management, the unaudited
financial data includes 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 MURREY COMPANIES
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
--------------------------- -------------------
1995 1996 1997 1997 1998
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................... $27,786 $25,024 $28,874 $21,477 $24,532
Cost of operations........................... 20,859 20,465 23,133 16,933 19,337
Selling, general and administrative.......... 2,101 2,142 2,323 1,653 1,870
Depreciation and amortization................ 923 1,236 1,371 1,350 1,640
------- ------- ------- ------- -------
Income from operations....................... 3,903 1,181 2,047 1,541 1,685
Interest expense............................. (198) (284) (380) (247) (423)
Other income, net............................ 210 309 283 150 (97)
------- ------- ------- ------- -------
Income before income taxes................... 3,915 1,206 1,950 1,444 1,165
Income tax provision......................... (690) (543) (634) (512) (414)
------- ------- ------- ------- -------
Net income................................... $ 3,225 $ 663 $ 1,316 $ 932 $ 751
======= ======= ======= ======= =======
Pro forma income taxes(1).................... $(1,338) $ (432) $ (697) $ (522) $ (421)
------- ------- ------- ------- -------
Pro forma net income(1)...................... $ 2,577 $ 774 $ 1,253 $ 922 $ 744
======= ======= ======= ======= =======
</TABLE>
70
<PAGE> 78
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1996 1997 1998
------- ------- --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 81 $ 126 $ 405
Working capital (deficit)................................. (3,721) (3,656) (3,349)
Property, plant and equipment, net........................ 12,529 14,819 14,371
Total assets.............................................. 15,065 19,696 19,908
Long-term debt............................................ 1,851 4,907 4,047
Total shareholders' equity................................ 6,258 7,491 8,075
</TABLE>
- ---------------
(1) Prior to their proposed mergers with WCI, certain of the Murrey Companies
operated under Subchapter S of the Internal Revenue Code and were not
subject to federal income taxes. The Subchapter S election will be
terminated upon their mergers with WCI. The pro forma income taxes and pro
forma net income reflect such amounts as if the Murrey Companies filed
federal income tax returns as regular corporations for the periods
presented. See Note 11 of the Murrey Companies' combined financial
statements included elsewhere herein.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 VS. NINE MONTHS ENDED SEPTEMBER 30,
1997
Revenue. Revenues for the nine months ended September 30, 1998 increased
$3.1 million or 14.2% to $24.5 million from $21.5 million for the nine months
ended September 30, 1997. This increase was primarily due to increased volumes
and the impact of acquisitions in the second half of 1997.
Cost of Operations. Cost of operations for the nine months ended September
30, 1998 increased $2.4 million or 14.2% to $19.3 million from $16.9 million for
the nine months ended September 30, 1997. This increase was primarily due to
increased volumes and the impact of acquisitions in the second half of 1997.
Cost of operations as a percentage of revenue remained the same at 78.8%.
SG&A. SG&A for the nine months ended September 30, 1998 increased $217,000
or 13.1% for the nine months ended September 30, 1997. SG&A as a percentage of
revenue decreased to 7.6% from 7.7% in 1997. The percentage decrease was
primarily due to operating leverage as a result of increased volumes and revenue
from acquisitions in the second half of 1997.
Depreciation and Amortization. Depreciation and amortization expense for
the nine months ended September 30, 1998 increased approximately $290,000 to
$1.6 million from $1.3 million from the nine months ended September 30, 1997.
Depreciation and amortization increased as a percentage of revenue to 6.7% from
6.3%. The higher depreciation level resulted from the purchase of additional
collection equipment and containers and the acquisitions in the second half of
1997.
Interest. Interest increased approximately $176,000 to $423,000 for the
nine months ended September 30, 1998 from $247,000 for the nine months ended
September 30, 1997. The increased interest expense resulted from higher debt
levels resulting from the purchases of property, equipment and other
acquisitions.
1997 VS. 1996
Revenue. Total revenues increased by $3.9 million or 15.4%, to $28.9
million in 1997 from $25.0 million in 1996. This increase was primarily
attributable to increased volumes, price increases as a result of increased
disposal fees, the acquisition of the assets of Vashon Island Disposal and the
additional services to existing customers.
Cost of Operations. Total cost of operations increased $2.7 million to
$23.1 million in 1997 from $20.5 million in 1996. The increase was principally
due to increased volume, increased disposal costs and the cost of operations of
Vashon Island Disposal. Cost of operations as a percentage of revenues declined
to 80.1% from 81.8% in 1996. The percentage decrease was primarily due to
operating leverage as a result of increased volumes.
71
<PAGE> 79
SG&A. SG&A expenses increased approximately $181,000 to $2.3 million in
1997 from $2.2 million in 1996. The increase was primarily due to increased
wages and contributions to the Corporations' 401(k) plan. As a percentage of
revenues, SG&A decreased to 8.0% from 8.6% in 1996, as a result of operating
leverage with the increased revenue.
Depreciation and Amortization. Depreciation and amortization expense
increased approximately $135,000 to $1.4 million in 1997 from $1.2 million in
1996. The higher depreciation level resulted from the purchase of additional
collection equipment and containers. Depreciation and amortization decreased as
a percentage of revenues to 4.7% from 4.9%. The percentage decrease was
primarily due to the increased revenues.
Interest Expense. Interest expense increased approximately $96,000 to
$380,000 in 1997 from approximately $284,000 in 1996. The increased interest
expense was a result of higher debt levels resulting from the purchases of
additional property and equipment.
1996 VS. 1995
Revenue. Total revenues declined by $2.8 million or 9.9%, to $25.0 million
in 1996 from $27.8 million in 1995. This decrease was primarily attributable to
a decline in recycled material commodity prices at the Corporations' Tacoma
operations, partially offset by increases in volumes of solid waste.
Cost of Operations. Total cost of operations decreased $394,000 to $20.5
million in 1996 from $20.9 million in 1995. The decrease was principally due to
a decline in the cost of recycled materials, which was offset by increased
operating costs associated with increased volumes of waste. Cost of operations
as a percentage of revenues increased to 81.8% from 75.1% in 1995. The
percentage increase was primarily due to reduced margins in the recycling
business.
SG&A. SG&A expenses increased approximately $81,000 to $2.2 million in 1996
from $2.1 million in 1995. As a percentage of revenues, SG&A increased to 8.6%
from 7.6% in 1995 as a result of the decline in revenue in 1996.
Depreciation and Amortization. Depreciation and amortization expense
increased approximately $313,000 to $1.2 million in 1996 from $923,000 in 1995.
Depreciation and amortization increased as a percentage of revenues to 4.9% from
3.3%. The higher depreciation level was as a result of the purchase of
additional collection equipment and containers.
Interest Expense. Interest expense increased approximately $86,000 to
$284,000 in 1996 from approximately $198,000 in 1995. The increased interest
expense resulted from higher debt levels resulting from the purchases of
property and equipment.
Liquidity and Capital Resources
The Corporations have funded their operating activities through a
combination of term and revolving debt, leases on equipment and internally
generated funds. Acquisitions have been financed through a combination of
borrowings and seller financing. At September 30, 1998, the Corporations had
aggregate outstanding balances of approximately $5.4 million of term and
revolving debt. At September 30, 1998, the Corporations had a working capital
deficit of $3.3 million, including cash and cash equivalents of $405,000. Absent
acquisitions, the Corporations will continue to fund their operations and
working capital requirements through internally generated funds and their bank
facilities. The Corporations believe that cash flow from operations and
available borrowings under their current credit facilities are sufficient to
fund their ongoing operations for the foreseeable future. Capital expenditures
for the nine months ending September 30, 1998 were approximately $1.7 million,
the majority of which was used for vehicle and equipment additions.
72
<PAGE> 80
EXPERTS
The following financial statements appearing in this Proxy Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere in this Proxy Statement:
(a) financial statements of Waste Connections, Inc. and Predecessors
as of December 31, 1996 and 1997, and for each of the three years in the
period ended December 31, 1997;
(b) combined financial statements of The Murrey Companies (which
consist of Murrey's Disposal Company, Inc., American Disposal Company,
Inc., D.M. Disposal Co., Inc. and Tacoma Recycling Company, Inc.) as of
December 31, 1996 and 1997, and for each of the three years in the period
ended December 31, 1997;
(c) financial statements of Madera Disposal Systems, Inc. as of
December 31, 1996 and 1997, and for each of the three years in the period
ended December 31, 1997;
(d) financial statements of Arrow Sanitary Service, Inc. as of
September 30, 1997, and for the year then ended;
(e) financial statements of Contractors Waste Removal, L.C. as of
December 31, 1997, and for the year then ended;
(f) consolidated financial statements of Curry Transfer and Recycling,
Inc. as of December 31, 1997 and for the year then ended; and
(g) combined financial statements of Butler County Landfill, Inc. and
Kobus Construction, Inc. as of December 31, 1997, and for the year then
ended.
Such financial statements have been included in this Proxy Statement in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
The following financial statements appearing in this Proxy Statement have
been audited by Grant Thornton LLP, independent auditors, as set forth in their
reports thereon appearing elsewhere in this Proxy Statement:
(a) financial statements of Shrader Refuse and Recycling Service
Company as of September 30, 1996 and 1997, and for the years then ended;
(b) combined financial statements of B&B Sanitation, Inc., Red Carpet
Landfill, Inc. and Darlin Equipment, Inc. as of December 31, 1997, and for
the year then ended; and
(c) combined financial statements of J&J Sanitation, Inc. and Big Red
Roll Off, Inc. as of December 31, 1997, and for the year then ended.
Such financial statements have been included in this Proxy Statement in
reliance upon such reports given upon the authority of such firm as experts in
accounting and auditing.
The combined financial statements of Amador Disposal Service, Inc. and
Mother Lode Sani-Hut, Inc. at June 30, 1998 and for the year then ended
appearing in this Proxy Statement have been audited by PricewaterhouseCoopers
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
Representatives of Ernst & Young LLP, WCI's principal independent auditors,
are expected to be present at the Special Meeting and will have the opportunity
to make a statement if they so desire. Such representatives are also expected to
be available to respond to appropriate questions.
73
<PAGE> 81
PROPOSALS OF STOCKHOLDERS FOR ANNUAL MEETING
WCI's Board of Directors will consider proposals of stockholders intended
to be presented for action at WCI's 1999 annual meeting of stockholders. WCI
must receive a stockholder proposal in writing at WCI's principal executive
offices, 2260 Douglas Boulevard, Suite 280, Roseville, California 95661, no
earlier than February 10, 1999, and no later than March 12, 1999, in order for
that proposal to be considered for inclusion in WCI's proxy statement and form
of proxy relating to the 1999 annual stockholders' meeting. Submitting a
stockholder proposal does not assure that it will be included in the proxy
statement or form of proxy, because proposals must meet certain rules of the
Commission and certain requirements of WCI's Bylaws.
OTHER MATTERS
WCI's Board of Directors does not know of any other matters to be presented
for action at the Special Meeting, other than those listed in its Notice of
Meeting and referred to herein. If any other matter should properly come before
the Special Meeting or any adjournment thereof, it is intended that the proxies
solicited hereby be voted with respect to such matters in accordance with the
judgment of the persons voting such proxies.
74
<PAGE> 82
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-4
Unaudited Pro Forma Statement of Operations for the year
ended December 31, 1997................................ F-5
Unaudited Pro Forma Statement of Operations for the nine
months ended September 30, 1998........................ F-6
Notes to Unaudited Pro Forma Statements of Operations..... F-7
Unaudited Pro Forma Balance Sheet as of September 30,
1998................................................... F-12
Notes to Unaudited Pro Forma Consolidated Balance Sheet... F-13
WASTE CONNECTIONS, INC. AND PREDECESSORS
Report of Ernst & Young LLP, Independent Auditors......... F-14
Combined Balance Sheet of Predecessors as of December 31,
1996................................................... F-15
Consolidated Balance Sheet of Waste Connections, Inc. as
of December 31, 1997 (Audited) and September 30, 1998
(Unaudited)............................................ F-15
Combined Statement of Operations of Predecessors for the
nine months ended September 30, 1997................... F-16
Consolidated Statement of Operations of Waste Connections,
Inc. for the period from inception (September 9, 1997)
through December 31, 1997 (Audited) and the nine months
ended September 30, 1998 (Unaudited)................... F-16
Combined Statement of Operations of The Disposal Group for
the period from January 1, 1996 through July 31,
1996................................................... F-17
Combined Statement of Operations of Predecessors for the
period ended December 31, 1996......................... F-17
Combined Statement of Operations of The Disposal Group for
the year ended December 31, 1995....................... F-18
Statement of Operations of Fibres International, Inc. for
the period from January 1, 1995 through November 30,
1995................................................... F-18
Statement of Operations of Predecessors for the one month
ended December 31, 1995................................ F-18
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 nine months
ended September 30, 1998 (Unaudited)................... F-19
Combined Statement of Cash Flows of Predecessors for the
nine months ended September 30, 1997................... F-20
Consolidated Statement of Cash Flows of Waste Connections,
Inc. for the period from inception (September 9, 1997)
through December 31, 1997 (Audited) and the nine months
ended September 30, 1998 (Unaudited)................... F-20
Combined Statement of Cash Flows of The Disposal Group for
the period from January 1, 1996 through July 31,
1996................................................... F-21
Combined Statement of Cash Flows of Predecessors for the
period ended December 31, 1996......................... F-21
Combined Statement of Cash Flows of The Disposal Group for
the year ended December 31, 1995....................... F-22
Statement of Cash Flows of Fibres International, Inc. for
the period from January 1, 1995 through November 30,
1995................................................... F-22
Statement of Cash Flows of Predecessors for the one month
ended December 31, 1995................................ F-22
Notes to Financial Statements............................. F-23
</TABLE>
F-1
<PAGE> 83
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
THE MURREY COMPANIES
Report of Ernst & Young LLP, Independent Auditors......... F-44
Combined Balance Sheets as of December 31, 1996 and 1997
(Audited) and September 30, 1998 (Unaudited)........... F-45
Combined Statements of Income and Retained Earnings for
the years ended December 31, 1995, 1996 and 1997
(Audited) and for the nine months ended September 30,
1997 and 1998 (Unaudited).............................. F-46
Combined Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 (Audited) and for the
nine months ended September 30, 1997 and 1998
(Unaudited)............................................ F-47
Notes to Combined Financial Statements.................... F-48
MADERA DISPOSAL SYSTEMS, INC.
Report of Ernst & Young LLP, Independent Auditors......... F-57
Balance Sheets as of December 31, 1996 and 1997........... F-58
Statements of Income and Retained Earnings for the years
ended December 31, 1995, 1996 and 1997................. F-59
Statements of Cash Flows for the years ended December 31,
1995, 1996 and 1997.................................... F-60
Notes to Financial Statements............................. F-61
ARROW SANITARY SERVICE, INC.
Report of Ernst & Young LLP, Independent Auditors......... F-67
Balance Sheets as of September 30, 1997 (Audited) and
March 31, 1998 (Unaudited)............................. F-68
Statements of Income and Retained Earnings for the year
ended September 30, 1997 (Audited) and the six months
ended March 31, 1997 and 1998 (Unaudited).............. F-69
Statements of Cash Flows for the year ended September 30,
1997 (Audited) and the six months ended March 31, 1997
and 1998 (Unaudited)................................... F-70
Notes to Financial Statements............................. F-71
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
Report of Grant Thornton LLP, Independent Auditors........ F-77
Balance Sheets as of September 30, 1996 and 1997 (Audited)
and June 30, 1998 (Unaudited).......................... F-78
Statements of Income for the years ended September 30,
1996 and 1997 (Audited) and the nine months ended June
30, 1997 and 1998 (Unaudited).......................... F-79
Statement of Stockholders Equity for the years ended
September 30, 1996 and 1997 (Audited) and the nine
months ended June 30, 1998 (Unaudited)................. F-80
Statements of Cash Flows for the years ended September 30,
1996 and 1997 (Audited) and the nine months ended June
30, 1997 and 1998 (Unaudited).......................... F-81
Notes to Financial Statements............................. F-82
CONTRACTOR'S WASTE REMOVAL, L.C.
Report of Ernst & Young LLP, Independent Auditors......... F-89
Balance Sheets as of December 31, 1997 (Audited) and March
31, 1998 (Unaudited)................................... F-90
Statements of Operations and Change in Members' Deficit
for the year ended December 31, 1997 (Audited) and the
three months ended March 31, 1997 and 1998
(Unaudited)............................................ F-91
Statements of Cash Flows for the year ended December 31,
1997 (Audited) and the three months ended March 31,
1997 and 1998 (Unaudited).............................. F-92
Notes to Financial Statements............................. F-93
</TABLE>
F-2
<PAGE> 84
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
CURRY TRANSFER AND RECYCLING, INC.
Report of Ernst & Young LLP, Independent Auditors......... F-97
Consolidated Balance Sheets as of December 31, 1997
(Audited) and March 31, 1998 (Unaudited)............... F-98
Consolidated Statements of Income and Retained Earnings
for the year ended December 31, 1997 (Audited) and the
three months ended March 31, 1997 and 1998
(Unaudited)............................................ F-99
Consolidated Statements of Cash Flows for the year ended
December 31, 1997 (Audited) and the three months ended
March 31, 1997 and 1998 (Unaudited).................... F-100
Notes to Consolidated Financial Statements................ F-101
B&B SANITATION
Report of Grant Thornton, LLP, Independent Auditors....... F-108
Combined Balance Sheets as of December 31, 1997 (Audited)
and March 31, 1998 (Unaudited)......................... F-109
Combined Statements of Earnings for the year ended
December 31, 1997 (Audited) and the three months ended
March 31, 1997 and 1998 (Unaudited).................... F-110
Combined Statement of Stockholders' Deficit for the year
ended December 31, 1997 (Audited) and the three months
ended March 31, 1998 (Unaudited)....................... F-111
Combined Statements of Cash Flows for the year ended
December 31, 1997 (Audited) and the three months ended
March 31, 1997 and 1998 (Unaudited).................... F-112
Notes to Combined Financial Statements.................... F-113
J & J SANITATION
Report of Grant Thornton LLP, Independent Auditors........ F-117
Combined Balance Sheets as of December 31, 1997 (Audited)
and June 30, 1998 (Unaudited).......................... F-118
Combined Statements of Operations for the year ended
December 31, 1997 (Audited) and the six months ended
June 30, 1997 and 1998 (Unaudited)..................... F-119
Combined Statement of Stockholders' and Partners' Equity
for the year ended December 31, 1997 (Audited) and the
six months ended June 30, 1998 (Unaudited)............. F-120
Combined Statements of Cash Flows for the year ended
December 31, 1997 (Audited) and the six months ended
June 30, 1997 and 1998 (Unaudited)..................... F-121
Notes to Combined Financial Statements.................... F-122
AMADOR DISPOSAL SERVICES, INC. AND MOTHERLODE SANI-HUT, INC.
Report of PricewaterhouseCoopers LLP, Independent
Auditors............................................... F-127
Combined Balance Sheets as of June 30, 1998, (Audited) and
September 30, 1998 (Unaudited)......................... F-128
Combined Statements of Operations and Retained Earnings
for the year ended June 30, 1998 (Audited) and the
three months ended September 30, 1997 and 1998
(Unaudited)............................................ F-129
Combined Statements of Cash Flows for the year ended June
30, 1998 (Audited) and the three months ended September
30, 1997 and 1998 (Unaudited).......................... F-130
Notes to Combined Financial Statements.................... F-131
BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC.
Report of Ernst & Young LLP, Independent Auditors......... F-136
Combined Balance Sheets as of December 31, 1997 (Audited)
and September 30, 1998 (Unaudited)..................... F-137
Combined Statements of Income and Retained Earnings for
the year ended December 31, 1997 (Audited) and the nine
months ended September 30, 1997 and 1998 (Unaudited)... F-138
Combined Statements of Cash Flows for the year ended
December 31, 1997 (Audited) and the nine months ended
September 30, 1997 and 1998 (Unaudited)................ F-139
Notes to Combined Financial Statements.................... F-140
</TABLE>
F-3
<PAGE> 85
WASTE CONNECTIONS, INC.
INTRODUCTION TO UNAUDITED PRO FORMA
CONSOLIDATED FINANCIAL STATEMENTS
The Unaudited Pro Forma Statements of Operations for the year ended
December 31, 1997 and the nine months ended September 30, 1998, give effect to
the business combinations involving WCI, its predecessors, Madera Disposal
Systems, Inc. ("Madera"), Arrow Sanitary Service, Inc. ("Arrow"), Shrader Refuse
and Recycling Service Company ("Shrader"), Curry Transfer and Recycling, Inc.
("Curry"), Contractors Waste Removal L.C. ("Contractors"), J & J Sanitation ("J
& J"), B&B Sanitation ("B&B"), Amador Disposal Service, Inc./Mother Lode
Sani-Hut, Inc. ("Amador"), and pending business combination involving Butler
County Landfill, Inc./Kobus Construction, Inc. ("Butler") as if such business
combinations occurred on January 1, 1997 and were accounted for using the
purchase method of accounting. In addition to reflecting the business
combinations involving WCI, its predecessors, Madera, Arrow, Shrader, Curry,
Contractors, J & J, B & B, Amador and Butler, the following Unaudited WCI and
the Murrey Companies Pro Forma Combined Statements of Operations for the year
ended December 31, 1997 and the nine months ended September 30, 1998 reflect the
merger with the Murrey Companies as poolings-of-interests.
The following Unaudited Pro Forma Balance Sheet as of September 30, 1998
assumes WCI's acquisition of Amador and pending acquisition of Butler occurred
on September 30, 1998. In addition to reflecting the business combinations
involving WCI, Amador and Butler, the following Unaudited Pro Forma Combined
Balance Sheet as of September 30, 1998 reflects the mergers with the Murrey
Companies as poolings-of-interests.
WCI has preliminarily analyzed the savings that it expects to be realized
by consolidating certain operational and general and administrative functions.
WCI has not and cannot quantify all of these savings due to the short period of
time since the predecessor, Madera, Arrow, Shrader, Curry, Contractors, J & J,
B&B, Amador and Butler 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 WCI'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 Financial Statements.
The Unaudited Pro Forma Financial Statements include certain adjustments to
the historical financial statements, including adjusting depreciation expense to
reflect purchase price allocations of the entities acquired by WCI, adjusting
interest expense to reflect acquisition-related debt and the related income tax
effects of these adjustments.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions and may be revised as additional information
becomes available. The Unaudited Pro Forma Financial Statements do not purport
to represent what WCI's financial position or results of operations would
actually have been if such transactions in fact had occurred on those dates or
to project WCI's financial position or results of operations for any future
period. Because WCI, its predecessors, the Murrey Companies, Madera, Arrow,
Shrader, Curry, Contractors, J & J, B&B, Amador and Butler 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
Financial Statements should be read in conjunction with the other financial
statements and notes thereto included elsewhere herein, 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-4
<PAGE> 86
WASTE CONNECTIONS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
WASTE
CONNECTIONS,
INC. ARROW
PERIOD FROM MADERA SANITARY
INCEPTION PREDECESSORS DISPOSAL SERVICE, INC.
(SEPTEMBER 9, COMBINED NINE SYSTEMS, INC. YEAR
1997) TO MONTHS ENDED YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1997 1997 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues............................................... $ 6,237 $18,114 $ 7,845 $6,209
Operating expenses:
Cost of operations.................................... 4,703 14,753 5,289 4,970
Selling, general and administrative................... 619 3,009 1,041 776
Depreciation and amortization......................... 354 1,083 627 143
Start-up and integration.............................. 493 -- -- --
Stock compensation.................................... 4,395 -- -- --
--------- ------- ------- ------
Income (loss) from operations.......................... (4,327) (731) 888 320
Interest expense....................................... (1,035) (456) (280) (72)
Other income (expense), net............................ (36) 14 173 (2)
--------- ------- ------- ------
Income (loss) before (provision) benefit for income
taxes................................................. (5,398) (1,173) 781 246
(Provision) benefit for income taxes................... 332 -- -- (117)
--------- ------- ------- ------
Net income (loss)...................................... $ (5,066) $(1,173) $ 781 $ 129
========= ======= ======= ======
Redeemable convertible preferred stock accretion....... $ (531)
---------
Net loss applicable to common
stockholders.......................................... $ (5,597)
=========
Basic and diluted net loss per common share............ $ (2.99)
=========
Shares used in the per share calculation............... 1,872,567
=========
<CAPTION>
SHRADER CURRY
REFUSE AND TRANSFER CONTRACTORS
RECYCLING AND WASTE J & J B&B
SERVICE RECYCLING, REMOVAL, SANITATION SANITATION
COMPANY INC. L.C. COMBINED COMBINED
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1997 1997 1997
------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues............................................... $6,896 $3,617 $1,903 $2,346 $1,965
Operating expenses:
Cost of operations.................................... 4,601 2,259 1,234 1,789 1,074
Selling, general and administrative................... 567 655 359 319
Depreciation and amortization......................... 770 260 202 197 259
Start-up and integration.............................. --
Stock compensation.................................... --
------ ------ ------ ------ ------
Income (loss) from operations.......................... 958 443 108 41 312
Interest expense....................................... (292) (50) (178) (108) (108)
Other income (expense), net............................ 59 64 -- -- 1
------ ------ ------ ------ ------
Income (loss) before (provision) benefit for income
taxes................................................. 725 457 (70) (67) 205
(Provision) benefit for income taxes................... (183) -- -- --
------ ------ ------ ------ ------
Net income (loss)...................................... $ 725 $ 274 $ (70) $ (67) $ 205
====== ====== ====== ====== ======
Redeemable convertible preferred stock accretion.......
Net loss applicable to common
stockholders..........................................
Basic and diluted net loss per common share............
Shares used in the per share calculation...............
<CAPTION>
AMADOR BUTLER
DISPOSAL COUNTY
SERVICE, INC. LANDFILL, INC.
COMBINED COMBINED PRO FORMA
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, PRO FORMA DECEMBER 31,
1997 1997 ADJUSTMENTS 1997
------------- -------------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues............................................... $3,205 $3,010 $ -- $ 61,347
Operating expenses:
Cost of operations.................................... 2,432 1,898 (146)(a) 44,561
(195)(b)
(100)(c)
Selling, general and administrative................... 480 236 (570)(d) 7,412
(132)(e)
(267)(j)
Depreciation and amortization......................... 317 631 (102)(f) 4,339
(2,022)(k)
1,620(l)
Start-up and integration.............................. -- -- -- 493
Stock compensation.................................... -- -- -- 4,395
------ ------ ------- ----------
Income (loss) from operations.......................... (24) 245 1,914 147
Interest expense....................................... (77) (180) 456(g) (6,049)
(218)(g)
1,345(m)
(4,796)(n)
Other income (expense), net............................ (3) 43 -- 313
------ ------ ------- ----------
Income (loss) before (provision) benefit for income
taxes................................................. (104) 108 (1,299) (5,589)
(Provision) benefit for income taxes................... (2) -- (92)(h) 402
(618)(o)
1,082(l)
------ ------ ------- ----------
Net income (loss)...................................... $ (106) $ 108 $ (927) $ (5,187)
====== ====== ======= ==========
Redeemable convertible preferred stock accretion....... (531)
----------
Net loss applicable to common
stockholders.......................................... $ (5,718)
==========
Basic and diluted net loss per common share............ $ (2.12)
==========
Shares used in the per share calculation............... 2,700,306
==========
<CAPTION>
THE MURREY PRO FORMA
COMPANIES COMBINED
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1997
------------ ------------
<S> <C> <C>
Revenues............................................... $28,874 $ 90,221
Operating expenses:
Cost of operations.................................... 23,133 67,694
Selling, general and administrative................... 2,323 9,735
Depreciation and amortization......................... 1,371 5,710
Start-up and integration.............................. -- 493
Stock compensation.................................... -- 4,395
------- ----------
Income (loss) from operations.......................... 2,047 2,194
Interest expense....................................... (380) (6,429)
Other income (expense), net............................ 283 596
------- ----------
Income (loss) before (provision) benefit for income
taxes................................................. 1,950 (3,639)
(Provision) benefit for income taxes................... (634) (232)
------- ----------
Net income (loss)...................................... $ 1,316 $ (3,871)
======= ==========
Redeemable convertible preferred stock accretion....... (531)
----------
Net loss applicable to common
stockholders.......................................... $ (4,402)
==========
Basic and diluted net loss per common share............ $ (0.81)
==========
Shares used in the per share calculation............... 5,450,306
==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 87
WASTE CONNECTIONS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
CURRY
TRANSFER
WASTE MADERA ARROW SHRADER REFUSE AND
CONNECTIONS, DISPOSAL SANITARY AND RECYCLING RECYCLING,
INC. CONSOLIDATED SYSTEMS, INC. SERVICE, INC. SERVICE INC.
NINE MONTHS ONE MONTH FIVE MONTHS COMPANY FIVE MONTHS
ENDED ENDED ENDED SIX MONTHS ENDED
SEPTEMBER 30, JANUARY 31, MAY 31, ENDED MAY 31,
1998 1998 1998 JUNE 30, 1998 1998
----------------- ------------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues............................. $ 35,336 $ 611 $2,508 $3,505 $1,408
Operating expenses:
Cost of operations.................. 24,007 412 1,836 2,264 837
Selling, general and
administrative.................... 3,518 112 385 310 270
Depreciation and amortization....... 2,693 69 67 471 124
Stock compensation.................. 561 -- -- -- --
--------- ----- ------ ------ ------
Income (loss) from operations........ 4,557 18 220 460 177
Interest expense..................... (1,427) (289) (14) (191) (33)
Other income, net.................... -- 16 2 11 41
--------- ----- ------ ------ ------
Income (loss) before (provision)
benefit for income taxes............ 3,130 (255) 208 280 185
(Provision) benefit for income
taxes............................... (1,513) -- (89) -- --
--------- ----- ------ ------ ------
Income (loss) before extraordinary
item................................ 1,617 $(255) $ 119 $ 280 $ 185
===== ====== ====== ======
Extraordinary Item -- early
extinguishment of debt, net of tax
benefit of $165..................... (815)
---------
Net income (loss).................... $ 802
=========
Redeemable convertible preferred
stock accretion..................... $ (917)
---------
Net income (loss) applicable to
common stockholders................. $ (115)
=========
Basic earnings (loss) per common
share:
Income (loss) before extraordinary
item................................ $ 0.13
=========
Extraordinary item................... (0.15)
=========
Basic net income (loss) per common
share............................... $ (0.02)
=========
Diluted earnings (loss) per common
share:
Income (loss) before extraordinary
item................................ $ 0.09
=========
Extraordinary item................... (0.11)
---------
Diluted net loss per common share.... $ (0.02)
=========
Shares used in the per share
calculations:
Basic............................... 5,476,532
=========
Diluted............................. 7,438,658
=========
<CAPTION>
CONTRACTORS AMADOR BUTLER
WASTE J & J B&B DISPOSAL COUNTY
REMOVAL SANITATION SANITATION SERVICE, INC LANDFILL, INC.
L.C. COMBINED COMBINED COMBINED COMBINED
FIVE MONTHS SIX MONTHS FIVE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED ENDED
MAY 31, JUNE 30, MAY 31, SEPTEMBER 30, SEPTEMBER 30, PRO FORMA
1998 1998 1998 1998 1998 ADJUSTMENTS
----------- ----------- ----------- ------------- -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues............................. $ 791 $1,210 $876 $2,355 $2,419 $ --
Operating expenses:
Cost of operations.................. 543 854 464 1,642 1,659 --
Selling, general and
administrative.................... 182 213 136 400 130 (111)(j)
Depreciation and amortization....... 94 107 110 229 408 (334)(l)
Stock compensation.................. -- -- -- -- -- --
----- ------ ---- ------ ------ -------
Income (loss) from operations........ (28) 36 166 84 222 445
Interest expense..................... (90) (53) (46) (88) (109) 624(m)
(2,146)(n)
Other income, net.................... -- -- -- (22) 109 --
----- ------ ---- ------ ------ -------
Income (loss) before (provision)
benefit for income taxes............ (118) (17) 120 (26) 222 (1,077)
(Provision) benefit for income
taxes............................... -- -- -- (1) 358(o)
----- ------ ---- ------ ------ -------
Income (loss) before extraordinary
item................................ $(118) $ (17) $120 $ (27) $ 222 $ (719)
===== ====== ==== ====== ====== =======
Extraordinary Item -- early
extinguishment of debt, net of tax
benefit of $165.....................
Net income (loss)....................
Redeemable convertible preferred
stock accretion.....................
Net income (loss) applicable to
common stockholders.................
Basic earnings (loss) per common
share:
Income (loss) before extraordinary
item................................
Extraordinary item...................
Basic net income (loss) per common
share...............................
Diluted earnings (loss) per common
share:
Income (loss) before extraordinary
item................................
Extraordinary item...................
Diluted net loss per common share....
Shares used in the per share
calculations:
Basic...............................
Diluted.............................
<CAPTION>
THE MURREY PRO FORMA
PRO FORMA COMPANIES COMBINED
NINE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1998 1998 1998
------------- ------------- -------------
<S> <C> <C> <C>
Revenues............................. $ 51,019 $24,532 $ 75,551
Operating expenses:
Cost of operations.................. 34,518 19,337 53,855
Selling, general and
administrative.................... 5,545 1,870 7,415
Depreciation and amortization....... 4,038 1,640 5,678
Stock compensation.................. 561 -- 561
---------- ------- -----------
Income (loss) from operations........ 6,357 1,685 8,042
Interest expense..................... (3,862) (423) (4,285)
Other income, net.................... 157 (97) 60
---------- ------- -----------
Income (loss) before (provision)
benefit for income taxes............ 2,652 1,165 3,817
(Provision) benefit for income
taxes............................... (1,245) (414) (1,659)
---------- ------- -----------
Income (loss) before extraordinary
item................................ 1,407 $ 751 2,158
======= ===========
Extraordinary Item -- early
extinguishment of debt, net of tax
benefit of $165..................... (815) (815)
---------- -----------
Net income (loss).................... $ 592 $ 1,343
========== ===========
Redeemable convertible preferred
stock accretion..................... $ (917) $ (917)
---------- -----------
Net income (loss) applicable to
common stockholders................. $ (325) $ 426
========== ===========
Basic earnings (loss) per common
share:
Income (loss) before extraordinary
item................................ $ 0.08 $ 0.14
========== ===========
Extraordinary item...................
Basic net income (loss) per common
share...............................
Diluted earnings (loss) per common
share:
Income (loss) before extraordinary
item................................ $ 0.06 0.12
========== ===========
Extraordinary item...................
Diluted net loss per common share....
Shares used in the per share
calculations:
Basic............................... 6,069,350 8,819,350
========== ===========
Diluted............................. 7,654,186 10,404,186
========== ===========
</TABLE>
See accompanying notes.
F-6
<PAGE> 88
WASTE CONNECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
ASSUMPTIONS. The unaudited pro forma statements of operations for the year
ended December 31, 1997 and for the nine months ended September 30, 1998 are
presented as if the acquisitions of the Company's predecessors, Madera, Arrow,
Shrader, Curry, Contractors, J & J, B&B, Amador and pending acquisition of
Butler had occurred on January 1, 1997. In addition, the unaudited WCI and the
Murrey Companies pro forma combined statements of operations for the year ended
December 31, 1997 and for the nine months ended September 30, 1998 combine the
pro forma statements of operations for those respective periods with the
historical statements of operations for the Murrey Companies for the year ended
December 31, 1997 and for the nine months ended September 30, 1998,
respectively.
BUSINESS COMBINATIONS. The acquisitions of Madera, Arrow, Shrader, Curry,
Contractors, J & J, B&B, Amador and pending acquisition of Butler 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 consist of the following:
<TABLE>
<CAPTION>
MADERA ARROW SHRADER CURRY CONTRACTORS J & J B&B AMADOR BUTLER
------- ------- ------- ------- ----------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash paid to
shareholders....... $6,949 $ 7,537 $ 8,106 $ 6,347 $ 2,442 $ 2,074 $ 3,321 $ 5,581 $ 7,013
Common stock
issued............. 7,500 3,045 9,997 -- 1,000 -- -- -- --
Liabilities assumed.. 4,256 769 2,102 1,298 2,561 1,372 1,723 1,428 2,219
Sellers notes........ -- -- 378 25 166 93 24 -- 172
Acquisition costs.... 180 125 225 90 73 80 170 100 132
Common stock warrants
issued............. 954 -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
$19,839 $11,476 $20,808 $ 7,760 $ 6,242 $ 3,619 $ 5,238 $ 7,109 $ 9,536
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The Company has preliminarily allocated the purchase prices as follows:
<TABLE>
<CAPTION>
MADERA ARROW SHRADER CURRY CONTRACTORS J & J B&B AMADOR BUTLER
------- ------- ------- ------- ----------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tangible assets
purchased.......... $4,534 $ 898 $ 4,378 $ 2,877 $ 1,506 $ 687 $ 2,611 $ 1,935 $ 9,265
Goodwill............. 14,580 10,528 16,300 4,583 4,686 2,892 2,577 5,144 251
Covenants not to
compete............ -- 50 130 100 50 40 50 30 20
Long-term franchise
agreements and
contracts.......... 725 -- -- 200 -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------
$19,839 $11,476 $20,808 $ 7,760 $ 6,242 $ 3,619 $ 5,238 $ 7,109 $ 9,536
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The valuation of the Company's common stock issued in connection with the
acquisitions was determined based on the market price of the securities over a
reasonable period of time before and after the two companies reached agreement
on the purchase price and, if applicable, after the proposed transaction is
announced. The valuation of common stock issued with contractual trading
restrictions is discounted to reflect the specific features of the stock issued.
WCI's mergers with the Murrey Companies are assumed to be accounted for
under the pooling of interests method of accounting for business combinations.
The pro forma financial statements assume the issuance of 2,750,000 shares,
which represents the expected number of shares to be exchanged. The actual
F-7
<PAGE> 89
WASTE CONNECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
number of share of WCI's common stock to be exchanged for all of the outstanding
stock of the Murrey Companies will be determined at the closing date.
PRO FORMA ADJUSTMENTS. The unaudited pro forma statements of operations do
not reflect non-recurring costs resulting directly from the merger between the
Company and the Murrey Companies. The management of the Company estimates that
these costs will approximate $6,500 and will be charged to operations in the
quarter that the merger is consummated. The amount includes costs to merge the
companies, signing bonuses to be paid to Murrey Company officers, and
professional fees. The following adjustments have been made to the unaudited pro
forma statements of operations:
(a) To eliminate BFI corporate environmental expense allocation related to
BFI landfill closure costs which do not exist for the Company.
(b) To record amortization of the loss contract accrual that was recorded
in connection with the acquisitions of the predecessor operations. The
loss contract accrual is being amortized to operating expenses over
the related terms of the loss contracts which range from 6 to 65
months. The loss contract accrual represents the estimated incremental
losses to the Company related to certain unfavorable contracts the
Company acquired in connection with the acquisition of the predecessor
operations.
(c) To reduce facilities lease expense to the amounts provided for in the
sublease agreement entered into with BFI in connection with the
acquisitions of the predecessor operations. The sublease agreement was
directly attributable to, a required element of, and a condition to
the closing of the acquisition.
(d) To reduce BFI corporate overhead expense allocations to the amount of
corporate overhead currently being incurred by the Company.
(e) To eliminate consulting expenses incurred by BFI related to the
acquisition of The Disposal Group which the Company did not assume in
connection with the acquisitions of the predecessors. The
non-assumption of the consulting agreement was directly attributable
to, a required element of, and a condition to the closing of the
acquisition.
(f) To decrease goodwill amortization for the lower goodwill amount
recorded by the Company in connection with its acquisition of the
predecessor operations.
(g) 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.
(h) To record the estimated tax provision associated with the proforma
adjustments for the Company's predecessors net of the tax benefit for
the net operating loss for the nine months ended September 30, 1997
using the Company's effective tax rate.
(i) To record the estimated tax benefit for the year ended December 31,
1997 associated with the pro forma adjustments for the Madera $198,
Arrow $226, Shrader $60, Curry $177, Contractors $96, J&J $76, B&B
$93, Amador $144 and Butler $12 acquisitions using the Company's
estimated effective tax rates.
(j) To reduce officers' salaries to levels provided for in the new
employment agreements which were directly attributable to, required
elements of, and a condition to the closing of the Madera acquisition
$83 and the Shrader acquisition $184 for the year ended 1997 and
Madera $19 and Shrader $92 for the nine months ended September 30,
1998.
F-8
<PAGE> 90
WASTE CONNECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA
STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(k) To reduce depreciation for the reduction in the property and
equipment's carrying value to fair value related to the acquisition of
Madera $377, Arrow $78, Shrader $585, Curry $130, Contractors $48, J&J
$130, B&B $82, Amador $180 and Butler $412 for the year ended December
31, 1997.
(l) To increase amortization for the increase in goodwill and other
intangibles resulting from the acquisition of Madera $364, Arrow $265,
Shrader $439, Curry $130, Contractors $128, J&J $80, B&B $69, Amador
$135 and Butler $10 for the year ended December 31, 1997. To increase
(decrease) depreciation and amortization for effects of the purchase
for Madera ($19), Arrow $90, Shrader ($160), Curry ($4), Contractors
$47, J&J ($33), B&B ($2), Amador ($25) and Butler ($228) for the nine
months ended September 30, 1998. Goodwill is amortized over a term of
40 years and the covenant not to compete is amortized over a term of
five years.
(m) To eliminate interest expense associated with the outstanding debt
obligations of Madera $280, Arrow $72, Shrader $292, Curry $50,
Contractors $178, J&J $108, B&B $108, Amador $77 and Butler $180 which
were paid-off in connection with the acquisitions for the year ended
December 31, 1997 and Arrow $14, Shrader $191, Curry $33, Contractors
$90, J&J $53, B&B $46, Amador $88 and Butler $109 for the nine months
ended September 30, 1998.
(n) To record interest expense on the additional long-term debt
obligations incurred by the Company in connection with the acquisition
of Madera $897, Arrow $606, Shrader $771, Curry $493, Contractors
$338, J&J $244, B&B $354, Amador $481 and Butler $612 for the year
ended 1997 and Arrow $239, Shrader $372, Curry $247, Contractors $169,
J&J $122, B&B $177, Amador $361 and Butler $459 for the nine months
ended September 30, 1998. In the aggregate the Company incurred or
refinanced long-term debt obligations of approximately $64,469 related
to these acquisitions; with a weighted average interest rate of 7.4%.
(o) To record C corporation income tax (provision) benefit for the year
ended December 31, 1997 for Madera ($297), Shrader ($290), Contractors
$28, J&J $27, B&B ($82), Amador $41 and Butler $(45), which were
subchapter S corporations LLC or partnerships for income tax purposes
for all periods prior to their acquisition by the Company. To record
the estimated C corporation tax (provision) benefit and tax effect of
pro forma adjustments for Madera $83, Arrow $118, Shrader ($64), Curry
$10, Contractors $97, J&J $42, B&B $4, Amador $110 and Butler ($42)
for the nine months ended September 30, 1998.
F-9
<PAGE> 91
WASTE CONNECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PRO FORMA PER SHARE DATA. The shares used in computing the unaudited pro
forma net loss per share for the periods ended December 31, 1997, and the nine
months ended September 30, 1998 are based upon the pro forma number of common
shares as summarized in the table below. See Note 1 of the Company's notes to
financial statements included elsewhere herein for information concerning the
computation of basic and diluted net income (loss) per share.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ ------------------
<S> <C> <C>
Basic Share Count:
Company weighted average shares outstanding............... 1,872,567 5,476,532
Shares issued in connection with the acquisition of
Arrow.................................................. 213,750 131,538(1)
Shares issued in connection with the acquisition of
Contractors............................................ 76,423 43,829(2)
Shares issued in connection with the acquisition of
Shrader................................................ 537,566 417,451(3)
---------- ----------
Shares used in calculating proforma basic income (loss)
per share.............................................. 2,700,306 6,069,350
Shares to be issued in exchange for the Murrey Companies'
stock(4)............................................... 2,750,000 2,750,000
---------- ----------
Shares used in calculating pro forma combined basic net
income (loss) per share................................ 5,450,306 8,819,350
========== ==========
Diluted Share Count:
Shares used in calculating pro forma basic income (loss)
per share.............................................. 2,700,306 6,069,350
Dilutive effect of stock options and warrants
outstanding............................................ -- 1,584,836
---------- ----------
Shares used in calculating pro forma dilutive income
(loss)................................................. 2,700,306 7,654,186
Shares to be issued in exchange for the Murrey Companies'
stock(4)............................................... 2,750,000 2,750,000
---------- ----------
Shares used in calculating pro forma combined diluted net
income (loss) per share................................ 5,450,306 10,404,186
========== ==========
</TABLE>
- ---------------
(1) Includes only incremental shares issued for acquisition of Arrow because
82,212 shares are already included in the Company's weighted average shares
outstanding for the nine months ended September 30, 1998.
(2) Includes only incremental shares issued for acquisition of Contractors
because 39,094 shares are already in the Company's weighted average shares
outstanding for the nine months ended September 30, 1998.
(3) Includes only incremental shares issued for acquisition of Shrader because
120,115 shares are already in the Company's weighted average for the nine
months ended September 30, 1998.
(4) The shares of the Company's common stock to be issued in exchange for the
Murrey Companies stock included in the above table represents the expected
number of shares to be exchanged. The actual number of shares of the
Company's common stock to be exchanged for all of the outstanding stock of
the Murrey Companies will be determined at the closing date.
F-10
<PAGE> 92
In the event that the Company is required to exchange an additional 500,000
shares of its common stock to consummate the merger with the Murrey Companies
the effect on pro forma net loss per share amounts are as follows:
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Basic earnings per common share:
Income (loss) before extraordinary item................... $(0.74) $ 0.13
Diluted earnings per common share:
Income (loss) before extraordinary item................... $(0.74) $ 0.11
</TABLE>
ACQUISITION COSTS. The Company incurred costs of $180, $125, $225, $90,
$73, $80, $170, $100 and $132 related to the Madera, Arrow, Shrader, Curry,
Contractors, J&J, B&B, Amador and Butler acquisitions, respectively, which have
been factored into the respective purchase agreements. Costs incurred by Madera,
Arrow, Shrader, Curry, Contractors, J&J, B&B, Amador and Butler were expensed as
incurred.
No adjustments have been made in these pro forma statements of operations
to conform accounting policies of the Murrey Companies with those of the
Company. The nature and extent of such adjustments, if any, are not expected to
be significant.
CONTINGENT PAYMENTS. In connection with the Madera, Shrader, J & J and
Butler acquisitions the Company is required to pay contingent consideration to
certain former shareholders of the respective companies, subject to their
involvement in specified events that give rise to the consideration. No amounts
related to these contingent payments have been included in the pro forma
financial statements as the events which would give rise to such payments have
not yet occurred nor are probable.
Contingent payments relating to these acquisitions total $6.8 million, are
payable primarily in cash, and are earned based upon the achievement of certain
milestones. Of the total contingent payments, $4.8 million relates to the
achievement of certain operational and financial performance goals, and $2
million relates to the consummation of future acquisitions.
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-11
<PAGE> 93
WASTE CONNECTIONS, INC.
UNAUDITED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
AMADOR BUTLER
WASTE DISPOSAL COUNTY
CONNECTIONS, INC. SERVICE, INC. LANDFILL, INC. PRO FORMA THE MURREY
CONSOLIDATED COMBINED COMBINED ADJUSTMENTS PRO FORMA COMPANIES
----------------- ------------- -------------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash................ $ 1,090 $ 239 $ 47 $ --(2)(5)(6) $ 1,376 $ 405
Accounts receivable,
net............... 9,046 190 428 -- 9,664 3,364
Prepaid expenses and
other current
assets............ 773 76 154 -- 1,003 10
-------- ------ ------ ------- -------- -------
Total current
assets...... 10,909 505 629 -- 12,043 3,779
Property and
equipment, net...... 18,438 2,107 3,124 4,454(3) 28,123 14,371
Goodwill, net......... 81,294 -- -- 5,395(4) 86,689 1,758
Other assets.......... 3,854 30 351 50(4) 4,285 --
-------- ------ ------ ------- -------- -------
$114,495 $2,642 $4,104 $ 9,899 $131,140 $19,908
======== ====== ====== ======= ======== =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Short-term
borrowings........ $ -- $ -- $ -- $ -- $ -- $ 620
Accounts payable.... 6,123 87 107 -- 6,317 2,217
Advance from a
related party..... -- -- -- -- -- 543
Deferred revenue.... 1,501 -- -- -- 1,501 1,432
Accrued
liabilities....... 3,165 145 214 -- 3,524 1,288
Income taxes
payable........... -- -- -- -- -- 277
Current portion of
notes payable..... 1,256 38 608 (474)(5)(8) 1,428 751
Other current
liabilities....... 346 -- -- -- 346 --
Accrued merger
related
expenses.......... -- -- -- -- -- --
-------- ------ ------ ------- -------- -------
12,391 270 929 (474) 13,116 7,128
Other long-term
liabilities......... 1,499 -- 474 -- 1,973 --
Long-term debt, net... 40,404 1,158 816 13,472(5)(6) 55,850 4,047
Deferred income
taxes............... 379 -- -- -- 379 658
Stockholders' equity:
Common stock........ 92 188 10 (198)(7) 92 45
Additional paid-in
capital........... 65,944 118 2 (120)(7) 65,944 455
Deferred stock
compensation...... (499) -- -- -- (499) --
Retained earnings
(deficit)......... (5,715) 908 1,873 (2,781)(7) (5,715) 7,575
-------- ------ ------ ------- -------- -------
Total
stockholders'
equity...... 59,822 1,214 1,885 (3,099) 59,822 8,075
-------- ------ ------ ------- -------- -------
$114,495 $2,642 $4,104 $ 9,899 $131,140 $19,908
======== ====== ====== ======= ======== =======
<CAPTION>
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
----------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash................ $ -- $ 1,781
Accounts receivable,
net............... -- 13,028
Prepaid expenses and
other current
assets............ -- 1,013
------- --------
Total current
assets...... -- 15,822
Property and
equipment, net...... -- 42,494
Goodwill, net......... -- 88,447
Other assets.......... -- 4,285
------- --------
$ -- $151,048
======= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Short-term
borrowings........ $ -- $ 620
Accounts payable.... -- 8,534
Advance from a
related party..... -- 543
Deferred revenue.... -- 2,933
Accrued
liabilities....... -- 4,812
Income taxes
payable........... -- 277
Current portion of
notes payable..... -- 2,179
Other current
liabilities....... -- 346
Accrued merger
related
expenses.......... 6,500(1) 6,500
------- --------
6,500 26,744
Other long-term
liabilities......... -- 1,973
Long-term debt, net... -- 59,897
Deferred income
taxes............... -- 1,037
Stockholders' equity:
Common stock........ (17)(1) 120
Additional paid-in
capital........... 17(1) 66,416
Deferred stock
compensation...... -- (499)
Retained earnings
(deficit)......... (6,500)(1) (4,640)
------- --------
Total
stockholders'
equity...... (6,500) 61,397
------- --------
$ -- $151,048
======= ========
</TABLE>
See accompanying notes.
F-12
<PAGE> 94
WASTE CONNECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSUMPTIONS. The unaudited pro forma balance sheet as of September 30, 1998
combines the historical balance sheet of Waste Connections, Inc. with the
historical balance sheets of Amador and Butler to be accounted for as purchases,
and the historical balance sheet of the Murrey Companies to be accounted for as
poolings-of-interests as of September 30, 1998.
PRO FORMA ADJUSTMENTS. The following adjustments have been made to the
unaudited pro forma consolidated balance sheet.
(1) To record Merger related entries consisting of estimated non-recurring
costs of the Merger with the Murrey Companies and the issuance of
2,750,000 shares of the Company's common stock. The management of the
Company estimates that the non-recurring costs will approximate $6,500
and will be charged to operations in the quarter the merger is
consummated. This estimated expense, has been charged to retained
earnings on the accompanying unaudited pro forma balance sheet.
(2) Cash payments to former shareholders of Amador ($5,581) and payment of
acquisition costs ($100). Cash payments to the former shareholders of
Butler ($7,013) and payment of acquisition cost of ($132).
(3) To increase (reduce) property, plant and equipment ($707) and $5,161 of
Amador and Butler, respectively to its estimated fair market value.
(4) To increase goodwill and other intangible assets for excess of the
purchase prices over the net assets acquired from Amador of $5,144 and
$30 and Butler of $251 and $20, respectively.
(5) Pay off outstanding debt obligations ($1,196) of Amador and debt
obligations ($1,424) of Butler.
(6) To record additional long term debt associated with the acquisition of
Amador and Butler of $6,877 and $8,569 respectively.
(7) To eliminate the equity accounts of Amador and Butler.
(8) To record Seller Notes Payable issued in connection with the
acquisition of Butler of $172.
No adjustments have been made in the unaudited pro forma balance sheet to
conform accounting policies of the Murrey Companies with those of the Company.
The nature and extent of such adjustments, if any, are not expected to be
significant.
F-13
<PAGE> 95
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-15
through F-22 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.
/s/ ERNST & YOUNG LLP
Sacramento, California
March 6, 1998
F-14
<PAGE> 96
WASTE CONNECTIONS, INC. AND PREDECESSORS
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
WASTE CONNECTIONS, INC.
CONSOLIDATED
PREDECESSORS ----------------------------
COMBINED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 (NOTE 1) 1997 1998
------------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 102 $ 820 $ 1,090
Accounts receivable, less allowance for doubtful accounts
of $390 at September 30, 1998 and $19 at December 31,
1997 ($81 in 1996)...................................... 2,650 3,940 9,046
Prepaid expenses and other current assets................. 339 358 773
------- ------- --------
Total current assets................................ 3,091 5,118 10,909
Property and equipment, net................................. 5,069 4,185 18,438
Goodwill, net............................................... 6,762 9,408 81,294
Other assets................................................ 369 169 3,854
------- ------- --------
$15,291 $18,880 $114,495
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 1,025 $ 2,609 $ 6,123
Deferred revenue.......................................... 564 597 1,501
Accrued liabilities....................................... 634 825 3,165
Current portion of notes payable.......................... -- -- 1,256
Current portion of long-term debt......................... 54 -- --
Other current liabilities................................. 119 251 346
------- ------- --------
Total current liabilities........................... 2,396 4,282 12,391
Other long term liabilities................................. -- 702 1,499
Long-term debt.............................................. 89 6,762 40,404
Deferred income taxes....................................... -- 162 379
Commitments and contingencies (Note 7)
Redeemable convertible preferred stock: $.01 par value;
2,500,000 shares authorized; 2,499,998 shares issued and
outstanding at December 31, 1997; no shares issued and
outstanding at September 30, 1998 (aggregate liquidation
preference of $10,500 at December 31, 1997)............... -- 7,523 --
Net intercompany balance.................................... 12,806 -- --
Stockholders' equity (deficit):
Preferred stock: $.01 par value; 7,500,000 shares
authorized; none issued and outstanding................. -- -- --
Common stock: $.01 par value; 50,000,000 shares
authorized; 2,300,000 shares issued and outstanding at
December 31, 1997; 9,204,632 shares issued and
outstanding at September 30, 1998....................... -- 23 92
Additional paid-in capital................................ -- 5,105 65,944
Stockholder notes receivable.............................. -- (82) --
Deferred stock compensation............................... -- -- (499)
Accumulated deficit....................................... -- (5,597) (5,715)
------- ------- --------
Total stockholders' equity (deficit)................ -- (551) 59,822
------- ------- --------
$15,291 $18,880 $114,495
======= ======= ========
</TABLE>
See accompanying notes.
F-15
<PAGE> 97
WASTE CONNECTIONS, INC. AND PREDECESSORS
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 (AUDITED)
AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
WASTE
PREDECESSORS CONNECTIONS, INC.
COMBINED CONSOLIDATED PERIOD WASTE
NINE MONTHS FROM INCEPTION CONNECTIONS, INC.
ENDED (SEPTEMBER 9, 1997) CONSOLIDATED NINE
SEPTEMBER 30, THROUGH MONTHS ENDED
1997 (NOTE 1) DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------- ------------------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues................................................ $18,114 $ 6,237 $ 35,336
Operating expenses:
Cost of operations.................................... 14,753 4,703 24,007
Selling, general and administrative................... 3,009 619 3,518
Depreciation and amortization......................... 1,083 354 2,693
Start-up and integration.............................. -- 493 --
Stock compensation.................................... -- 4,395 561
------- ---------- ----------
Income (loss) from operations........................... (731) (4,327) 4,557
Interest expense........................................ (456) (1,035) (1,427)
Other income (expense), net............................. 14 (36) --
------- ---------- ----------
Income (loss) before income taxes....................... (1,173) (5,398) 3,130
Income tax (provision) benefit.......................... -- 332 (1,513)
------- ---------- ----------
Income (loss) before extraordinary item................. $(1,173) (5,066) 1,617
=======
Extraordinary item -- early extinguishment
of debt, net of tax benefit of $165................... -- (815)
---------- ----------
Net income (loss)....................................... $ (5,066) $ 802
========== ==========
Redeemable convertible preferred stock
accretion............................................. (531) (917)
---------- ----------
Net loss applicable to common stockholders.............. $ (5,597) $ (115)
========== ==========
Basic loss per common share:
Income (loss) before extraordinary item............... $ (2.99) $ 0.13
Extraordinary item.................................... -- (0.15)
---------- ----------
Net loss per common share............................. $ (2.99) $ (0.02)
========== ==========
Diluted earnings per common share:
Income before extraordinary item...................... $ (2.99) $ 0.09
Extraordinary item.................................... -- (0.11)
---------- ----------
Net loss per common share............................. $ (2.99) $ (0.02)
========== ==========
Shares used in calculating basic net loss per share..... 1,872,567 5,476,532
========== ==========
Shares used in calculating diluted net loss per share... 1,872,567 7,438,658
========== ==========
Pro forma basic net income (loss) per share............. $ (1.16) $ 0.11
========== ==========
Shares used in calculating pro forma basic net income
(loss) per share...................................... 4,372,565 7,117,557
========== ==========
Pro forma diluted net income (loss) per share........... $ 0.09
==========
Shares used in calculating pro forma diluted net income
(loss) per share...................................... 8,702,393
==========
</TABLE>
See accompanying notes.
F-16
<PAGE> 98
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-17
<PAGE> 99
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-18
<PAGE> 100
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 NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
WASTE CONNECTIONS, INC. CONSOLIDATED
---------------------------------------------
REDEEMABLE STOCKHOLDERS' EQUITY (DEFICIT)
CONVERTIBLE REDEEMABLE ---------------------------------------------
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL STOCKHOLDER
-------------------- -------------------- ------------------ PAID-IN NOTES
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE
---------- ------- ---------- ------- --------- ------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at inception............. -- $ -- -- $ -- -- -- $ -- $ --
Sale of redeemable convertible
preferred stock.................. 2,499,998 6,992 -- -- -- -- -- --
Sale of common stock.............. -- -- -- -- 2,300,000 23 4,395 --
Issuance of common stock
warrants......................... -- -- -- -- -- -- 710 --
Issuance of stockholder notes
receivable....................... -- -- -- -- -- -- -- (82)
Accretion of redeemable
convertible preferred stock...... -- 531 -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
---------- ------- ---------- ------- --------- --- ------- ----
Balances at December 31, 1997..... 2,499,998 7,523 -- -- 2,300,000 23 5,105 (82)
Exercise of warrants
(unaudited)...................... -- -- -- -- 50,000 -- 140 --
Payment of stockholder notes
receivable....................... -- -- -- -- -- -- -- 82
Issuance of redeemable common
stock (unaudited)................ -- -- 1,000,000 7,500 -- -- -- --
Issuance of common stock warrants
(unaudited)...................... -- -- -- -- -- -- 2,388 --
Accretion of redeemable
convertible preferred stock
(unaudited)...................... -- 917 -- -- -- -- -- --
Deferred stock compensation
associated with stock options
(unaudited)...................... -- -- -- -- -- -- 821 --
Amortization of deferred stock
compensation (unaudited)......... -- -- -- -- -- -- -- --
Common stock sold in connection
with IPO (unaudited)............. -- -- -- -- 2,300,000 23 23,963 --
Issuance of common stock
(unaudited)...................... -- -- -- -- 1,054,634 11 17,783 --
Preferred stock dividend
(unaudited)...................... -- (161) -- -- -- -- -- --
Conversion of redeemable preferred
stock (unaudited)................ (2,499,998) (8,279) -- -- 2,499,998 25 8,254 --
Conversion of redeemable common
stock (unaudited)................ (1,000,000) (7,500) 1,000,000 10 7,490 --
Net income (unaudited)............ -- -- -- -- -- -- -- --
---------- ------- ---------- ------- --------- --- ------- ----
Balances at September 30, 1998
(unaudited)...................... -- $ -- -- $ -- 9,204,632 $92 $65,944 $ --
========== ======= ========== ======= ========= === ======= ====
<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
Payment of stockholder notes
receivable....................... -- -- 82
Issuance of redeemable common
stock (unaudited)................ -- -- --
Issuance of common stock warrants
(unaudited)...................... -- -- 2,388
Accretion of redeemable
convertible preferred stock
(unaudited)...................... -- (917) (917)
Deferred stock compensation
associated with stock options
(unaudited)...................... (821) -- --
Amortization of deferred stock
compensation (unaudited)......... 322 -- 322
Common stock sold in connection
with IPO (unaudited)............. -- -- 23,986
Issuance of common stock
(unaudited)...................... -- -- 17,794
Preferred stock dividend
(unaudited)...................... -- -- --
Conversion of redeemable preferred
stock (unaudited)................ -- -- 8,279
Conversion of redeemable common
stock (unaudited)................ -- -- 7,500
Net income (unaudited)............ -- 802 802
----- ------- -------
Balances at September 30, 1998
(unaudited)...................... $(499) $(5,715) $59,822
===== ======= =======
</TABLE>
See accompanying notes.
F-19
<PAGE> 101
WASTE CONNECTIONS, INC. AND PREDECESSORS
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 (AUDITED)
AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
WASTE CONNECTIONS, INC.
PREDECESSORS CONSOLIDATED
COMBINED PERIOD FROM
NINE MONTHS INCEPTION WASTE CONNECTIONS, INC.
ENDED (SEPTEMBER 9, 1997) CONSOLIDATED NINE
SEPTEMBER 30, THROUGH MONTHS ENDED
1997 (NOTE 1) DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------- ----------------------- -----------------------
(UNAUDITED)
<S> <C> <C> <C>
- ------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(1,173) $ (5,066) $ 802
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 2,693
Deferred income taxes................................... -- (369) --
Amortization of debt issuance costs, debt guarantee fees
and accretion of discount on long-term debt........... -- 860 176
Stock compensation...................................... -- 4,395 562
Extraordinary item -- extinguishment of debt............ -- -- 981
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable, net.............................. (604) (1,021) (989)
Prepaid expenses and other current assets............. (74) (51) (249)
Accounts payable...................................... (221) 2,607 492
Deferred revenue...................................... (137) 169 326
Accrued liabilities................................... (450) 801 (178)
Accrued losses on acquired contracts.................. -- (65) (241)
------- ---------- --------
Net cash provided by (used in) operating activities....... (1,580) 2,614 4,375
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.............. 188 -- 58
Payments for acquisitions, net of cash acquired........... -- (11,493) (44,185)
Prepaid acquisition costs................................. -- (20) --
Capital expenditures for property and equipment........... (735) (264) (2,068)
Decrease (increase) in other assets....................... 22 (19) --
Proceeds from stockholder notes receivable................ -- -- 82
Issuance of stockholder notes receivable.................. -- (82) --
------- ---------- --------
Net cash used in investing activities....................... (525) (11,878) (46,113)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net intercompany balance.................................. 2,142 -- --
Proceeds from short-term borrowings....................... -- 600 --
Proceeds from long-term debt.............................. -- 5,500 57,703
Principal payments on notes payable....................... (38) (2,724) (407)
Principal payments on long-term debt...................... -- (157) (38,653)
Proceeds from sale of redeemable convertible preferred
stock................................................... -- 6,992 --
Proceeds from sale of common stock........................ -- 23 24,126
Payment of preferred stock dividend....................... -- -- (161)
Debt issuance costs....................................... -- (150) (600)
------- ---------- --------
Net cash provided by financing activities................... 2,104 10,084 42,008
------- ---------- --------
Net increase (decrease) in cash............................. (1) 820 270
Cash at beginning of period................................. 102 -- 820
------- ---------- --------
Cash at end of period....................................... $ 101 $ 820 $ 1,090
======= ========== ========
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND
NON-CASH TRANSACTIONS:
Cash paid for income taxes................................ $ -- $ -- $ 887
======= ========== ========
Cash paid for interest.................................... $ -- $ 183 $ 791
======= ========== ========
Redeemable convertible preferred stock accretion.......... $ 531 $ 917
========== ========
In connection with the BFI related acquisitions (Note 2),
the Company assumed liabilities as follows:
Fair value of assets acquired........................... $ 17,040 $ 91,103
Cash paid for acquisitions (including acquisition
costs)................................................ (11,493) (44,185)
---------- --------
Liabilities assumed, stock and notes payable to
seller................................................ $ 5,547 $ 46,918
========== ========
</TABLE>
See accompanying notes.
F-20
<PAGE> 102
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-21
<PAGE> 103
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-22
<PAGE> 104
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 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 which the Company's management believes are
reasonable.
During the periods prior to their acquisition by BFI, the Company's
predecessors operated as separate stand-alone businesses. The acquisitions of
the predecessors by BFI were accounted for using the purchase method of
accounting, and the respective purchase prices were allocated to the fair values
of the assets acquired and liabilities assumed. Similarly, the Company's
acquisitions of the predecessors from BFI in September 1997 were accounted for
using the purchase method of accounting, and the purchase price was allocated to
the fair value of the assets acquired and liabilities assumed. Consequently, the
amounts of depreciation and amortization included in the statements of
operations for the periods presented reflect the changes in basis of the
underlying assets that were made as a result of the changes in ownership that
occurred during the periods presented. In addition, because the predecessor
companies operated independently and were not under common control or management
during these periods, and because different tax strategies may have influenced
their results of operations, the data may not be comparable to or indicative of
their operating results after their acquisition by BFI.
Due to the manner in which BFI intercompany transactions were recorded as
described above, it is not feasible to present a detailed analysis of
transactions reflected in the net intercompany balance with BFI. The
F-23
<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 SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
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.
Interim Financial Information
The unaudited interim consolidated financial statements as of September 30,
1998 and for the nine months ended September 30, 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
F-24
<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 SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
for a fair presentation have been included. Operating results for the nine
months ended September 30, 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.
The estimated useful lives are as follows:
<TABLE>
<S> <C>
Machinery and equipment........ 3 - 10 years
Rolling stock.................. 10 years
Containers..................... 5 - 12 years
Furniture and fixtures......... 3 - 6 years
</TABLE>
In connection with the BFI acquisitions (Note 2) the Company acquired
certain used property and equipment. This used property and equipment is being
depreciated using the straight-line method over its estimated remaining useful
lives, which range from one to nine years.
Capitalized landfill costs include expenditures for land and related
airspace, permitting costs and preparation costs. Landfill permitting and
preparation costs represent only direct costs related to those activities,
including legal, engineering and construction. Interest is capitalized on
landfill permitting and
F-25
<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 SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
construction projects and other projects under development while the assets are
undergoing activities to ready them for their intended use. The interest
capitalization rate is based on the Company's weighted average cost of
indebtedness. No interest was capitalized during the nine months ended September
30, 1998. Landfill permitting, acquisition and preparation costs, excluding the
estimated residual value of land, are amortized as permitted airspace of the
landfill is consumed. Landfill preparation costs include the costs of
construction associated with excavation, liners, site berms and the installation
of leak detection and leachate collection systems. In determining the
amortization rate for a landfill, preparation costs include the total estimated
costs to complete construction of the landfills' permitted capacity.
Units-of-production amortization rates are determined annually for the Company's
operating landfill. The rates are based on estimates provided by the Company's
outside engineers and consider the information provided by surveys which are
performed at least annually.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of
the net assets of the acquired entities (Note 2), and is amortized on a
straight-line basis over the period of expected benefit of 40 years. Accumulated
amortization amounted to $279 and $64 as of December 31, 1996 and 1997,
respectively.
The Company continually evaluates the value and future benefits of its
intangibles. The Company assesses recoverability from future operations using
income from operations of the related acquired business as a measure. Under this
approach, the carrying value would be reduced if it becomes probable that the
Company's best estimate for expected future cash flows of the related business
would be less than the carrying amount of the intangible over the remaining
amortization period. For the period ending December 31, 1997, there were no
adjustments to the carrying amounts of intangibles resulting from these
evaluations.
Fair Value of Financial Instruments
The carrying values of the line of credit (Note 5) and other long-term debt
(Note 6) approximate their fair values as of December 31, 1997 and September 30,
1998, based on current incremental borrowing rates for similar types of
borrowing arrangements.
Income Taxes
The Company, The Disposal Group, and Fibres International, Inc., use the
liability method to account for income taxes. Under this method, deferred tax
assets and liabilities are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
During the periods in which the predecessors were owned by BFI, their
operations were included in the consolidated income tax returns of BFI, and no
allocations of income taxes were reflected in the historical statements of
operations. For purposes of the combined predecessor financial statements,
current and deferred income taxes have been provided on a separate income tax
return basis.
Revenue Recognition
Revenues are recognized as services are provided. Certain customers are
billed in advance and, accordingly, recognition of the related revenues is
deferred until the services are provided.
F-26
<PAGE> 108
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
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 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.)
F-27
<PAGE> 109
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
Closure and Post-Closure Costs
The Company does not accrue for closure and post-closure costs related to
the Fairmead Landfill it operated in Madera County, California. Madera County as
required by state law, has established a special fund to pay such liabilities.
On June 5, 1998, the Company acquired the stock of Red Carpet Landfill, Inc. in
Oklahoma. Red Carpet is engaged in landfilling of municipal solid waste and
other acceptable waste streams in the county of Major, Oklahoma. As a result of
the acquisition, the Company is required to accrue for closure and post-closure
costs related to the landfill. Accrued closure and post-closure costs include
the current and non-current portion of accruals associated with obligations for
closure and post-closure of the landfill. The Company, based as input from its
outside engineers, estimates its future closure and post-closure monitoring and
maintenance costs for solid waste landfills based on its interpretation of the
technical standards of the U.S. Environmental Protection Agency's Subtitle D
regulations and the air emissions standards under the Clean Air Act as they are
being applied on a state-by-state basis. Closure and post-closure monitoring and
maintenance costs represent the costs related to cash expenditures yet to be
incurred when a landfill facility ceases to accept waste and closes. Accruals
for closure and post-closure monitoring and maintenance requirements in the U.S.
consider final capping of the site, site inspection, groundwater monitoring,
leachate management, methane gas control and recovery, and operating and
maintenance costs to be incurred during the period after the facility closes.
Certain of these environmental costs, principally capping and methane gas
control costs, are also incurred during the operating life of the site in
accordance with the landfill operation requirements of Subtitle D and the air
emissions standards. Reviews of the future requirements for closure and
post-closure monitoring and maintenance costs for the Company's operating
landfills are performed by the Company's consulting engineers at least annually
and are the basis upon which the Company's estimates of these future costs and
the related accrual rates are revised. The Company provides accruals for these
estimated costs as the remaining permitted airspace of such facilities is
consumed. As of September 30, 1998, the Company estimates that total closure and
post closure costs relating to the Red Carpet Landfill will be approximately
$929,000, of which approximately $491,000 has been accrued as of September 30,
1998 and included in other long-term liabilities in the accompanying balance
sheet. The states in which the Company operates its landfills require a
specified portion of these accrued closure and post-closure obligations to be
funded at any point in time.
New Accounting Pronouncements
In February 1997, the FASB issued Statement No. 129, Disclosure of
Information about Capital Structure, which is effective for financial statements
for periods ending after December 15, 1997. This statement establishes standards
for disclosing information about an entity's capital structure. Adoption of
Statement 129 will have no impact on the Company's existing disclosures.
In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive
Income. Statement 130 establishes standards for reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. Statement 130, which is
effective for fiscal years beginning after December 15, 1997, requires
reclassification of financial statements for earlier periods to be provided for
comparative purposes. The Company anticipates that implementing the provisions
of Statement 130 will not have a significant impact on the Company's existing
disclosures.
In June 1997, the FASB issued Statement No. 131, Disclosure About Segments
of an Enterprise and Related Information. Statement 131 establishes standards
for the way that public business enterprises report information about operating
segments. It also establishes standards for related disclosures about products
and
F-28
<PAGE> 110
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
services, geographic areas and major customers. Statement 131 is effective for
fiscal years beginning after December 15, 1997. In the initial year of
application, comparative information for earlier years must be restated. The
Company anticipates that implementing the provisions of Statement 131 will not
have a significant impact on the Company's existing disclosures.
2. ACQUISITIONS
Browning-Ferris Industries Related
On September 29, 1997, the Company purchased all of the outstanding stock
of Browning-Ferris Industries of Washington, Inc. and Fibres International, Inc.
from BFI (collectively the "Acquisitions"). The total purchase price for the
Acquisitions was approximately $15,036, comprised principally of $11,493 in cash
and promissory notes payable to BFI totaling $3,543. Of the combined $15,036
purchase price, $9,578 was recorded as goodwill and $150 was assigned to a
non-competition agreement. The Acquisitions were accounted for in accordance
with the purchase method of accounting and, accordingly, the net assets acquired
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 nine months ended September 30, 1998, the Company increased the
accrual for losses on acquired contracts and goodwill by approximately $291 to
reflect revised estimates of additional losses on the acquired contracts that
are expected to be incurred.
Madera Disposal Systems, Inc.
On February 23, 1998, the Company purchased all of the outstanding stock of
Madera Disposal Systems, Inc. ("Madera") effective February 1, 1998, pursuant to
a Stock Purchase Agreement (the "Agreement"). The Agreement requires the Company
to pay to the shareholders of Madera $9,579 in cash (a portion of which was used
to repay Madera outstanding debt on the date of acquisition and which is subject
to other adjustments as specified in the Agreement), 1,000,000 shares of the
Company's common stock with a fair market value of $7,500 (the "Stock"),
warrants to purchase 200,000 shares of the Company's common stock
F-29
<PAGE> 111
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
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:
<TABLE>
<S> <C>
Acquired assets:
Cash...................................................... $ 1,388
Accounts receivable....................................... 905
Prepaid expenses and other current assets................. 141
Property and equipment.................................... 2,100
Long-term franchise agreements and contracts.............. 725
Goodwill.................................................. 14,580
Assumed liabilities:
Accounts payable and accrued liabilities.................. (1,120)
Accrued losses on acquired contracts...................... (306)
Notes payable............................................. (200)
-------
$18,213
=======
</TABLE>
Arrow Sanitary Service, Inc.
On June 17, 1998, the Company purchased all of the outstanding stock of
Arrow Sanitary Service, Inc. ("Arrow") effective June 1, 1998, pursuant to a
Stock Purchase Agreement (the "Arrow Agreement"). The Arrow Agreement required
the Company to pay the shareholders of Arrow $7,944 in cash (a portion of which
was used to repay the Arrow outstanding debt on the date of the acquisition and
a portion of which is subject to other adjustments as specified in the Arrow
Agreement), 213,750 shares of the Company's common stock with an estimated fair
market value of $3,045.
The Arrow acquisition has been accounted for in accordance with the
purchase method of accounting. The total purchase price and the excess of the
purchase price over the fair value of the net assets acquired in the Arrow
acquisition were approximately $11,255 and $10,528, respectively.
F-30
<PAGE> 112
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
Certain items affecting the purchase price and the allocation are
preliminary. A summary of the preliminary purchase price allocation for the
Arrow acquisition is as follows:
<TABLE>
<S> <C>
Acquired assets:
Accounts receivable....................................... $ 575
Prepaid expenses and other current assets................. 10
Property and equipment.................................... 313
Covenant not to compete................................... 50
Goodwill.................................................. 10,528
Assumed liabilities:
Accounts payable and accrued liabilities.................. (221)
-------
$11,255
=======
</TABLE>
Predecessor Acquisitions
As described in Note 1, BFI acquired for cash and debt Fibres
International, Inc. on November 30, 1995 and The Disposal Group Combined on July
31, 1996 in transactions that were accounted for as purchases. Accordingly, the
respective purchase prices were allocated to the fair values of the assets
acquired and liabilities assumed. The following presents purchase price
information for these acquisitions:
<TABLE>
<CAPTION>
THE
FIBRES DISPOSAL
INTERNATIONAL, GROUP
INC. COMBINED
-------------- ---------
<S> <C> <C>
Tangible assets acquired...................... $5,076 $2,076
Goodwill...................................... 4,187 2,671
Assumed liabilities........................... (969) (33)
------ ------
$8,294 $4,714
====== ======
</TABLE>
3. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1996 and 1997 and September 30,
1998 consists of the following:
<TABLE>
<CAPTION>
PREDECESSORS COMPANY
COMBINED ----------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Land and buildings................ $2,314 $ -- $ 3,737
Machinery and equipment........... 146 60 1,461
Rolling stock..................... 2,068 2,353 8,165
Containers........................ 1,084 1,995 6,408
Furniture and fixtures............ 137 67 851
------ ------ -------
5,749 4,475 20,622
Less accumulated depreciation..... (680) (290) (2,184)
------ ------ -------
$5,069 $4,185 $18,438
====== ====== =======
</TABLE>
F-31
<PAGE> 113
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
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 September 30, 1998
consist of the following:
<TABLE>
<CAPTION>
PREDECESSORS COMPANY
COMBINED ----------------------------
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1996 1997 1998
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Long-term franchise agreements and
contracts............................... $ -- $ -- $1,048
Non-competition agreement, net............ -- 142 585
Restricted Cash........................... -- -- 1,895
Other..................................... 369 27 326
---- ---- ------
$369 $169 $3,854
==== ==== ======
</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). Accumulated amortization amounted to $62 as of September 30, 1998. The
estimated fair value of the non-competition agreement was determined by
management based on the discounted adjusted operating income stream that would
have otherwise been subject to competition. The amount assigned to the
non-competition agreement is being amortized on a straight-line method over the
term of the agreement (five years). Accumulated amortization amounted to $8 as
of December 31, 1997 and $36 as of September 30, 1998.
5. LINE OF CREDIT
On September 30, 1997, the Company obtained a revolving line of credit (the
"Line") from a bank (the "Bank"). The maximum amount available under the terms
of the Line was $2,000 and borrowings bore interest based on the prime rate plus
1.5% (aggregating 10.0% at December 31, 1997). Interest was payable monthly and
the Line was to expire on September 29, 1998. Borrowings under the Line were
secured by substantially all of the Company's assets and were subordinate to the
notes payable to BFI (Note 6) with respect to certain specified assets. The Line
was personally guaranteed by certain officers and stockholders of the Company
(Note 9). As of December 31, 1997, $600 was outstanding under the Line.
Management used borrowings from a new credit facility obtained in January
1998 (Note 12) to pay off amounts outstanding under the Line, and as such, these
amounts have been included in long-term debt as of December 31, 1997.
F-32
<PAGE> 114
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
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).
As of December 31, 1997, aggregate contractual future principal payments by
calendar year on long-term debt are due as follows:
<TABLE>
<S> <C>
1998................................ $1,736
1999................................ 917
2000................................ 917
2001................................ 917
2002................................ 917
Thereafter.......................... 758
------
$6,162
======
</TABLE>
Management used borrowings from a new credit facility obtained in January
1998 (Note 12) to pay off all amounts outstanding under the term loan payable to
the Bank and all notes payable to BFI, and as such, these amounts have been
classified as long-term debt as of December 31, 1997.
On June 16, 1998, the Company completed a $1.8 million tax-exempt bond
financing for its Madera subsidiary. These funds will be used for specified
capital expenditures and improvements, including installation of a landfill gas
recovery system. The bonds issued mature on May 1, 2016 and bear interest at
variable rates based on market conditions for California tax exempt bonds. The
bonds are backed by a letter of credit issued by BankBoston under the Credit
Facility for $1.8 million. Funds from the bond offering are held by a trustee
until the capital expenditures are completed. The unused funds are classified as
restricted cash and included in other assets on the accompanying consolidated
balance sheet. The capital expenditures funded by the bonds are expected to be
substantially completed by December 31, 1998.
F-33
<PAGE> 115
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
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 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 September 30, 1998, the Company is not
aware of any such environmental liabilities.
F-34
<PAGE> 116
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
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 September 30, 1998 there is no current proceeding or litigation
involving the Company that the Company believes will have a material adverse
impact on the Company's business, financial condition, results of operations or
cash flows.
During the period from January 1, 1996 through July 31, 1996, The Disposal
Group won a lawsuit against the city of Vancouver, Washington relating to the
city's annexation of certain territories served by The Disposal Group. The
Disposal Group received approximately $2.6 million from the lawsuit, which is
included in other income in the accompanying statement of operations.
Employees
Approximately 55 drivers and mechanics at the Company's Vancouver,
Washington operation are represented by the Teamsters Union, with which
Browning-Ferris Industries of Washington, Inc., the Company's predecessor in
Vancouver, entered a four-year collective bargaining agreement in January 1997.
Approximately 11 drivers at Arrow Sanitary Services, Inc. ("Arrow"), a wholly
owned subsidiary of the Company, are represented by the Teamsters Union, with
which Arrow entered into a three-year collective bargaining agreement in March
1998. In addition, in July 1997, the employees at the Company's facility in
Issaquah, Washington, adopted a measure to select a union to represent them in
labor negotiations with management. The union and management operated under a
one-year negotiating agreement, that ended July 27, 1998.
Since July 27, 1998, negotiations have continued between the union and the
Company, although the union is permitted to call a strike or call for
arbitration of the outstanding issues. The employees at Issaquah have filed to
decertify the union, and the union has filed a claim with the National Labor
Relation Board to attempt to block the decertification. The Company is not aware
of any other organizational efforts among its employees and believes that its
relations with its employees are good.
8. REDEEMABLE CONVERTIBLE PREFERRED STOCK
In September 1997, the Company received net proceeds of $6,992 from the
sale of 2,499,998 shares of redeemable convertible preferred stock (the
"Preferred Stock"). The Preferred Stock accrues cumulative dividends at the rate
of $.098 per share annually. Accumulated and unpaid dividends on Preferred Stock
amounted to $61 as of December 31, 1997. The Preferred Stock and any accumulated
and unpaid dividends are convertible at the holder's option into shares of the
Company's common stock at the calculated rate of $2.80 per share divided by the
"Conversion Price" subject to certain anti-dilution adjustments. Each share was
F-35
<PAGE> 117
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
automatically converted into common stock immediately upon the closing of the
Company's initial public offering of common stock at a Conversion Price of $2.80
per share.
Each share of Preferred Stock is redeemable, at the holder's option, during
the period from April 1, 1999 through October 1, 1999 for $4.20 per share plus
any accumulated and unpaid dividends. The difference between the carrying value
of the Preferred Stock and the redemption value (including accumulated
dividends) is being accreted using the interest method through the earliest
redemption date. The redemption of the Preferred Stock is not mandatory if it
would cause the Company to incur additional indebtedness or if it is prohibited
under any of the Company's then existing debt agreements.
The preferred stockholders are entitled to one vote for each share of
common stock into which such shares can be converted, and are also entitled to
liquidation preferences equal to the greater of the initial purchase price per
share ($2.80) plus any accumulated and unpaid dividends, plus the greater of
$4.20 per share or an amount which equals an internal rate of return of 50% to
the investor. After receiving such preference, the holders of the preferred
stock share remaining proceeds with the common stockholders on an as converted
basis.
9. STOCKHOLDERS' EQUITY
Common Stock
Of the 47,700,000 shares of common stock authorized but unissued as of
December 31, 1997, the following shares were reserved for issuance:
<TABLE>
<S> <C>
Preferred Stock................................... 2,521,874
Madera acquisition (Note 2)....................... 1,200,000
Stock option plan................................. 1,200,000
Stock purchase warrants........................... 1,056,000
---------
5,977,874
=========
</TABLE>
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 September 30, 1998,
F-36
<PAGE> 118
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
35,000 options to purchase common stock were exercisable under the Option Plan.
In addition, as of December 31, 1997 and September 30, 1998, options for 671,500
and 160,450 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 nine months ended September 30, 1998 is presented below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES (OPTIONS) EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Outstanding at inception.............. -- $ --
Granted............................... 528,500 4.92
Forfeited............................. -- --
Exercised............................. -- --
---------
Outstanding as of December 31, 1997... 528,500 4.92
Granted (unaudited)................... 511,050 9.59
Forfeited (unaudited)................. -- --
Exercised (unaudited)................. -- --
---------
Outstanding as of September 30, 1998
(unaudited)......................... 1,039,550 7.21
=========
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31, 1997 and September 30, 1998:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 SEPTEMBER 30, 1998
------------------- -----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
EXERCISE RANGE SHARES PRICE SHARES PRICE
-------------- ------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
$ 2.80 to 5.00................. 385,500 2.85 589,800 2.91
$ 6.00 to 9.50................. -- -- 72,500 8.54
$10.50 to 12.50................ 143,000 10.50 245,000 11.07
$15.19 to 19.00................ -- -- 95,750 17.24
$21.00 to 22.13................ -- -- 36,500 21.90
------- ----- --------- -----
528,500 4.92 1,039,550 7.21
======= ===== ========= =====
</TABLE>
The weighted average remaining contractual life of stock options
outstanding as of December 31, 1997, was 9.4 years.
Pro Forma information regarding net income and earnings per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the period from inception (September 9, 1997) through December
31, 1997: risk-free interest rate of 6%; dividend yield of zero; volatility
factor of the expected market price of the Company's common stock of .40; and a
weighted-average expected life of the option of 4 years.
F-37
<PAGE> 119
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
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 nine months ended September 30, 1998, the Company recorded
deferred stock compensation of $821 relating to stock options granted during the
period with exercise prices less than the estimated fair value of the Company's
common stock on the date of grant. The deferred stock compensation is being
amortized into expense over the vesting periods of the stock options which
generally range from 1 to 3 years. Compensation expense of $322 was recorded
during the nine months ended September 30, 1998 relating to these options, and
the remaining $499 will be amortized into expense in future periods.
Stock Purchase Warrants
In September 1997, the Company issued a warrant to purchase 200,000 shares
of the Company's common stock to the Bank that provided the Line and term loan
payable (Notes 5 and 6). The exercise price of the warrant is $.01 per share.
The warrant was valued at $382 on its date of issuance using the Black-Scholes
pricing model with an assumed stock price volatility of .40, risk-free interest
rate of 6.0%, estimated fair value of the common stock of $1.92 per share and an
expected life of 7 years. The value assigned to the warrant was reflected as a
discount on long-term debt. The discount was fully accreted to interest expense
using the straight-line method over the expected term of the debt agreements
(approximately three months).
In connection with their guarantee of certain of the Company's debt
obligations (Notes 5 and 6), the Company issued warrants to purchase 841,000
shares of the Company's common stock to certain directors and stockholders of
the Company. The exercise price of the warrants is $2.80 per share. The warrants
were valued at $328 on their date of issuance using the Black-Scholes pricing
model with an assumed stock price volatility of .40, risk-free interest rate of
6.0%, estimated fair value of the common stock of $1.92 per share and expected
lives of 3 years. The value assigned to these warrants was fully amortized to
interest expense over the expected term of the debt agreements (approximately
three months).
In December 1997, the Company issued to consultants warrants to purchase
15,000 shares of the Company's common stock. Warrants to purchase 10,000 and
5,000 shares of common stock had exercise prices of $5.00 per share and $2.80
per share, respectively.
In February 1998, the Company granted warrants to an employee to purchase
50,000 shares of the Company's common stock at $2.80 per share. The Company
recorded stock compensation expense of approximately $235 relating to these
warrants.
F-38
<PAGE> 120
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
Initial Public Offering
In May 1998, the Company sold in its initial public offering, a total of
2,300,000 shares of common stock at $12.00 per share. The net proceeds after
underwriters' commissions and fees and other costs associated with the offering
were approximately $23,986. In connection with the offering, the redeemable
convertible preferred stock was converted into common stock, and the redemption
provisions of the common stock issued in connection with the Madera acquisition
(Note 2) expired.
10. INCOME TAXES
The provision (benefit) for income taxes for the periods ended December 31,
1995 and 1996, the nine months ended September 30, 1997 and for the period from
inception (September 9, 1997) through December 31, 1997 consists of the
following:
<TABLE>
<CAPTION>
PREDECESSORS
-------------------------------------------------------------
FIBRES THE DISPOSAL GROUP WASTE CONNECTIONS, INC.
INTERNATIONAL, INC. COMBINED CONSOLIDATED
THE DISPOSAL GROUP PERIOD FROM PERIOD FROM PERIOD FROM INCEPTION
COMBINED JANUARY 1, 1995 JANUARY 1, 1996 (SEPTEMBER 9, 1997)
YEAR ENDED THROUGH THROUGH THROUGH
DECEMBER 31, 1995 NOVEMBER 30, 1995 JULY 31, 1996 DECEMBER 31, 1997
------------------ ------------------- ------------------ -----------------------
<S> <C> <C> <C> <C>
Current:
Federal............ $ -- $ 29 $207 $ 38
State.............. -- -- -- --
Deferred:
Federal............ (298) -- 298 (370)
State.............. -- -- -- --
----- ---- ---- -----
$(298) $ 29 $505 $(332)
===== ==== ==== =====
</TABLE>
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-39
<PAGE> 121
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 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-40
<PAGE> 122
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
11. NET INCOME (LOSS) PER SHARE INFORMATION
The following table sets forth the calculation of the numerator and
denominator used in the computation of basic and diluted net loss per share and
pro forma basic and diluted net income (loss) per share for the period from
inception (September 9, 1997) through December 31, 1997 and the nine months
ended September 30, 1998. The pro forma basic and diluted net income (loss) per
share calculations assume the conversion of all outstanding shares of redeemable
convertible preferred stock for the period from inception (September 9, 1997)
through December 31, 1997, and the conversion of all outstanding shares of
redeemable convertible preferred stock and redeemable common stock for the nine
months ended September 30, 1998, as if such conversions occurred as of the first
day of each period presented or the actual date of issuance, if subsequent to
the first day of the period presented.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
DECEMBER 31, 1997 ----------------------------------------------
--------------------- (UNAUDITED)
PRO FORMA PRO FORMA PRO FORMA
BASIC BASIC BASIC DILUTED BASIC DILUTED
NET LOSS NET LOSS NET LOSS NET LOSS NET LOSS NET LOSS
PER SHARE PER SHARE PER SHARE PER SHARE PER SHARE PER SHARE
--------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Numerator:
Income (loss) before
extraordinary item......... $ (5,066) $ (4,788) $ 1,617 $ 1,617 $ 1,617 $ 1,617
Redeemable convertible
preferred stock
accretion.................. (531) -- (917) (917) -- --
--------- --------- --------- --------- --------- ---------
Income (loss) applicable to
common stockholders before
extraordinary item......... $ (5,597) $ (4,788) $ 700 $ 700 $ 1,617 $ 1,617
========= ========= ========= ========= ========= =========
Extraordinary item............ -- -- (815) (815) (815) (815)
--------- --------- --------- --------- --------- ---------
Net income (loss) applicable
to common stockholders..... $ (5,597) $ (4,788) $ (115) $ (115) $ 802 $ 802
========= ========= ========= ========= ========= =========
Denominator:
Weighted average common shares
outstanding................ 1,872,567 1,872,567 5,476,532 5,476,532 5,476,532 5,476,532
Dilutive effect of stock
options and warrants
outstanding................ -- -- -- 1,584,836 -- 1,584,836
Incremental common shares
issuable upon redemption of
redeemable common stock.... -- -- -- 377,290 377,290 377,290
Incremental common shares
issuable upon conversion of
preferred stock............ -- 2,499,998 -- -- 1,263,735 1,263,735
--------- --------- --------- --------- --------- ---------
1,872,567 4,372,565 5,476,532 7,438,658 7,117,557 8,702,393
========= ========= ========= ========= ========= =========
</TABLE>
F-41
<PAGE> 123
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
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 revolving credit facility from
BankBoston (the "Credit Facility"). The maximum amount available under the
Credit Facility was $25,000 including stand-by letters-of-credit and the
borrowings bore interest at various fixed and/or variable rates at the Company's
'option. The Credit Facility allowed for the Company to issue up to $5,000 in
stand-by letters-of-credit. The Credit Facility required quarterly payments of
interest. The Credit Facility required the Company to pay an annual commitment
fee equal to 0.5% of the unused portion of the Credit Facility. In connection
with the Credit Facility the Company granted to an affiliate of BankBoston a
warrant to purchase 140,000 shares of the Company's common stock with an
exercise price of $2.80 per share and an expiration date of January 29, 2008.
On May 28, 1998, the Company entered into a new revolving credit facility
with a syndicate of banks for which BankBoston N.A. acts as agent (the "May
Credit Facility"). The maximum amount available under the May Credit Facility
was $60 million (including stand-by letters of credit) and the borrowings bore
interest at various fixed and/or variable rates at the Company's option
(approximately 7.49% as of September 30, 1998). The May Credit Facility replaced
an existing revolving credit facility. The May Credit Facility allowed for the
Company to issue up to $5 million in stand-by letters-of-credit. The May Credit
Facility required quarterly payments of interest. Borrowings under the May
Credit Facility were secured by virtually all of the Company's assets. The May
Credit Facility required the Company to pay an annual commitment fee equal to
0.375% of the unused portion of the Credit Facility.
On November 20, 1998, the Company entered into a new revolving credit
facility with a syndicate of banks for which BankBoston N.A. acts as agent (the
"November Credit Facility"). The maximum amount available under the November
Credit Facility is $125 million (including stand-by letters of credit) and the
borrowings bear interest at various fixed and/or variable rates at the Company's
option (approximately 7.0% as of September 30, 1998). The November Credit
Facility replaced an existing revolving credit facility. The November Credit
Facility allows for the Company to issue up to $15 million in stand-by
letters-of-credit. The November Credit Facility requires quarterly payments of
interest and it matures in November 2003. Borrowings under the November Credit
Facility are secured by virtually all of the Company's assets. The November
Credit Facility requires the Company to pay an annual commitment fee equal to
0.375% of the unused portion of the November Credit Facility. The November
Credit Facility places certain business, financial and operating restrictions on
the Company relating to, among other things the incurrence of additional
indebtedness, investments, acquisitions, asset sales, mergers, dividends,
distributions and repurchase and redemption of capital stock. The November
Credit Facility also requires that specified financial ratios and balances be
maintained. Management of the Company expects to record an extraordinary charge
of approximately $211 (net of income tax) in the fourth quarter of 1998 related
to the extinguishment of the May Credit Facility.
F-42
<PAGE> 124
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED)
13. RELATED PARTY TRANSACTIONS
The Company has entered into certain transactions with Continental Paper,
LLC ("Continental"), in which the Company delivers to Continental all of the
Company's collected recyclable materials in areas in which Continental has
processing facilities and Continental pays the Company market rates for the
recyclable materials. Certain of the Company's stockholders are the majority
owners of Continental. During the period from inception (September 9, 1997)
through December 31, 1997, the Company received approximately $223 from
Continental in these transactions.
F-43
<PAGE> 125
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Murrey's Disposal Company, Inc.
American Disposal Company, Inc.
D.M. Disposal Co., Inc.
Tacoma Recycling Company, Inc.
We have audited the accompanying combined balance sheets of Murrey's
Disposal Company, Inc., American Disposal Company, Inc., D.M. Disposal Co.,
Inc., and Tacoma Recycling Company, Inc. (collectively the "Murrey Companies")
as of December 31, 1996 and 1997, and the related combined 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 Murrey Companies' 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 combined financial position of the Murrey
Companies at December 31, 1996 and 1997, and the combined 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.
/s/ ERNST & YOUNG LLP
Sacramento, California
October 2, 1998,
except for Note 12, as to
which the date is
October 22, 1998
F-44
<PAGE> 126
THE MURREY COMPANIES
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 81 $ 126 $ 405
Accounts receivable, less allowance for doubtful accounts
of $62 in 1996, $74 in 1997 and $82 in 1998........... 2,333 2,779 3,364
Prepaid expenses and other current assets................ 119 79 10
------- ------- -------
Total current assets....................................... 2,533 2,984 3,779
Property, plant and equipment, net......................... 12,529 14,819 14,371
Intangible assets, net..................................... -- 1,862 1,758
Other assets............................................... 3 31 --
------- ------- -------
$15,065 $19,696 $19,908
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings.................................... $ 1,609 $ 1,628 $ 620
Accounts payable......................................... 1,108 1,617 2,217
Advances from a related party............................ 818 543 543
Deferred revenue......................................... 765 919 1,432
Accrued liabilities...................................... 705 832 1,288
Income taxes payable..................................... 321 228 277
Current portion of long-term debt........................ 928 873 751
------- ------- -------
Total current liabilities.................................. 6,254 6,640 7,128
Long-term debt............................................. 1,851 4,907 4,047
Deferred income taxes...................................... 702 658 658
Commitments and contingencies (Note 7)
Shareholders' equity:
Common stock at par value; 60,500 shares authorized;
1,470 shares issued and outstanding................... 45 45 45
Additional paid-in capital............................... 455 455 455
Retained earnings........................................ 5,758 6,991 7,575
------- ------- -------
Total shareholders' equity................................. 6,258 7,491 8,075
------- ------- -------
$15,065 $19,696 $19,908
======= ======= =======
</TABLE>
See accompanying notes.
F-45
<PAGE> 127
THE MURREY COMPANIES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues................................. $27,786 $25,024 $28,874 $21,477 $24,532
Operating expenses:
Cost of operations..................... 20,859 20,465 23,133 16,933 19,337
Selling, general and administrative.... 2,101 2,142 2,323 1,653 1,870
Depreciation and amortization.......... 923 1,236 1,371 1,350 1,640
------- ------- ------- ------- -------
Income from operations................... 3,903 1,181 2,047 1,541 1,685
Interest expense......................... (198) (284) (380) (247) (423)
Other income (expense), net.............. 210 309 283 150 (97)
------- ------- ------- ------- -------
Income before income taxes............... 3,915 1,206 1,950 1,444 1,165
Income tax provision..................... (690) (543) (634) (512) (414)
------- ------- ------- ------- -------
Net income............................... 3,225 663 1,316 932 751
Retained earnings, beginning of period... 1,920 5,095 5,758 5,758 6,991
Dividends................................ (50) -- (83) -- (167)
------- ------- ------- ------- -------
Retained earnings, end of period......... $ 5,095 $ 5,758 $ 6,991 $ 6,690 $ 7,575
======= ======= ======= ======= =======
Pro forma income taxes (unaudited -- Note
11).................................... $(1,338) $ (432) $ (697) $ (522) $ (421)
------- ------- ------- ------- -------
Pro forma net income (unaudited -- Note
11).................................... $ 2,577 $ 774 $ 1,253 $ 922 $ 744
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-46
<PAGE> 128
THE MURREY COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 3,225 $ 663 $ 1,316 $ 932 $ 751
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 923 1,236 1,371 1,056 1,640
Deferred income taxes............................... 147 (19) (44) -- --
Gain on sale of land................................ -- -- -- -- (8)
Changes in operating assets and liabilities:
Accounts receivable, net......................... (31) 63 (446) (562) (585)
Prepaid expenses and other assets................ (83) (36) 40 (616) 69
Accounts payable................................. (156) 932 509 1,004 600
Deferred revenue................................. 68 42 154 95 513
Accrued liabilities.............................. (352) 129 127 26 456
Income taxes payable............................. 383 (232) (93) 426 49
------- ------- ------- ------- -------
Net cash provided by operating activities................ 4,124 2,778 2,934 2,361 3,485
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions................................ -- -- (2,900) (100) --
Capital expenditures for property and equipment.......... (3,025) (4,790) (2,108) (2,106) (1,731)
Proceeds from sale of land............................... -- -- -- -- 625
Net change in other assets............................... (18) 31 (28) (117) 57
------- ------- ------- ------- -------
Net cash used in investing activities...................... (3,043) (4,759) (5,036) (2,323) (1,049)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............................. 750 1,418 3,414 2,021 550
Principal payments on long-term debt..................... (1,383) (615) (928) (302) (1,532)
Net change in short-term borrowings...................... (77) 659 19 (812) (1,008)
Net change in advances from a related party.............. 189 (259) (275) (275) --
Payment of dividends..................................... (50) -- (83) -- (167)
------- ------- ------- ------- -------
Net cash provided by (used in) financing activities........ (571) 1,203 2,147 632 (2,157)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents....... 510 (778) 45 670 279
Cash and cash equivalents:
Beginning of period................................... 349 859 81 81 126
------- ------- ------- ------- -------
End of period......................................... $ 859 $ 81 $ 126 $ 751 $ 405
======= ======= ======= ======= =======
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION
AND NON-CASH TRANSACTIONS:
Cash paid for interest................................ $ 198 $ 284 $ 358 $ 247 $ 423
======= ======= ======= ======= =======
Cash paid for income taxes............................ $ 160 $ 792 $ 744 $ 277 $ 10
======= ======= ======= ======= =======
Issuance of notes payable for land and buildings...... $ -- $ 260 $ 315 $ -- $ --
======= ======= ======= ======= =======
In connection with acquisitions (Note 3) the Murrey
Companies acquired assets and issued notes payable
to sellers as follows:
Fair value of assets acquired.................... $ -- $ -- $ 3,100 $ 300 $ --
Notes payable to sellers......................... -- -- (200) (200) --
------- ------- ------- ------- -------
Cash paid for acquisitions....................... $ -- $ -- $ 2,900 $ 100 $ --
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-47
<PAGE> 129
THE MURREY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
1. BUSINESS, ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND ORGANIZATION
Murrey's Disposal Company, Inc. ("Murrey's"), American Disposal Company,
Inc. ("American"), D.M. Disposal Co., Inc. ("DM"), and Tacoma Recycling Company,
Inc. ("Tacoma") (collectively the "Murrey Companies") are regional, integrated,
non-hazardous solid waste services companies that provide collection, transfer,
and disposal of solid waste and recyclables to residential and commercial
customers in and around the Tacoma, Washington area. Murrey's, American, DM and
Tacoma were incorporated in Washington on March 13, 1963, October 27, 1966, July
12, 1979 and January 30, 1990, respectively.
Each of the Murrey Companies' Common Stock is owned 90% by one or both of
two trusts. The beneficiary of both trusts is also an officer and director of
the Murrey Companies. The remaining stock is owned by two individuals (5% each)
who are also officers and directors of the Murrey Companies.
BASIS OF COMBINATION
The combined financial statements of the Murrey Companies include the
accounts of Murrey's, American, DM and Tacoma as a result of their common
management which exercises significant influence over their operations.
Significant intercompany balances and transactions between the Murrey Companies
have been eliminated in combination.
INTERIM FINANCIAL INFORMATION
The unaudited interim combined financial statements as of September 30,
1998 and for the nine months ended September 30, 1997 and 1998 have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the nine months ended September 30
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.
CASH EQUIVALENTS
The Murrey Companies considers all highly liquid investments with a
maturity of three months or less at purchase to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Murrey Companies 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 Murrey Companies' customer base. The Murrey Companies maintain
allowances for
F-48
<PAGE> 130
THE MURREY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
losses based on the expected collectibility of accounts receivable. Credit
losses have been within management's expectations.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Improvements or
betterments which significantly extend the life of an asset are capitalized.
Expenditures for maintenance and repair costs are charged to operations as
incurred. The cost of assets retired or otherwise disposed of and the related
accumulated depreciation are eliminated from the accounts in the year of
disposal. Gains and losses resulting from property disposals are included in
other income (expense). Depreciation is computed using the straight-line method
over the estimated useful lives of the assets.
The estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings............................................... 20 years
Machinery and equipment................................. 5 - 15 years
Rolling stock........................................... 10 years
Containers.............................................. 5 - 15 years
Furniture and fixtures.................................. 3 - 5 years
</TABLE>
In connection with the Acquisitions (Note 3) the Murrey Companies 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 twelve years.
GOODWILL
Goodwill represents the excess of the purchase price over the fair value of
the net assets acquired (Notes 3 and 4), and is amortized on a straight-line
basis over the period of expected benefit of 40 years.
The Murrey Companies continually evaluate the value and future benefits of
its goodwill. The Murrey Companies assess 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 Murrey Companies' best estimate for expected future cash flows of the
related business would be less than the carrying amount of the goodwill over the
remaining amortization period. For the period ending December 31, 1997, there
were no adjustments to the carrying amount of goodwill resulting from these
evaluations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents approximate their fair
values as of December 31, 1996 and 1997. The carrying values of short-term
borrowings (Note 5) and long-term debt (Note 6) 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
The Murrey Companies recognize revenues as services are provided. Certain
customers are billed in advance and, accordingly, recognition of the related
revenues is deferred until the services are provided.
F-49
<PAGE> 131
THE MURREY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
INCOME TAXES
DM uses the liability method to account for income taxes. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
Murrey's, American and Tacoma operate 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 these companies' operations
flow through to the individual shareholders.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 1996 and 1997 and
September 30, 1998 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Land and buildings......................... $ 6,316 $ 6,668 $ 6,111
Machinery and equipment.................... 3,518 3,780 3,883
Rolling stock.............................. 6,134 7,570 8,315
Containers................................. 3,140 4,380 5,224
Furniture and fixtures..................... 231 255 242
------- ------- -------
19,339 22,653 23,775
Less accumulated depreciation.............. (6,810) (7,834) (9,404)
------- ------- -------
$12,529 $14,819 $14,371
======= ======= =======
</TABLE>
3. ACQUISITIONS
During 1997, the Murrey Companies purchased substantially all of the assets
of Island Disposal (effective May 2, 1997) and Environmental Waste Systems and
Olympic Disposal (both effective December 1, 1997) (collectively the
"Acquisitions"). The total purchase price for the Acquisitions was approximately
$3,100, comprised of $2,900 in cash and promissory notes payable to the sellers
totaling $200. Of the combined $3,100 purchase price, $1,791 was recorded as
goodwill and $80 was assigned to non-competition agreements. The Acquisitions
were accounted for in accordance with the purchase method of accounting and,
accordingly, the net assets acquired were included in the Murrey Companies'
combined balance sheet based upon their estimated fair values on the date of the
Acquisitions. The Murrey Companies' combined statement of operations includes
the revenues and expenses of the acquired businesses after the effective date of
the transactions.
F-50
<PAGE> 132
THE MURREY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
Certain items affecting the purchase price and the allocation are
preliminary. A summary of the preliminary purchase price allocation as of
December 31, 1997, for the Acquisitions is as follows:
<TABLE>
<S> <C>
Acquired assets:
Property and equipment.................................... $1,229
Goodwill.................................................. 1,791
Non-competition agreements................................ 80
------
$3,100
======
</TABLE>
The following unaudited pro forma information shows the results of the
Murrey Companies' operations as though the Acquisitions had occurred as of
January 1, 1996:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1997
--------- ---------
(UNAUDITED)
<S> <C> <C>
Revenue................................................ $27,485 $31,106
======= =======
Net Income............................................. $ 706 $ 1,094
======= =======
</TABLE>
The pro forma results have been prepared for comparative purposes only and
are not necessarily indicative of the actual results of operations had the
Acquisitions occurred on January 1, 1996, or the results of future operations of
the Murrey Companies. Furthermore, the pro forma results do not give effect to
all cost savings or incremental costs that may occur as a result of the
integration and consolidation of the Acquisitions.
4. INTANGIBLE ASSETS
Intangible assets as of December 31, 1996 and 1997 and September 30, 1998
consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill, net................................ $ -- $1,783 $1,691
Non-competition agreement, net............... -- 79 67
------ ------ ------
$ -- $1,862 $1,758
====== ====== ======
</TABLE>
Accumulated amortization on intangible assets amounted to $9 as of December
31, 1997 (none in 1996) and $113 as of September 30, 1998.
5. SHORT-TERM BORROWINGS
Short-term borrowings consist of various revolving and non-revolving
lines-of-credit with banks, bearing interest at variable rates (ranging from
9.0% to 9.25% as of December 31, 1997) and mature at various dates through
November 30, 1998. The lines of credit are secured by all cash accounts held
with the banks, which totaled $126 as of December 31, 1997. All available
amounts under these lines-of-credit were outstanding as of December 31, 1997.
F-51
<PAGE> 133
THE MURREY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
Certain of these lines-of-credit contain certain restrictive covenants,
which among other things require that specified financial balances and ratios be
maintained. As of December 31, 1997, the Murrey Companies were in compliance
with the covenants.
6. LONG-TERM DEBT
Long-term debt as of December 31, 1996 and 1997 and September 30, 1998
consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1996 1997 1998
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to a bank bearing interest at a variable
rate (approximately 8.5% as of December 31, 1997);
monthly payments of principal and interest of $25;
maturing in November, 2007; secured by certain cash
accounts and a pledge of one of the Murrey
Companies exclusive franchise agreements........... $ -- $2,000 $1,901
Note payable to a bank bearing interest at 8.6%;
monthly payments of principal and interest
aggregating $13; maturing in October, 2001; secured
by equipment with a net book value of approximately
$533 as of December 31, 1997 and certain cash
accounts........................................... $ -- $ 632 $ 542
Notes payable to a bank bearing interest at various
fixed rates (ranging from 9.1% to 9.2% as of
December 31, 1997); monthly payments of principal
and interest aggregating $25 and one-time payments
of $470 and $751 in September, 2000 and May, 2001,
respectively; maturing at various dates between
September, 2000 and May, 2001; secured by land and
buildings with a net book value of approximately
$2,548 as of December 31, 1997..................... 1,752 1,544 1,393
Equipment financing notes payable bearing interest at
various rates (ranging from 8.6% to 8.8% as of
December 31, 1997); monthly payments of principal
and interest aggregating $25; maturing at various
dates through September, 2001; secured by equipment
with an aggregate net book value of approximately
$984 as of December 31, 1997....................... 567 822 479
Notes payable to sellers bearing interest at various
rates (ranging from 8.5% to 9.0% as of December 31,
1997); monthly principal and interest payments of
$9; maturing at various dates between February,
2001 and October, 2007; secured by land and
buildings with a net book value of approximately
$908 as of December 31, 1997....................... 218 471 295
Unsecured notes payable to seller bearing interest at
8.0% as of December 31, 1997; monthly principal and
interest payments of $4; maturing in June, 2002.... -- 189 100
Others............................................... 242 122 88
------ ------ ------
2,779 5,780 4,798
Less: current portion................................ 928 873 751
------ ------ ------
Long-term debt....................................... $1,851 $4,907 $4,047
====== ====== ======
</TABLE>
F-52
<PAGE> 134
THE MURREY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
As of December 31, 1997, aggregate contractual future principal payments by
calendar year on long-term debt are due as follows:
<TABLE>
<S> <C>
1998........................................................ $ 873
1999........................................................ 780
2000........................................................ 1,056
2001........................................................ 1,232
2002........................................................ 408
Thereafter.................................................. 1,431
------
$5,780
======
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Operating Leases
The Murrey Companies lease certain equipment and facilities under
non-cancelable operating leases. Rent expense under all operating leases during
the years ended December 31, 1995, 1996 and 1997 amounted to $319, $170 and
$183, respectively.
As of December 31, 1997, future minimum lease payments under these
operating leases, by calendar year, are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 187
1999........................................................ 186
2000........................................................ 167
2001........................................................ 107
2002........................................................ 87
Thereafter.................................................. 355
------
$1,089
======
</TABLE>
CONTINGENCIES
Environmental Risks
The Murrey Companies are subject to liability for any environmental damage
that the solid waste facilities they operate 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 operation of such facilities by the Murrey Companies. The Murrey Companies
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 Murrey Companies. Any substantial liability for
environmental damage incurred by the Murrey Companies could have a material
adverse effect on the Murrey Companies' combined financial condition, results of
operations or cash flows.
F-53
<PAGE> 135
THE MURREY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
Legal Proceedings
In the normal course of their business and as a result of the extensive
governmental regulation of the solid waste industry, the Murrey Companies 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 or to revoke or deny renewal of an operating permit held by
the Murrey Companies. From time to time the Murrey Companies may also become
parties to various claims or suits for alleged damages to persons and property,
alleged violations of certain laws and alleged liabilities arising out of
matters occurring during the normal course of operating a waste management
business. However, as of December 31, 1997 and September 30, 1998, there is no
current proceeding or litigation involving the Murrey Companies that the Murrey
Companies believe will have a material adverse impact on the Murrey Companies'
business, financial condition, results of operations or cash flows.
Disposal Site
The Murrey Companies have been informed that the Hidden Valley Landfill
which is currently utilized by them for disposal of waste collected in Pierce
County is currently operating under a Consent Decree with the Washington State
Department of Ecology and the Environmental Protection Agency. Under the terms
of the Consent Decree the Hidden Valley Landfill is required to be closed on or
before December 31, 1998; after which all of the waste collected by the Murrey
Companies in Pierce County will be long hauled to an alternate disposal site
until the new solid waste landfill in Pierce County is opened. The new landfill
is projected to open in November 1999. Management of the Murrey Companies does
not believe that the closure of the Hidden Valley Landfill will have a material
adverse impact on the Murrey Companies' business, combined financial position,
results of operations or cash flows.
Employees
Approximately 44 of the Murrey Companies' route drivers are represented by
the Teamsters Union. The Murrey Companies have a collective bargaining agreement
that expires in June 1999. The Murrey Companies are not aware of any other
organizational efforts among their employees and believes that their relations
with their employees are good.
8. RELATED PARTY TRANSACTIONS
OPERATING LEASE
The Murrey Companies lease land on which certain of their facilities are
located from a shareholder of the Murrey Companies. This lease is pursuant to an
informal arrangement whereby the Murrey Companies pay all of the property taxes
and other expenses associated with the leased land in lieu of monthly rent.
These payments totaled approximately $10 during each of the years ended December
31, 1995, 1996, and 1997.
ADVANCES
As of December 31, 1996 and 1997, the Murrey Companies had non-interest
bearing advances payable to one of their shareholders totaling $818 and $543,
respectively.
F-54
<PAGE> 136
THE MURREY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
DISPOSAL FEES
During the years ended December 31, 1995, 1996 and 1997, the Murrey
Companies paid $7,355, $7,730, and $8,592, respectively, in disposal fees to a
landfill that is owned and operated by a company in which one of the Murrey
Companies shareholders has an approximate 33% ownership interest.
9. 401(k) PLAN
The Murrey Companies have a voluntary savings and investment plan (the
"401(k) Plan"). The 401(k) Plan is available to all eligible, non-union
employees of the Murrey Companies. Under the 401(k) Plan the Murrey Companies'
contributions are at the discretion of management of the Murrey Companies.
During the years ended December 31, 1995, 1996 and 1997, the Murrey Companies'
401(k) Plan expense was approximately $246, $267 and $316, respectively.
10. INCOME TAXES
The provision (benefit) for income taxes for the Murrey Companies pertains
solely to DM and consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Federal:
Current................................................... $543 $562 $678
Deferred.................................................. 147 (19) (44)
---- ---- ----
$690 $543 $634
==== ==== ====
</TABLE>
Deferred taxes result from temporary differences in the recognition of
certain expense items for income tax and financial reporting purposes. The
Murrey Companies' deferred taxes as of December 31, 1996 and 1997 are
substantially comprised of depreciation deducted for tax purposes that will be
recorded in future periods for financial reporting purposes.
The principal reasons for the difference between the federal statutory
income tax rate and the effective income tax rate are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ----- -----
<S> <C> <C> <C>
Federal expense expected at statutory rates on combined
income before income taxes................................ $1,331 $410 $663
Tax effect of companies reporting under Subchapter S........ (645) 124 (42)
Other....................................................... 4 9 13
------ ---- ----
$ 690 $543 $634
====== ==== ====
</TABLE>
11. PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
As described in Note 1, Murrey's, American, and Tacoma (the "S
Corporations") operate under Subchapter S of the Internal Revenue Code and are
not subject to federal income taxes. In connection with the Murrey Companies'
proposed merger with Waste Connections, Inc. ("WCI") (Note 12), the Subchapter S
election will be terminated. As a result, the S Corporations (as wholly-owned
subsidiaries of
F-55
<PAGE> 137
THE MURREY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
WCI) will be subject to corporate income taxes subsequent to the termination of
S corporation status. The Murrey Companies had combined income for income tax
purposes of $2,769, $2,135 and $1,941 for 1995, 1996 and 1997, respectively. Had
the Murrey Companies filed federal income tax returns as regular corporations
for 1995, 1996 and 1997, income tax expense under the provisions of Financial
Accounting Standards No. 109 would have been $1,338, $432 and $697,
respectively.
The following unaudited pro forma information reflects income tax expense
(benefit) for the Murrey Companies as if the S Corporations had also been
subject to federal income taxes:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
1995 1996 1997
------ ----- ----
<S> <C> <C> <C>
Federal:
Current................................................... $ 941 $ 726 $660
Deferred.................................................. 397 (294) 37
------ ----- ----
Pro forma income taxes...................................... $1,338 $ 432 $697
====== ===== ====
</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
certain non-deductible expenses.
The Murrey Companies pro forma deferred income tax asset of approximately
$98 and $71 as of December 31, 1996 and 1997, respectively, relates principally
to differences in the recognition of bad debt expenses, vacation accruals, and
certain other temporary differences. The Murrey Companies also had pro forma
deferred tax liabilities as of December 31, 1996 and 1997 of approximately
$1,322 and $1,332 which relate to differences between tax and financial methods
of depreciation and the use of the cash method of accounting for tax purposes by
certain of the S Corporations.
12. SUBSEQUENT EVENT
MERGER OF THE MURREY COMPANIES
On October 22, 1998, the Murrey Companies and WCI jointly announced that
they had signed a definitive agreement under which the Murrey Companies will
merge with wholly-owned subsidiaries of WCI. Under the terms of the agreement,
substantially all shares of common stock of the Murrey Companies will be
exchanged for 2.75 million shares of WCI common stock (subject to adjustment at
the date of consummation of the Merger). The transaction is expected to be
accounted for as a pooling of interests and is expected to close during the
fourth quarter of calendar 1998.
13. YEAR 2000 (UNAUDITED)
The Murrey Companies will need to modify or replace portions of their
software so that their computer systems will function properly with respect to
dates in the year 2000 ("Year 2000") and thereafter. To date, the Murrey
Companies have not incurred any costs related to the Year 2000 project. The
Murrey Companies do not believe that their 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 their operations.
F-56
<PAGE> 138
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.
/s/ ERNST & YOUNG LLP
Sacramento, California
February 20, 1998
F-57
<PAGE> 139
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-58
<PAGE> 140
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-59
<PAGE> 141
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-60
<PAGE> 142
MADERA DISPOSAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Madera Disposal Systems, Inc. ("Madera") is a regional, integrated,
non-hazardous solid waste services company that provides collection, transfer
disposal and recycling services to residential, commercial and industrial
customers. Madera Landfill is contracted by the County of Madera to operate the
Fairmead, the North Fork Transfer Station and the materials recovery facility
(aka, Mammoth Recycling Facility), all of which are located in the County of
Madera, State of California. Madera also holds an exclusive contract with the
County of Madera to collect solid waste within the unincorporated areas of the
County of Madera. The contracts continue in force and effect until August 2004,
and will automatically be extended for one five year period unless Madera is
then in material breach or default of its obligations under the materials
recovery facility contract. All contracts may be extended for additional periods
and upon terms as the County of Madera and Madera may mutually agree upon.
On November 9, 1993, Madera entered into an agreement with the County of
Madera, whereby Madera was to design, permit, finance, construct, equip, staff,
operate and maintain a materials recovery facility (the "Facility") at the
County's Fairmead Landfill for the purpose of providing the County of Madera
with a guaranteed reduction in the quantity of municipal solid waste requiring
landfill disposal. The Facility was to be designed, constructed and operated to
receive all municipal solid waste from the Cities of Madera and Chowchilla and
the unincorporated areas of the County of Madera. It was also to meet the
twenty-five percent (25%) waste reduction requirements of Assembly Bill 939
(Chapter 1095 of the Statutes of 1989) for the Cities of Madera and Chowchilla
and the County of Madera by January 11, 1995, through the recycling of recovered
material, and work toward the waste reduction requirements of fifty percent
(50%) that each jurisdiction must achieve by January 1, 2000. The Facility
became operational on August 15, 1994.
The County of Madera will compensate Madera for its capital costs incurred
in designing, permitting, financing, constructing and equipping the Facility.
These costs were $1,661 and are included in property and equipment in the
accompanying balance sheets. The County of Madera will reimburse Madera for the
equipment and interest costs over a ten year operational period. The County of
Madera will also reimburse Madera for its other operational costs incurred in
connection with the staffing, maintaining and operating of the materials
recovery facility. All of the aforementioned costs are reimbursed to Madera
through receipt of a specified portion of waste disposal fees collected by
Madera on behalf of the County of Madera for landfill operations.
At the termination of the contracts described above, the improvements made
by Madera become the sole and exclusive property of the County of Madera,
subject only to the County of Madera's continuing obligation to pay or reimburse
the Company for any remaining unamortized capital costs of the Facility.
In 1995, Madera started a new line of business which provided clean-up and
waste removal services to residential and commercial construction businesses.
Due to continued losses, in July 1997 Madera ceased operations in this line of
business. The estimated fair value of the remaining assets of the business is
reflected in the accompanying balance sheets as assets held for sale at December
31, 1997. For the years ended December 31, 1995, 1996, and 1997, this business
had revenues of $531, $785 and $193, respectively, and had operating losses of
$290, $397, and $215, respectively.
Madera entered into an exclusive franchise agreement with the City of
Chowchilla on April 8, 1996, whereby Madera was granted the exclusive right and
franchise to collect, haul, and dispose of all solid waste, recyclable solid
waste, and green waste within the city limits of the City of Chowchilla. The
term of this franchise shall continue in force and effect for a period of seven
years, and the City of Chowchilla may renew and extend the franchise for an
additional period of five years or more.
F-61
<PAGE> 143
MADERA DISPOSAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
SALE OF THE COMPANY
Effective February 1, 1998, Madera's shareholders entered into an agreement
to sell their stock to Waste Connections, Inc. ("WCI") for cash and stock in
WCI.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
Madera considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject Madera to concentrations of
credit risks consist primarily of accounts receivable. Credit risk on accounts
receivable is minimized as a result of the large and diverse nature of Madera's
customer base. Madera maintains an allowance for losses based on the expected
collectibility of accounts receivable. Credit losses have been within
management's expectations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Improvements or betterments
which significantly extend the life of an asset are capitalized. Expenditures
for maintenance and repair costs are charged to operations as incurred. The cost
of assets retired or otherwise disposed of and the related accumulated
depreciation are eliminated from the accounts in the year of disposal. Gains and
losses resulting from property disposals are included in other income (expense).
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets or lease term, whichever is shorter.
The estimated useful lives are as follows:
<TABLE>
<S> <C>
Machinery and equipment................................ 6 - 10 years
Leasehold improvements................................. 10 - 40 years
Furniture and fixtures................................. 6 - 10 years
</TABLE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and equivalents approximate their fair values
as of December 31, 1996 and 1997. The carrying values of the long-term debt and
capital lease obligations (Notes 3 and 4) approximate their fair values as of
December 31, 1996 and 1997, based on current incremental borrowing rates for
similar types of borrowing arrangements.
REVENUE RECOGNITION
Madera recognizes revenues as services are provided. Certain customers are
billed in advance and, accordingly, recognition of the related revenues is
deferred until the services are provided.
F-62
<PAGE> 144
MADERA DISPOSAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
INCOME TAXES
Madera operates under Subchapter S of the Internal Revenue Code for federal
and state income tax reporting purposes. Consequently, all of the income tax
attributes and liabilities of the Madera's operations flow through to the
individual shareholders.
CLOSURE AND POST-CLOSURE COSTS
Under regulations pursuant to which the permit for the Fairmead Landfill
was issued, Madera and Madera County, as operator and owner, respectively, are
jointly liable for closure and post-closure liabilities with respect to the
landfill. Madera has not accrued for such liabilities because Madera County, as
required by state law, has established a special fund, into which a designated
portion of tipping fee surcharges are deposited, to pay such liabilities.
Consequently, management of Madera does not believe Madera has any financial
obligation for closure and post-closure costs for the Fairmead Landfill as of
December 31, 1997.
2. PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1996 and 1997 consists of the
following:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Machinery and equipment..................................... $5,480 $5,777
Leasehold improvements...................................... 498 500
Furniture and fixtures...................................... 137 133
------ ------
6,115 6,410
Less accumulated depreciation and amortization.............. 2,315 2,774
------ ------
$3,800 $3,636
====== ======
</TABLE>
3. LONG-TERM DEBT
Long-term debt as of December 31, 1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Equipment financing notes payable bearing interest at
various fixed and variable rates (ranging from 6.0% to 12.9%
at December 31, 1997); monthly payments of principal and
interest aggregating $16; maturing at various dates through
August 31, 2001; secured by equipment with net book values
aggregating $522 as of December 31, 1997.................... $664 $467
Notes payable to related parties bearing interest at 10.0%;
monthly payments of interest; maturing December 1, 1998..... 150 150
---- ----
814 617
Less: Current portion....................................... 177 288
---- ----
Long-term debt.............................................. $637 $329
==== ====
</TABLE>
One of the equipment financing notes, with an outstanding balance of $236
as of December 31, 1997, contains certain restrictive covenants, which among
other things require that specified financial balances and ratios be maintained,
restrict the payment of dividends and prohibit the incurrence of additional
indebtedness. As of December 31, 1997, Madera was in compliance with the
covenants.
F-63
<PAGE> 145
MADERA DISPOSAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
As of December 31, 1997, aggregate contractual future principal payments by
calendar year on long-term debt are due as follows:
<TABLE>
<S> <C>
1998........................................................ $288
1999........................................................ 149
2000........................................................ 122
2001........................................................ 58
----
$617
====
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Capital Leases
Madera leases certain equipment under capital leases. As of December 31,
1996 and 1997, the following amounts are included in property and equipment as
assets under these capital leases:
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Cost....................................................... $2,235 $2,605
Less: accumulated amortization............................. 527 780
------ ------
Net assets under capital leases............................ $1,708 $1,825
====== ======
</TABLE>
The future minimum lease payments under these capital leases along with the
present value of the minimum lease payments as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
MINIMUM LEASE PAYMENTS
YEAR ENDING DECEMBER 31:
------------------------
<S> <C>
1998.............................................. $ 448
1999.............................................. 489
2000.............................................. 427
2001.............................................. 352
2002.............................................. 294
Thereafter........................................ 494
------
Total minimum lease payments................................ 2,504
Less amount representing interest........................... 665
------
Present value of minimum lease payments..................... 1,839
Less current portion........................................ 274
------
Long-term portion........................................... $1,565
======
</TABLE>
OPERATING LEASES
Madera leases its facilities and certain equipment under cancelable
operating leases for periods of one year or less. Rent expense under all
operating leases during the years ended December 31, 1995, 1996 and 1997
amounted to $47, $41 and $33, respectively.
PERFORMANCE BONDS AND LETTERS OF CREDIT
Municipal solid waste collection contracts may require performance bonds to
secure contractual performance. As of December 31, 1997, Madera had provided
customers and various regulatory authorities with bonds of approximately $200 to
secure its obligations. If Madera were unable to obtain surety bonds in
sufficient amounts or at acceptable rates, it could be precluded from entering
into additional municipal solid waste collection contracts or obtaining or
retaining landfill operating permits.
F-64
<PAGE> 146
MADERA DISPOSAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
ENVIRONMENTAL RISKS
Madera is subject to liability for any environmental damage that its solid
waste facilities may cause to neighboring landowners, particularly as a result
of the contamination of drinking water sources or soil, including damage
resulting from conditions existing prior to the acquisition of such facilities
by Madera. Madera may also be subject to liability for any off-site
environmental contamination caused by pollutants or hazardous substances whose
transportation, treatment or disposal was arranged by Madera or its
predecessors. Any substantial liability for environmental damage incurred by
Madera could have a material adverse effect on Madera's financial condition,
results of operations or cash flows.
LEGAL PROCEEDINGS
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, Madera may periodically
become subject to various judicial and administrative proceeding involving
federal, state or local agencies. In these proceedings, an agency may seek to
impose fines on Madera or to revoke or deny renewal of an operating permit held
by Madera. From time to time Madera may also be subject to actions brought by
citizens' groups or adjacent landowners in connection with the permitting and
licensing of landfills and transfer stations, or alleging environmental damage
or violations of the permits and licenses pursuant to which Madera operates.
In addition, Madera may become party to various claims and suits pending
for alleged damages to persons and property, alleged violations of certain laws
and alleged liabilities arising out of matters occurring during the normal
operation of the waste management business. However, as of December 31, 1997,
there is no current proceeding or litigation involving Madera that Madera
believes will have a material adverse impact on Madera's business, financial
condition, results of operations or cash flows.
5. RELATED PARTY TRANSACTIONS
Madera performs repair services on equipment owned and operated by
shareholders of Madera. Revenues relating to these activities were $41, $60 and
$51 for the years ended December 31, 1995, 1996 and 1997, respectively. As of
December 31, 1996 and 1997, Madera has receivables of $100 and $113,
respectively, relating to these activities.
6. 401(k) PLAN
Madera has a voluntary savings and investment plan (the "401(k) Plan"). The
401(k) Plan is available to all eligible employees of Madera. Under the 401(k)
Plan Madera is required to match 100% of employees' contributions up to a
maximum of 3% of the employees' wages. During the years ended December 31, 1995,
1996 and 1997, Madera's 401(k) Plan expenses were approximately $78, $107 and
$108, respectively.
F-65
<PAGE> 147
MADERA DISPOSAL SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
7. PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
The following unaudited pro forma information reflects income tax expense
(benefit) as if Madera had been subject to federal and state income taxes:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Current:
Federal............................................. $(16) $(19) $197
State............................................... -- 12 57
Deferred:
Federal............................................. 32 188 33
State............................................... 14 27 8
---- ---- ----
Pro forma income taxes................................ $ 30 $208 $295
==== ==== ====
</TABLE>
The pro forma provisions for income taxes for the years ended December 31,
1995, 1996 and 1997 differ from the amounts computed by applying the applicable
statutory federal income tax rate (34%) to income before income taxes due to
state franchise taxes, certain non-deductible expenses and refundable tax
credits.
Madera's pro forma deferred income tax asset of approximately $20 and $54
at December 31, 1996 and 1997, respectively, relates principally to differences
in the recognition of bad debt expenses, state franchise taxes and certain other
temporary differences. Madera also has pro forma deferred tax liabilities at
December 31, 1996 and 1997 of approximately $534 and $570, respectively, which
relate to differences between tax and financial methods of depreciation.
8. SUBSEQUENT EVENTS
On January 12, 1998, Madera distributed $131 to its shareholders.
F-66
<PAGE> 148
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Arrow Sanitary Service, Inc.
We have audited the accompanying balance sheet of Arrow Sanitary Service,
Inc. as of September 30, 1997, and the related statement of income and retained
earnings, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Arrow Sanitary Service, Inc.
at September 30, 1997, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Sacramento, California
July 8, 1998
F-67
<PAGE> 149
ARROW SANITARY SERVICE, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
------------- -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 205 $ 274
Accounts receivable....................................... 520 694
Prepaid expenses and other current assets................. 37 48
------ ------
Total current assets.............................. 762 1,016
Property and equipment, net................................. 815 926
Intangible assets, net...................................... 121 118
Other assets................................................ 48 13
------ ------
$1,746 $2,073
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 470 $ 439
Deferred revenue.......................................... 11 11
Accrued liabilities....................................... 151 213
Current portion of long-term debt......................... 168 154
------ ------
Total current liabilities......................... 800 817
Long-term portion of capital lease obligations.............. -- 45
Long-term debt.............................................. 429 450
Deferred income taxes....................................... 34 46
Commitments and contingencies (Note 4)
Shareholders' equity:
Common stock: no par value; 1,000 shares authorized; 600
shares issued and outstanding.......................... 47 47
Treasury stock payments................................... (25) (25)
Retained earnings......................................... 461 693
------ ------
Total shareholders' equity........................ 483 715
------ ------
$1,746 $2,073
====== ======
</TABLE>
See accompanying notes.
F-68
<PAGE> 150
ARROW SANITARY SERVICE, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31,
SEPTEMBER 30, ----------------
1997 1997 1998
------------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Revenues.................................................... $6,209 $2,872 $3,148
Operating expenses:
Cost of operations........................................ 4,970 2,080 2,255
Selling, general and administrative....................... 776 448 369
Depreciation and amortization............................. 143 70 85
------ ------ ------
Income from operations...................................... 320 274 439
Interest expense............................................ (72) (39) (30)
Other income (expense), net................................. (2) (5) 40
------ ------ ------
Income before income taxes.................................. 246 230 449
Income tax expense.......................................... (117) (98) (217)
------ ------ ------
Net income.................................................. 129 132 232
Retained earnings, beginning of period...................... 332 332 461
------ ------ ------
Retained earnings, end of period............................ $ 461 $ 464 $ 693
====== ====== ======
</TABLE>
See accompanying notes.
F-69
<PAGE> 151
ARROW SANITARY SERVICE, INC.
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31,
SEPTEMBER 30, ----------------
1997 1997 1998
------------- ------ ------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 129 $ 132 $ 232
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 143 70 85
Deferred income taxes.................................. 34 -- 12
Gain on sale of property and equipment................. (2) -- --
Changes in operating assets and liabilities:
Accounts receivable.................................. (2) (105) (174)
Prepaid expenses and other current assets............ 19 17 (11)
Other assets......................................... 1 2 35
Accounts payable..................................... 43 (46) (31)
Accrued liabilities.................................. 70 110 62
----- ----- -----
Net cash provided by operating activities................. 435 180 210
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment........... (117) (80) (134)
Treasury stock payments................................... (5) -- --
----- ----- -----
Net cash used in investing activities....................... (122) (80) (134)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. -- 200 97
Principal payments on long-term debt...................... (191) (298) (104)
----- ----- -----
Net cash used in financing activities....................... (191) (98) (7)
----- ----- -----
Net increase in cash........................................ 122 2 69
Cash and cash equivalents, beginning of period.............. 83 83 205
----- ----- -----
Cash and cash equivalents, end of period.................... $ 205 $ 85 $ 274
===== ===== =====
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND
NON-CASH TRANSACTIONS:
Cash paid for interest...................................... $ 74 $ 39 $ 33
===== ===== =====
</TABLE>
See accompanying notes.
F-70
<PAGE> 152
ARROW SANITARY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO MARCH 31, 1998 AND
THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Arrow Sanitary Service, Inc. (the "Company") is a regional, integrated,
non-hazardous solid waste services company that provides collection, hauling and
disposal of recyclable materials for residential and commercial customers in
various counties of Oregon and Washington in and around Portland, Oregon.
SALE OF THE COMPANY
On June 17, 1998, the Company's shareholders entered into an agreement to
sell all capital stock in the Company to Waste Connections, Inc. ("WCI") for
cash and common stock of WCI.
INTERIM FINANCIAL INFORMATION
The unaudited interim financial statements as of March 31, 1998 and for the
six months ended March 31, 1997 and 1998 have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the six months ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ended September 30,
1998.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable. Credit
risk on accounts receivable is minimized as a result of the large and diverse
nature of the Company's customer base. Credit losses have been within
management's expectations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Improvements or betterments
which significantly extend the life of an asset are capitalized. Expenditures
for maintenance and repair costs are charged to operations as incurred. The cost
of assets retired or otherwise disposed of and the related accumulated
depreciation are eliminated from the accounts in the year of disposal. Gains and
losses resulting from property disposals are included in other income (expense).
Depreciation is computed using the straight-line method over the estimated
useful lives of the assets, or lease term, whichever is shorter.
F-71
<PAGE> 153
ARROW SANITARY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO MARCH 31, 1998 AND
THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The estimated useful lives of property and equipment are as follows:
<TABLE>
<S> <C>
Buildings............................................... 30 years
Machinery and equipment................................. 3 - 10 years
Rolling stock........................................... 10 years
Furniture and fixtures.................................. 3 - 6 years
Containers.............................................. 5 - 12 years
</TABLE>
INTANGIBLE ASSETS
Intangible assets are comprised of the following at September 30, 1997:
<TABLE>
<S> <C>
Goodwill.................................................... $126
Covenant not to compete..................................... 12
----
138
Accumulated amortization.................................... (17)
----
$121
====
</TABLE>
Goodwill represents the excess of the purchase price over the fair value of
the net assets of entities previously acquired by the Company and is amortized
on a straight-line basis over the period of expected benefit of 40 years. The
covenant not to compete is amortized on a straight-line basis over the period of
expected benefit of 5 years.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided. Certain customers
are billed in advance and, accordingly, recognition of the related revenues is
deferred until the services are provided.
INCOME TAXES
The Company uses the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
SIGNIFICANT CUSTOMERS AND SUPPLIERS
The Company has three major customers which represent 21%, 14% and 11% of
total sales, respectively, for the year ended September 30, 1997. In addition,
the Company purchases a substantial portion of its recyclable materials and
equipment from four major suppliers.
F-72
<PAGE> 154
ARROW SANITARY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO MARCH 31, 1998 AND
THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
2. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1998
------------- -----------
(UNAUDITED)
<S> <C> <C>
Land................................................. $ 121 $ 121
Buildings............................................ 168 168
Machinery and equipment.............................. 480 593
Rolling stock........................................ 1,026 1,028
Furniture and fixtures............................... 104 109
Containers........................................... 296 342
------- -------
2,195 2,361
Less accumulated depreciation and amortization....... (1,380) (1,435)
------- -------
$ 815 $ 926
======= =======
</TABLE>
3. FINANCING ARRANGEMENTS
BANK LINE OF CREDIT
The Company maintains a revolving line of credit with a financial
institution. Under the agreement, the Company may borrow an amount up to $150.
Interest on the revolving line of credit accrues at the financial institution's
prime rate (8.5% at September 30, 1997) plus 1.5%. The agreement provides that
the Company comply with various financial and other covenants. The line of
credit had no amounts outstanding at September 30, 1997.
LONG-TERM DEBT
Long-term debt as of September 30, 1997 consists of the following:
<TABLE>
<S> <C>
Contract financing notes payable bearing interest at 9%;
payable in monthly installments of principal and interest
(ranging from $1 to $2); maturing between October 20, 1998
and November 15, 2004..................................... $159
Mortgage financing notes payable bearing interest at 8.25%;
payable in monthly installments of principal and interest
of $1; maturing on January 20, 2022; secured by certain
real estate............................................... 139
Equipment financing notes payable bearing interest (ranging
from 8.5% to 10.75%); payable in monthly installments of
principal (ranging from $2 to $5) plus interest; maturing
on March 20, 1998 and October 12, 2000; secured by the
Company's accounts receivable, inventory, equipment, and
certain other assets...................................... 299
----
597
Less: current portion....................................... 168
----
Long-term debt.............................................. $429
====
</TABLE>
One of the equipment financing notes, with no outstanding balance at
September 30, 1997, contains certain restrictive covenants, which among other
things require that specified financial balances and ratios be maintained,
restrict the payment of dividends and prohibit the incurrence of additional
indebtedness.
F-73
<PAGE> 155
ARROW SANITARY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO MARCH 31, 1998 AND
THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. FINANCING ARRANGEMENTS (CONTINUED)
As of September 30, 1997, aggregate contractual future principal payments
by fiscal year on long-term debt are due as follows:
<TABLE>
<S> <C>
1998........................................................ $168
1999........................................................ 121
2000........................................................ 81
2001........................................................ 27
2002........................................................ 26
Thereafter.................................................. 174
----
$597
====
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Operating Leases
The Company leases its facilities and certain equipment under noncancelable
operating leases. Rent expense under these agreements approximated $50 for the
year ended September 30, 1997.
The future minimum lease payments under these agreements as of September
30, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 54
1999........................................................ 54
2000........................................................ 49
2001........................................................ 48
2002........................................................ 48
Thereafter.................................................. 494
----
$747
====
</TABLE>
CONTINGENCIES
Legal Proceedings
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, the Company may
periodically become subject to various judicial and administrative proceedings
involving federal, state or local agencies. In these proceedings, an agency may
seek to impose fines on the Company or to revoke or deny renewal of an operating
permit held by the Company. From time to time the Company may also be subject to
actions brought by citizens' groups or adjacent landowners in connection with
the permitting and licensing of landfills and transfer stations, or alleging
environmental damage or violations of the permits and licenses pursuant to which
the Company operates.
In addition, the Company may become party to various claims and suits
pending for alleged damages to persons and property, alleged violations of
certain laws and alleged liabilities arising out of matters occurring during the
normal operation of the waste management business. However, as of September 30,
1997, there is
F-74
<PAGE> 156
ARROW SANITARY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO MARCH 31, 1998 AND
THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. COMMITMENTS AND CONTINGENCIES (CONTINUED)
no current proceeding or litigation involving the Company that the Company
believes will have a material adverse impact on the Company's business,
financial condition, results of operations or cash flows.
Employees
Approximately 11 of the Company's route drivers are represented by the
Teamsters Union. The Company entered into a three-year collective bargaining
agreement in March 1998. The Company is not aware of any other organizational
efforts among its employees and believes that its relations with its employees
are good.
5. 401(k) PLAN
The Company has a voluntary savings and investment plan (the "401(k)
Plan"). The 401(k) Plan is available to all eligible employees of the Company.
Under the 401(k) Plan the Company is required to match 3% of employees'
contributions up to a maximum of 6% of the employees' wages once the employee
contributes a minimum of 3%. The Company will match 100% of employee
contributions between 3 and 6%. Sixteen of twenty-one eligible employees
participated in the plan with minimum contributions of at least 3%. During the
year ended September 30, 1997, the Company's 401(k) Plan expense was
approximately $35.
6. INCOME TAXES
The provision for income taxes for the year ended September 30, 1997
consists of the following:
<TABLE>
<S> <C>
Current:
Federal................................................... $ 60
State..................................................... 23
Deferred:
Federal................................................... 29
State..................................................... 5
----
$117
====
</TABLE>
Deferred taxes result from temporary differences in the recognition of
certain expense items for income tax and financial reporting purposes. The
Company's deferred taxes as of September 30, 1997 are substantially comprised of
depreciation deducted for tax purposes that will be recorded in future periods
for financial reporting purposes.
The principal reasons for the difference between the effective income tax
rate and the federal statutory income tax rate are as follows:
<TABLE>
<S> <C>
Federal expense expected at statutory rates................. $ 84
State and local income taxes, net of Federal benefit........ 15
Officers life insurance expense............................. 17
Other....................................................... 1
----
$117
====
</TABLE>
The Company paid $10 for income taxes during the year ended September 30,
1997.
F-75
<PAGE> 157
ARROW SANITARY SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO MARCH 31, 1998 AND
THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
7. YEAR 2000 (UNAUDITED)
The Company will need to modify or replace portions of its software so that
its computer systems will function properly with respect to dates in the year
2000 ("Year 2000") and thereafter. To date, the Company has not incurred any
costs related to the Year 2000 project. The Company does not believe that its
expenditures relating to the Year 2000 project will be material. However, if the
required Year 2000 modifications and conversions are not made or are not
completed in a timely manner, the Year 2000 issue could materially affect the
Company's operations.
F-76
<PAGE> 158
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Shrader Refuse and Recycling Service Company
We have audited the accompanying balance sheets of Shrader Refuse and
Recycling Service Company as of September 30, 1996 and 1997, and the related
statements of income, stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Shrader Refuse and Recycling
Service Company at September 30, 1996 and 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
Lincoln, Nebraska
August 24, 1998
F-77
<PAGE> 159
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------- JUNE 30,
1996 1997 1998
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 287 $ 116 $ 342
Marketable equity securities.............................. 246 403 576
Accounts receivable, less allowance for doubtful accounts
of $29 and $32 at September 30, 1996 and 1997,
respectively........................................... 674 897 808
Prepaid expenses.......................................... 37 69 79
------ ------ ------
Total current assets.............................. 1,244 1,485 1,805
Property and equipment, net................................. 3,939 5,195 5,112
Goodwill, net............................................... 223 214 209
Other assets................................................ 122 157 208
------ ------ ------
$5,528 $7,051 $7,334
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 244 $ 202 $ 323
Accrued liabilities....................................... 100 103 117
Current portion of long-term debt......................... 763 703 703
Current portion of capital lease obligations.............. 18 97 97
------ ------ ------
Total current liabilities......................... 1,125 1,105 1,240
Long-term debt, net of current portion...................... 1,676 1,258 959
Capital lease obligations, net of current portion........... 338 1,583 1,511
Commitments and contingencies (Note F)
Stockholders' equity:
Common stock: $1 par value; 10,000 shares authorized;
8,571 shares issued and outstanding.................. 9 9 9
Retained earnings......................................... 2,338 3,012 3,465
Net unrealized gain on marketable equity securities....... 42 84 150
------ ------ ------
Total stockholders' equity........................ 2,389 3,105 3,624
------ ------ ------
$5,528 $7,051 $7,334
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-78
<PAGE> 160
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE
YEAR ENDED MONTHS ENDED
SEPTEMBER 30, JUNE 30,
---------------- ----------------
1996 1997 1997 1998
------ ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................................ $5,461 $6,896 $5,027 $5,382
Operating expenses:
Cost of operations.................................... 3,861 4,601 3,241 3,479
Selling, general and administrative................... 516 567 426 425
Depreciation and amortization......................... 565 770 546 697
------ ------ ------ ------
4,942 5,938 4,213 4,601
------ ------ ------ ------
Income from operations.................................. 519 958 814 781
Other income (expense):
Interest expense...................................... (206) (292) (219) (287)
Other income, net..................................... 35 59 19 19
------ ------ ------ ------
(171) (233) (200) (268)
------ ------ ------ ------
Net income.............................................. $ 348 $ 725 $ 614 $ 513
====== ====== ====== ======
Pro forma income taxes (unaudited) (Note G)............. $ 141 $ 290 $ 245 $ 206
------ ------ ------ ------
Pro forma net income (unaudited) (Note G)............... $ 207 $ 435 $ 369 $ 307
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-79
<PAGE> 161
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1996 AND 1997
AND THE NINE MONTHS ENDED JUNE 30, 1998
(INFORMATION RELATED TO THE NINE MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSS) ON
COMMON STOCK MARKETABLE TOTAL
--------------- RETAINED EQUITY STOCKHOLDERS'
SHARES AMOUNT EARNINGS SECURITIES EQUITY
------ ------ -------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance October 1, 1995........................ 8,571 $9 $2,154 $ (2) $2,161
Net income..................................... -- -- 348 -- 348
Distributions to stockholders.................. -- -- (164) -- (164)
Change in net unrealized gain (loss) on
marketable equity securities................. -- -- -- 44 44
----- -- ------ ---- ------
Balance at September 30, 1996.................. 8,571 9 2,338 42 2,389
Net income..................................... -- -- 725 -- 725
Distributions to stockholders.................. -- -- (51) -- (51)
Change in net unrealized gain (loss) on
marketable equity securities................. -- -- -- 42 42
----- -- ------ ---- ------
Balance at September 30, 1997.................. 8,571 9 3,012 84 3,105
Net income..................................... -- -- 513 -- 513
Distributions to stockholders.................. -- -- (60) -- (60)
Change in net unrealized gain (loss) on
marketable equity securities................. -- -- -- 66 66
----- -- ------ ---- ------
Balance at June 30, 1998....................... 8,571 $9 $3,465 $150 $3,624
===== == ====== ==== ======
</TABLE>
The accompanying notes are an integral part of this statement.
F-80
<PAGE> 162
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE
YEAR ENDED MONTHS ENDED
SEPTEMBER 30, JUNE 30,
----------------- ----------------
1996 1997 1997 1998
------- ------ ------ ------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 348 $ 725 $ 614 $ 513
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 565 770 546 697
Realized (gain) loss on marketable equity securities... 8 (23) (19) (19)
Gain on sale of property and equipment................. (6) (8) -- --
Changes in operating assets and liabilities:
Accounts receivable, net............................. (25) (223) (49) 89
Prepaid expenses..................................... 16 (32) (7) (10)
Other assets......................................... (6) (35) (85) (51)
Accounts payable..................................... 73 (42) (30) 121
Accrued liabilities.................................. 23 3 18 14
------- ------ ------ ------
Net cash provided by operating activities......... 996 1,135 988 1,354
------- ------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment........... (2,010) (655) (395) (609)
Proceeds from sale of property and equipment.............. 6 26 -- --
Purchases of marketable equity securities................. (272) (307) (273) (232)
Proceeds from sale of marketable equity securities........ 81 215 184 144
------- ------ ------ ------
Net cash used in investing activities............. (2,195) (721) (484) (697)
------- ------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 1,777 300 120 250
Principal payments on long-term debt and capital lease
obligations............................................ (518) (834) (617) (621)
Cash distributions made to stockholders................... (164) (51) (39) (60)
------- ------ ------ ------
Net cash provided by (used in) financing
activities...................................... 1,095 (585) (536) (431)
------- ------ ------ ------
Net change in cash and cash equivalents..................... (104) (171) (32) 226
Cash and cash equivalents:
Beginning of period....................................... 391 287 287 116
------- ------ ------ ------
End of period............................................. $ 287 $ 116 $ 255 $ 342
======= ====== ====== ======
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND
NON-CASH TRANSACTIONS:
Cash paid for interest.................................... $ 206 $ 299 $ 219 $ 287
======= ====== ====== ======
Capital lease obligations incurred for the purchase of
property and equipment................................. $ 376 $1,380 $1,380 $ --
======= ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-81
<PAGE> 163
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.)
NOTE A -- ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Organization and Business
Shrader Refuse and Recycling Service Company (the "Company") is a
non-hazardous solid waste services company that provides collection, hauling,
disposal and recycling services to residential and commercial customers in
various counties of Nebraska.
The Company derives a portion of its revenue from exclusive municipal
contracts, of which a significant number will be subject to competitive bidding
at some time in the future. The Company intends to bid on additional municipal
contracts as a means of adding customers. There can be no assurance that the
Company will be the successful bidder to obtain or retain contracts that come up
for competitive bidding.
2. Sale of the Company
On July 31, 1998, the Company's stockholders sold all capital stock of the
Company to Waste Connections, Inc. ("WCI") for cash and common stock of WCI.
3. Interim Financial Information
The unaudited interim financial statements as of June 30, 1998 and for the
nine months ended June 30, 1997 and 1998 have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the nine months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending September 30,
1998.
4. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
5. Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
6. Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable. Credit
risk on accounts receivable is minimized as a result of the large and diverse
nature of the Company's customer base. Credit losses have been within
management's expectations.
7. Marketable Equity Securities
The Company's marketable equity securities are classified as "available for
sale" and stated at market value. Unrealized holding gains and losses on such
securities are reported as a separate component of stockholders' equity until
realized.
F-82
<PAGE> 164
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.)
NOTE A -- ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Gains and losses on the disposition of marketable equity securities are
determined using the first-in, first-out method. Declines in the fair value of
individual securities below their cost that are other than temporary are
recorded as realized losses through a charge to income.
8. Property and Equipment
Property and equipment are stated at cost. Improvements or betterments
which significantly extend the life of an asset are capitalized. Expenditures
for maintenance and repair costs are charged to operations as incurred. The cost
of assets retired or otherwise disposed of and the related accumulated
depreciation are eliminated from the accounts in the year of disposal. Gains and
losses resulting from property disposals are included in other income or
expense. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, or lease term, whichever is shorter.
The estimated useful lives of property and equipment are as follows:
<TABLE>
<S> <C>
Buildings under capital leases........................... 10 years
Machinery and equipment.................................. 3-10 years
Rolling stock............................................ 5-10 years
Containers............................................... 5-12 years
</TABLE>
9. Goodwill
Goodwill represents the excess of the purchase price over the fair value of
the tangible net assets of entities previously acquired by the Company and is
amortized on a straight-line basis over the period of expected benefit of 40
years.
10. Revenue Recognition
The Company recognizes revenues as services are provided. Certain customers
are billed in advance and, accordingly, recognition of the related revenues is
deferred until the services are provided.
11. Income Taxes
The Company operates under Subchapter "S" of the Internal Revenue Code for
federal and state income tax reporting purposes. Consequently, all of the income
tax attributes and liabilities of the Company's operations flow through to the
individual shareholders.
12. Significant Customer
The Company has one major customer which represents 16% of total revenues
for the year ended September 30, 1997.
NOTE B -- MARKETABLE EQUITY SECURITIES
At September 30, 1996 and 1997, the aggregate market value of marketable
equity securities exceeded their aggregate cost by $42 and $84, respectively.
Gross unrealized gains totaled $44 and $89 and gross unrealized losses totaled
$2 and $5 at September 30, 1996 and 1997, respectively.
F-83
<PAGE> 165
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.)
NOTE B -- MARKETABLE EQUITY SECURITIES (CONTINUED)
Proceeds from sales of marketable equity securities during the years ended
September 30, 1996 and 1997 were $81 and $215, respectively. Gross gains of $4
and gross losses of $12 were realized on sales during 1996. Gross gains of $37
and gross losses of $14 were realized on sales during 1997.
NOTE C -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------- JUNE 30,
1996 1997 1998
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Buildings under capital leases....................... $ 376 $1,756 $1,756
Machinery and equipment.............................. 440 455 471
Rolling stock........................................ 3,359 3,656 4,009
Containers........................................... 1,781 2,089 2,328
------ ------ ------
5,956 7,956 8,564
Less accumulated depreciation and amortization....... 2,017 2,761 3,452
------ ------ ------
$3,939 $5,195 $5,112
====== ====== ======
</TABLE>
NOTE D -- GOODWILL
Goodwill is comprised of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------- JUNE 30,
1996 1997 1998
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Goodwill............................................. $ 351 $ 351 $ 351
Accumulated amortization............................. 128 137 142
------ ------ ------
$ 223 $ 214 $ 209
====== ====== ======
</TABLE>
NOTE E -- FINANCING ARRANGEMENTS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------- JUNE 30,
1996 1997 1998
------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable to bank bearing interest at rates
ranging from 7.75% to 9.50%, payable in monthly
installments of principal and interest; maturing
through August 2001................................ $2,244 $1,766 $1,467
Note payable to related party, with interest at 9%
per annum payable quarterly until monthly
installments of principal and interest commence on
November 1997. This note matures July 2003 and is
without collateral................................. 195 195 195
------ ------ ------
2,439 1,961 1,662
Less current portion................................. 763 703 703
------ ------ ------
Long-term debt, net of current portion............... $1,676 $1,258 $ 959
====== ====== ======
</TABLE>
F-84
<PAGE> 166
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.)
NOTE E -- FINANCING ARRANGEMENTS (CONTINUED)
On July 1, 1998, the Company entered into an $875 credit facility with a
bank maturing December 2001. The credit facility is a line of credit through
January 1, 1999, whereupon all borrowings under the facility will be refinanced
on a note payable due in monthly installments through December 2001. Borrowings
bear interest at 8.0% per annum. During July 1998, the Company utilized all of
the credit facility for equipment purchases.
The notes payable to bank and the credit facility are collateralized by
substantially all of the Company's assets and the personal guarantees of the
stockholders. The Company is subject to certain restrictive covenants with the
bank, which among other things, require that a specified debt service coverage
ratio be maintained and restrict the payment of dividends solely to amounts
sufficient to meet the tax requirements of the stockholders relative to the
Company's status as a Subchapter "S" Corporation. The Company was in compliance
with or received waivers of the covenant requirements for the year ended
September 30, 1997.
As of September 30, 1997, aggregate contractual future principal payments
by fiscal year are due as follows:
<TABLE>
<S> <C>
1998................................................ $ 703
1999................................................ 546
2000................................................ 355
2001................................................ 284
2002................................................ 39
Thereafter.......................................... 34
------
$1,961
======
</TABLE>
In conjunction with the acquisition of the Company by WCI on July 31, 1998,
all of the outstanding long-term debt of the Company was repaid.
NOTE F -- COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Leases
The Company leases three facilities from a related party under two ten-year
leases expiring in 2005 and 2007. For financial reporting purposes, minimum
lease rentals relating to the facilities have been capitalized. The related
assets and obligations have been recorded using the Company's implicit borrowing
rate at the inception of the leases. The following amounts are included in
property and equipment as buildings under capital leases:
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------- JUNE 30,
1996 1997 1998
---- ------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Buildings....................................... $376 $1,756 $1,756
Less accumulated amortization................... 38 121 253
---- ------ ------
$338 $1,635 $1,503
==== ====== ======
</TABLE>
F-85
<PAGE> 167
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.)
NOTE F -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
The following is a schedule by fiscal years of future minimum lease
payments under capital leases together with the present value of the net minimum
lease payments as of September 30, 1997:
<TABLE>
<S> <C>
1998........................................................ $ 321
1999........................................................ 321
2000........................................................ 321
2001........................................................ 321
2002........................................................ 321
Thereafter.................................................. 1,368
------
Total minimum lease payments................................ 2,973
Less amount representing interest........................... 1,293
------
$1,680
======
Current portion............................................. $ 97
Long-term portion........................................... 1,583
------
$1,680
======
</TABLE>
Prior to entering into the current leases, the Company leased these
facilities on a month-to-month basis from the related party. The Company
recognized rent expense of $171 and $117 in fiscal 1996 and 1997, respectively.
Total rent and minimum lease payments to the related party during fiscal 1996
and 1997 were $249 and $260, respectively.
In conjunction with the acquisition of the Company by WCI on July 31, 1998,
the current leases were terminated, two of the three facilities were acquired
and the remaining facility was leased under a two-year lease with an option to
extend for an additional two years through July 2002.
Noncompete Agreement
The Company has a noncompete agreement with a related party that requires
the Company to pay $4 a month through October 1997 provided the related party
abides by the noncompete agreement. The Company paid the related party $44 in
each of the fiscal years ended September 30, 1996 and 1997.
CONTINGENCIES
Legal Proceedings
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, the Company may
periodically become subject to various judicial and administrative proceedings
involving federal, state or local agencies. In these proceedings, an agency may
seek to impose fines on the Company or to revoke or deny renewal of an operating
permit held by the Company. From time to time the Company may also be subject to
actions brought by citizens' groups or adjacent landowners in connection with
the permitting and licensing of landfills and transfer stations, or alleging
environmental damage or violations of the permits and licenses pursuant to which
the Company operates.
In addition, the Company may become party to various claims and suits
pending for alleged damages to persons and property, alleged violations of
certain laws and alleged liabilities arising out of matters occurring
F-86
<PAGE> 168
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.)
NOTE F -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
during the normal operation of the waste management business. As of September
30, 1997, there is no current proceeding or litigation involving the Company
that the Company believes will have a material adverse impact on the Company's
business, financial condition, results of operations or cash flows.
NOTE G -- PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
Unaudited pro forma information reflects income tax expense as if the
Company had been subject to federal and state income taxes. The pro forma
provisions for income taxes for the years ended September 30, 1996 and 1997 and
the nine month periods ended June 30, 1997 and 1998 differ from the amounts
computed by applying the applicable statutory federal income tax rate (34%) to
income before income taxes due to state income taxes and certain non-deductible
expenses.
The following is a summary of pro forma income taxes for the years ended
September 30, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
--------------
1996 1997
----- -----
<S> <C> <C>
Current:
Federal................................................... $ 47 $ 66
State..................................................... 10 14
Deferred:
Federal................................................... 69 171
State..................................................... 15 39
---- ----
Pro forma income taxes...................................... $141 $290
==== ====
</TABLE>
The Company's pro forma deferred income tax liabilities of approximately
$739 and $949 at September 30, 1996 and 1997, respectively, relate principally
to differences between tax and financial methods of reporting depreciation
expense and the use of the cash method of accounting for income tax purposes
which gives rise to differences between financial statement and tax return
recognition of receivables, prepaid expenses, accounts payable and accrued
liabilities.
NOTE H -- FINANCIAL INSTRUMENTS
The following estimated fair value information pertains to the Company's
financial instruments and does not purport to represent the aggregate net fair
value of the Company.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents: The carrying amount approximates fair value
because of the short maturity of those instruments.
Marketable equity securities: Quoted market prices for the Company's
marketable equity securities are used to estimate fair value.
Long-term debt and capital lease obligations: Current incremental borrowing
rates for similar type borrowings are used to estimate the fair value of the
Company's long-term debt and capital lease obligations.
F-87
<PAGE> 169
SHRADER REFUSE AND RECYCLING SERVICE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SEPTEMBER 30, 1996 AND 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.)
NOTE H -- FINANCIAL INSTRUMENTS (CONTINUED)
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997
--------------------- ---------------------
ESTIMATED ESTIMATED
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and cash equivalents......................... $ 287 $ 287 $ 116 $ 116
Marketable equity securities...................... 246 246 403 403
Financial Liabilities:
Long-term debt.................................... 2,439 2,528 1,961 1,970
Capital lease obligations......................... 356 486 1,680 2,038
</TABLE>
F-88
<PAGE> 170
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Members
Contractor's Waste Removal, L.C.
We have audited the accompanying balance sheet of Contractor's Waste
Removal, L.C. as of December 31, 1997, and the related statements of operations
and change in members' deficit and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Contractor's Waste Removal,
L.C. at December 31, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Sacramento, California
August 26, 1998
F-89
<PAGE> 171
CONTRACTOR'S WASTE REMOVAL, L.C.
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Accounts receivable, net of allowance for doubtful
accounts of $75........................................ $ 256 $ 222
Property and equipment:
Containers................................................ 1,332 1,703
Furniture and fixtures.................................... 104 104
Vehicles.................................................. 454 562
------ ------
1,890 2,369
Less: accumulated depreciation and amortization............. 316 375
------ ------
1,574 1,994
Other assets................................................ 34 14
------ ------
$1,864 $2,230
====== ======
LIABILITIES AND MEMBERS' DEFICIT
Current liabilities:
Overdraft on bank balance................................. $ 35 $ 38
Accounts payable.......................................... 291 135
Accrued liabilities....................................... 121 71
Lines of credit........................................... 392 392
Current portion of long-term debt......................... 510 1,025
Current portion of notes payable to members............... 50 50
Current portion of capital lease obligations.............. 59 59
------ ------
Total current liabilities......................... 1,458 1,770
Long-term debt.............................................. 375 518
Notes payable to members.................................... 95 95
Capital lease obligations................................... 180 178
Commitments and contingencies (Note 6)
Members' deficit............................................ (244) (331)
------ ------
$1,864 $2,230
====== ======
</TABLE>
See accompanying notes.
F-90
<PAGE> 172
CONTRACTOR'S WASTE REMOVAL, L.C.
STATEMENTS OF OPERATIONS AND CHANGE IN MEMBERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------
1997 1997 1998
------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Revenues.................................................... $1,903 $ 377 $ 438
Operating expenses:
Cost of operations........................................ 1,234 262 315
Selling, general and administrative....................... 359 67 97
Depreciation and amortization............................. 202 48 59
------ ----- -----
Income (loss) from operations............................... 108 -- (33)
Interest expense............................................ (178) (40) (54)
------ ----- -----
Net loss.................................................... (70) (40) (87)
Members' withdrawals........................................ (14) -- --
------ ----- -----
Net change in members' deficit.............................. (84) (40) (87)
Members' deficit, beginning of period....................... (160) (160) (244)
------ ----- -----
Members' deficit, end of period............................. $ (244) $(200) $(331)
====== ===== =====
</TABLE>
See accompanying notes.
F-91
<PAGE> 173
CONTRACTOR'S WASTE REMOVAL, L.C.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------
1997 1997 1998
------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (70) $ (40) $ (87)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 202 48 59
Changes in operating assets and liabilities:
Accounts receivable, net............................. (83) (18) 34
Other assets......................................... (27) (1) 20
Accounts payable..................................... 105 (81) (156)
Accrued liabilities.................................. 18 (13) (50)
----- ----- -----
Net cash provided by (used in) operating activities.... 145 (105) (180)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment........... (235) -- --
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt and notes payable to
members................................................ 435 229 208
Principal payments on long-term debt and notes payable to
members................................................ (309) (146) (29)
Principal payments on capital lease obligations........... (45) (12) (2)
Member withdrawals........................................ (14) -- --
----- ----- -----
Net cash provided by financing activities................... 67 71 177
----- ----- -----
Net change in overdraft in bank balances.................... (23) (34) (3)
Overdraft in bank balances at beginning of period........... (12) (12) (35)
----- ----- -----
Overdraft in bank balances at end of period................. $ (35) $ (46) $ (38)
===== ===== =====
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest...................................... $ 151 $ 40 $ 54
===== ===== =====
</TABLE>
See accompanying notes.
F-92
<PAGE> 174
CONTRACTOR'S WASTE REMOVAL, L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
(IN THOUSANDS)
(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
Contractor's Waste Removal, L.C. (the "Company") is a Utah limited
liability company. The Company is a non-hazardous solid waste services company
that provides collection, hauling and disposal of materials primarily for
commercial customers in various counties in the State of Utah.
Upon the sale or liquidation of the Company, the members have verbally
agreed that each member will receive an amount equal to their original
contribution basis in the Company as a first priority distribution after payment
of all debt and other obligations of the Company including any notes payable to
members. Remaining proceeds, if any, will be split between the members based
upon their respective ownership percentages of the Company.
INTERIM FINANCIAL INFORMATION
The unaudited interim 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.
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 does maintain an allowance
for such credit losses. 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.
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>
Containers.............................................. 10-12 years
Furniture and fixtures.................................. 3-5 years
Vehicles................................................ 5 years
</TABLE>
F-93
<PAGE> 175
CONTRACTOR'S WASTE REMOVAL, L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
(INFORMATION RELATING TO MARCH 31, 1998 AND
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
REVENUE RECOGNITION
The Company recognizes revenues as services are provided.
INCOME TAXES
In conformity with the Internal Revenue Code and applicable state and local
tax statutes, taxable income or loss of the Company is required to be reported
in the tax returns of the individual members and, accordingly, no provision has
been made in the accompanying financial statements for any federal, state, or
local income taxes.
2. SHORT-TERM BORROWINGS
The Company maintains four revolving lines of credit (the "Lines") with a
financial institution. Under the Lines, the Company may borrow an amount up to
$410. Borrowings under the Lines bear interest at the financial institution's
prime rate (8.5% at December 31, 1997) plus 3.25%. The Lines are secured by the
Company's accounts receivable and equipment and are personally guaranteed by the
members. The Lines had $392 in the aggregate outstanding at December 31, 1997.
3. LONG-TERM DEBT
Long-term debt as of December 31, 1997 consists of the following:
<TABLE>
<S> <C>
Unsecured notes payable to private individuals bearing
interest at 10%; payable in monthly installments of
interest with the principal amount due at maturity;
maturing on May 31, 1998 and July 3, 2010................. $ 282
Equipment financing notes payable; bearing interest at rates
ranging from 8.9% to 13%; payable in monthly installments
of principal plus interest; maturing June 4, 2000 through
June 1, 2003; secured by property and equipment and
personally guaranteed by the members...................... 584
Other....................................................... 19
------
885
Less: current portion....................................... 510
------
Long-term debt.............................................. $ 375
======
</TABLE>
As of December 31, 1997, aggregate contractual future principal payments by
fiscal year on long-term debt are due as follows:
<TABLE>
<S> <C>
1998........................................................ $ 510
1999........................................................ 101
2000........................................................ 101
2001........................................................ 54
2002........................................................ 14
Thereafter.................................................. 105
------
$ 885
======
</TABLE>
F-94
<PAGE> 176
CONTRACTOR'S WASTE REMOVAL, L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
(INFORMATION RELATING TO MARCH 31, 1998 AND
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
4. NOTES PAYABLE TO MEMBERS
The Company has various notes payable to members which bear interest at
rates ranging from 11% to 13% payable in monthly installments of principal and
interest. The notes mature on January 1, 1998 through July 1, 2005.
As of December 31, 1997, aggregate contractual future principal payments by
fiscal year on notes payable to members are due as follows:
<TABLE>
<S> <C>
1998........................................................ $ 50
1999........................................................ 15
2000........................................................ 13
2001........................................................ 15
2002........................................................ 14
Thereafter.................................................. 38
------
$ 145
======
</TABLE>
5. CAPITAL LEASE OBLIGATION
Property and equipment includes $443 of equipment under capital lease as of
December 31, 1997. Accumulated amortization for such equipment was $47 as of
December 31, 1997.
The future minimum lease payments under the capital lease along with the
present value of the minimum lease payments as of December 31, 1997 are as
follows:
Minimum lease payments
Year ending December 31:
<TABLE>
<S> <C>
1998........................................................ $ 83
1999........................................................ 77
2000........................................................ 77
2001........................................................ 53
----
Total minimum lease payments................................ 290
Less amount representing interest........................... 51
----
Present value of minimum lease payments..................... 239
Current portion............................................. 59
----
Amounts due after one year.................................. $180
====
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Operating Leases
The Company leases its facilities and certain equipment under
non-cancellable operating leases for periods ranging from 1 to 3 years. Rent
expense under operating leases was approximately $31 for the year ended December
31, 1997. The future minimum lease payments under operating leases are $28, $29
and $15 for the years ended December 31, 1998, 1999, and 2000, respectively.
F-95
<PAGE> 177
CONTRACTOR'S WASTE REMOVAL, L.C.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(IN THOUSANDS)
(INFORMATION RELATING TO MARCH 31, 1998 AND
THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
CONTINGENCIES
Legal Proceedings
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, the Company may
periodically become subject to various judicial and administrative proceedings
involving federal, state or local agencies. In these proceedings, an agency may
seek to impose fines on the Company or to revoke or deny renewal of an operating
permit held by the Company.
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, 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 and cash flows.
7. RELATED PARTY TRANSACTIONS
During the year ended December 31, 1997, the Company purchased
approximately $98 of containers from a Company 50% owned by a member.
8. YEAR 2000 (UNAUDITED)
The Company will need to modify or replace portions of its software so that
its computer systems will function properly with respect to dates in the year
2000 ("Year 2000") and thereafter. To date, the Company has not incurred any
costs related to the Year 2000 project. The Company does not believe that its
expenditures relating to the Year 2000 project will be material. However, if the
required Year 2000 modifications and conversions are not made or are not
completed in a timely manner, the Year 2000 issue could materially affect the
Company's operations.
9. SUBSEQUENT EVENTS
ACQUISITION OF UTAH DUMPSTER
The Company entered into an agreement effective January 1, 1998 to purchase
the assets of Utah Dumpster, a non-hazardous solid waste services company, for
total consideration of $600 (consisting primarily of assumed liabilities of Utah
Dumpster). The acquisition will be accounted for as a purchase. No amounts have
been included in the accompanying December 31, 1997 financial statements with
respect to the assets, liabilities, or operations of Utah Dumpster. The
operations of Utah Dumpster have been included in the Company's unaudited
statements of operations for the three months ended March 31, 1998.
SALE OF THE COMPANY
On June 1, 1998, the Company's Members entered into an agreement to sell
all of the Company membership interests to Waste Connections, Inc. ("WCI") for
cash and stock of WCI.
F-96
<PAGE> 178
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Curry Transfer and Recycling, Inc.
We have audited the accompanying consolidated balance sheet of Curry
Transfer and Recycling, Inc. as of December 31, 1997, and the related
consolidated statements of income and retained earnings, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Curry Transfer
and Recycling, Inc. at December 31, 1997, and the consolidated results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Sacramento, California
July 31, 1998
F-97
<PAGE> 179
CURRY TRANSFER AND RECYCLING, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE ACCOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 225 $ 297
Marketable securities..................................... 460 478
Accounts receivable....................................... 388 379
Prepaid expenses and other current assets................. 78 49
------ ------
Total current assets.............................. 1,151 1,203
Property and equipment, net................................. 1,244 1,269
Intangible assets, net...................................... 110 107
Other assets................................................ 185 167
------ ------
$2,690 $2,746
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 122 $ 114
Accrued expenses.......................................... 97 104
Accrued income taxes...................................... 159 172
Deferred revenue.......................................... 205 206
Current portion of long-term debt......................... 213 200
Current portion of capital lease obligations.............. 90 101
------ ------
Total current liabilities......................... 886 897
Long-term debt, net of current portion...................... 222 175
Capital lease obligations, net of current portion........... 141 141
Deferred income taxes....................................... 85 85
Commitments and contingencies (Note 5)
Stockholders' equity:
Common stock; no par value; 2,500 shares authorized,
issued and outstanding................................. 67 67
Retained earnings......................................... 1,604 1,660
Unrealized holding gains on marketable securities......... 39 75
Treasury stock agreement.................................. (354) (354)
------ ------
Total stockholders' equity.................................. 1,356 1,448
------ ------
$2,690 $2,746
====== ======
</TABLE>
See accompanying notes.
F-98
<PAGE> 180
CURRY TRANSFER AND RECYCLING, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------
1997 1997 1998
------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Revenues.................................................... $3,617 $ 800 $ 795
Operating expenses:
Cost of operations........................................ 2,259 548 481
Selling, general and administrative....................... 655 147 159
Depreciation and amortization............................. 260 61 69
------ ------ ------
Income from operations...................................... 443 44 86
Other income (expense):
Interest and dividend income.............................. 25 2 7
Interest expense.......................................... (75) (9) (12)
Gain on sale of assets.................................... 41 -- 9
Other income.............................................. 23 -- --
------ ------ ------
Income before income taxes.................................. 457 37 90
Income tax provision........................................ 183 15 34
------ ------ ------
Net income.................................................. 274 22 56
Retained earnings, beginning of period...................... 1,330 1,330 1,604
------ ------ ------
Retained earnings, end of period............................ $1,604 $1,352 $1,660
====== ====== ======
</TABLE>
See accompanying notes.
F-99
<PAGE> 181
CURRY TRANSFER AND RECYCLING, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------
1997 1997 1998
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 274 $ 22 $ 56
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 260 61 69
Deferred income taxes..................................... 9 -- --
Gain on sale of assets.................................... (41) -- (9)
Changes in operating assets and liabilities:
Accounts receivable.................................... (26) (22) 9
Prepaid expenses and other assets...................... (16) (29) 29
Accounts payable....................................... (3) (21) (8)
Accrued expenses....................................... 16 44 7
Accrued income taxes................................... 88 15 13
Deferred revenue....................................... 17 5 1
----- ---- ----
Net cash provided by operating activities................... 578 75 167
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (218) (9) (19)
Proceeds from sale of property and equipment.............. 89 -- 22
Purchases of marketable securities........................ (125) (52) (18)
Proceeds from sale of marketable securities............... 72 -- --
----- ---- ----
Net cash used in investing activities....................... (182) (61) (15)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt................................ $(156) $(14) $(51)
Proceeds from long-term debt.............................. -- --
Payments of revolving line of credit...................... (32) (23) --
Payments for acquisition of treasury stock................ (30) (8)
Payments on capital lease obligations..................... (71) (6) (29)
----- ---- ----
Net cash used in financing activities....................... (289) (51) (80)
----- ---- ----
Net increase (decrease) in cash and cash equivalents........ 107 (37) 72
Cash and cash equivalents, beginning of period.............. 118 118 225
----- ---- ----
Cash and cash equivalents, end of period.................... $ 225 $ 81 $297
===== ==== ====
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND
NON-CASH TRANSACTIONS:
Cash paid for interest.................................... $ 49
=====
Cash paid for income taxes................................ $ 131
=====
Purchase of equipment with capital lease obligations...... $ 182
=====
Sale of land for note receivable............................ $ 27
=====
</TABLE>
See accompanying notes.
F-100
<PAGE> 182
CURRY TRANSFER AND RECYCLING, INC.
NOTES TO CONSOLIDATED 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
Curry Transfer and Recycling, Inc. ("CTR") provides full service waste
disposal to residential and commercial customers in the Curry County, Oregon
area including the cities of Brookings, Gold Beach, and Port Orford and the
unincorporated areas of Curry County under exclusive franchise agreements that
expire from 2009 to 2011.
Oregon Waste Technology, Inc. ("OWT"), a wholly-owned subsidiary of CTR,
provides sani-can rentals, septic tank pumping, and drain maintenance to the
general public in the Curry County area including the cities of Brookings, Gold
Beach, and Port Orford and the unincorporated areas of Curry County.
SALE OF THE COMPANY
On June 25, 1998, the Company's stockholders entered into an agreement to
sell all capital stock in the Company to Waste Connections, Inc. ("WCI") for
cash.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements includes the accounts of CTR and OWT
(collectively, "the Company"). All significant intercompany transactions and
balances have been eliminated in consolidation.
INTERIM FINANCIAL INFORMATION
The unaudited interim 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 consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance,
repairs, and minor renewals are charged to operations as incurred. Improvements
and betterments that significantly extend the life of an asset are capitalized.
F-101
<PAGE> 183
CURRY TRANSFER AND RECYCLING, INC.
NOTES TO CONSOLIDATED 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)
Depreciation is calculated using the straight-line method over the
estimated useful life of the asset. Machinery and equipment have lives between 5
and 10 years. Buildings and improvements have lives between 15 and 30 years.
Assets purchased under capital leases are depreciated using the straight-line
method over the estimated useful life of the asset or the lease term, whichever
is shorter.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable. The
Company grants credit to qualified local customers and generally does not
require collateral. Credit risk on accounts receivable is minimized as a result
of the large and diverse nature of the Company's customer base. Credit losses
have been within management's expectations.
INTANGIBLE ASSETS
Intangible assets are comprised of the following at December 31, 1997:
<TABLE>
<S> <C>
Goodwill.................................................... $ 137
Franchise agreements........................................ 235
Covenants not to compete.................................... 27
Other....................................................... 1
-----
400
Accumulated amortization.................................... (290)
-----
$ 110
=====
</TABLE>
Goodwill represents the excess of the purchase price over the fair value of
the net assets of entities previously acquired by the Company and is amortized
on a straight-line basis over the period of expected benefit of 40 years.
Franchise agreements are amortized on a straight-line basis over the period of
expected benefits of 9 to 10 years. The covenants not to compete are amortized
on a straight-line basis over the period of expected benefit.
REVENUE RECOGNITION
The Company recognizes revenues as services are provided. Certain customers
are billed in advance and, accordingly, recognition of the related revenues is
deferred until the services are provided.
INCOME TAXES
The Company uses the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
F-102
<PAGE> 184
CURRY TRANSFER AND RECYCLING, INC.
NOTES TO CONSOLIDATED 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. MARKETABLE SECURITIES
Marketable securities consist of the following at December 31, 1997:
<TABLE>
<CAPTION>
APPROXIMATE
ORIGINAL FAIR MARKET
NUMBER OF SHARES COST VALUE
---------------- -------- -----------
<S> <C> <C> <C>
Nuveen Municipal Bond Fund................. 30,640 $298 $340
====== ==== ====
Putnam Investments Mutual funds............ 4,351 $ 96 $ 96
====== ==== ====
Nuveen Growth and Income Fund.............. 835 $ 21 $ 19
====== ==== ====
Certificate of deposit..................... N/A $ 5 $ 5
====== ==== ====
</TABLE>
For the year ended December 31, 1997, a gain of $3 was realized using the
average cost of shares sold.
The Nuveen Municipal Bond Fund shares are classified as available for sale
marketable debt securities.
Total approximate fair market values of marketable securities at December
31, 1997 were $460, and were determined using quoted market prices. The net
unrealized holding gains on available for sale securities have been included as
a separate component of stockholders' equity and increased $9 during 1997.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Land................................................ $ 112 $ 112
Buildings........................................... 340 340
Machinery and equipment............................. 2,080 2,170
Leased machinery and equipment...................... 423 424
------- -------
2,955 3,046
Less: accumulated depreciation...................... (1,711) (1,777)
------- -------
Total fixed assets, net................... $ 1,244 $ 1,269
======= =======
</TABLE>
F-103
<PAGE> 185
CURRY TRANSFER AND RECYCLING, INC.
NOTES TO CONSOLIDATED 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)
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Mortgage payable to an individual; bearing interest at
10.25%; payable in monthly installments of $1 through June
26, 2001; secured by land with a net book value of $12 at
December 31, 1997......................................... $ 32
Notes payable to lending institutions; bearing interest
ranging from 8.75 to 11%; payable in monthly installments
ranging from $1 to $2 through December 18, 1999; secured
by various equipment and vehicles with a net book value of
$104 at December 31, 1997................................. 54
Note payable to banks; bearing interest ranging from 1.75%
over prime to 14%; payable in one payment of $112 on
September 18, 1998 and monthly installments ranging from
$1 to $2 through February 10, 1999; secured by equipment
and various vehicles with a net book value of $18 at
December 31, 1997, and 30,424 shares of marketable
securities (Note 2)....................................... 135
Note payable to an individual interest imputed at 8%,
payable in monthly installments of $2,500 through December
15, 2007 under a stock purchase agreement secured by
treasury stock............................................ 214
-----
Total long-term debt.............................. 435
Less: current portion....................................... (213)
-----
$ 222
=====
</TABLE>
As of December 31, 1997, the Company has the ability to borrow an
additional $65 on one of its notes payable to a bank.
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........................................................ $213
1999........................................................ 60
2000........................................................ 37
2001........................................................ 30
2002........................................................ 30
Thereafter.................................................. 65
----
$435
====
</TABLE>
CAPITAL LEASE OBLIGATIONS
Capital lease obligations consist of the following at December 31, 1997:
<TABLE>
<S> <C>
Capital lease obligations payable to banks at an imputed
interest rate ranging from 9.75% to 13% payable in monthly
installments ranging from $0.5 to $2 through June 14,
2002; secured by various equipment. vehicles and buildings
with a net book value of $365 at December 31, 1997........ $231
----
Total present value of capital lease obligations............ 231
Less: current portion....................................... (90)
----
$141
====
</TABLE>
F-104
<PAGE> 186
CURRY TRANSFER AND RECYCLING, INC.
NOTES TO CONSOLIDATED 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 lease payments on
capital lease obligations by calendar year are due as follows:
<TABLE>
<S> <C>
1998........................................................ $107
1999........................................................ 75
2000........................................................ 60
2001........................................................ 13
2002........................................................ 7
----
Total payments on capital lease obligations................. 262
Less: amount representing interest.......................... (31)
----
Present value of capital lease obligations.................. $231
====
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company leases certain office equipment. Office equipment and property
is rented under cancellable, month-to-month leases.
The Company currently leases land, under a month-to-month operating lease,
from a stockholder. The monthly rent expense is $3.
The Company leases two garbage trucks under a month-to-month operating
lease from an affiliated company. The monthly rent expense is $5.
The Company leases a transfer station, under an operating lease which
terminates in December 1998. Future minimum rental payments required under the
transfer station lease are $7 in 1998.
Rent expense for the year ended December 31, 1997 was $133.
ENVIRONMENTAL RISKS
The Company is subject to liability for environmental damage that the solid
waste facilities it operates 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 use 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.
LEGAL PROCEEDINGS
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, the Company may
periodically become subject to various judicial and administrative proceedings
involving federal, state or local agencies. In these proceedings, an agency may
seek to impose fines on the Company or to revoke or deny renewal of an operating
permit held by the Company. From time to time the Company may also be subject to
actions brought by citizens' groups or adjacent landowners in connection
F-105
<PAGE> 187
CURRY TRANSFER AND RECYCLING, INC.
NOTES TO CONSOLIDATED 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)
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, 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.
6. TREASURY STOCK AGREEMENT
In November 1993, CTR entered into an agreement to purchase 1,225 shares of
common stock held by one of its stockholders at $368 per share. At December 31,
1997, CTR had paid $139 for 378 shares of stock. The agreement allows for
adjustments to the price per share based on certain future events and requires
the shares to be held in an escrow account pending the Company's payments on a
note payable issued to the former shareholder in connection with the agreement.
As of December 31, 1997, 928 shares were held in escrow.
At December 31, 1997, $354 has been recorded as a contra-equity account,
which reflects $139 of payments made to the former stockholder through December
31, 1997 and a $215 note payable due to the former stockholder (discounted to
its net present value assuming 8% imputed interest).
Subsequent to December 31, 1997, CTR made five payments totaling $13 under
the terms of this agreement, and the entire balance was paid in connection with
the sale of the Company on June 25, 1998.
7. INCOME TAXES
The provision for income taxes for the year ended December 31, 1997
consists of the following:
<TABLE>
<S> <C>
Current:
Federal................................................... $140
State..................................................... 34
Deferred:
Federal................................................... 8
State..................................................... 1
----
$183
====
</TABLE>
Deferred taxes result from temporary differences in the recognition of
certain revenue and expense items for income tax and financial reporting
purposes. The Company's deferred taxes as of December 31, 1997 are substantially
comprised of depreciation deducted for tax purposes that will be recorded in
future periods for financial reporting purposes.
F-106
<PAGE> 188
CURRY TRANSFER AND RECYCLING, INC.
NOTES TO CONSOLIDATED 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 principal reasons for the difference between the effective income tax
rate and the federal statutory income tax rate are as follows:
<TABLE>
<S> <C>
Federal expense expected at statutory rates................. $155
State and local income taxes, net of Federal benefit........ 23
Other....................................................... 5
----
$183
====
</TABLE>
8. 401(k) PLAN
The Company has a voluntary savings and investment plan (the "Plan"). The
Plan is available to all eligible employees of the Company. Eligible employees
are those which have been employed with the Company for a year or more. The
employees are not required to contribute to the Plan. During the year ended
December 31, 1997, twelve of the nineteen eligible employees participated in the
Plan and the Company's expense was $11.
9. TRUST AGREEMENTS
During 1997, the Company acted as an agent for Curry County, Oregon,
pursuant to two trust agreements by and between the Company, various local
governmental agencies, and a national bank (the "Agreements"). The Agreements
require the Company to collect rates established by Curry County from customers
and remit such funds to the trusts established to provide closure/post closure
funding for two landfills located in or around Curry County, Oregon. No trust
assets or liabilities have been recorded in the Company's financial statements
as of December 31, 1997.
10. YEAR 2000 (UNAUDITED)
The Company will need to modify or replace portions of its software so that
its computer systems will function properly with respect to dates in the year
2000 ("Year 2000") and thereafter. To date, the company has not incurred any
costs related to the Year 2000 project. The Company does not believe that its
expenditures relating to the Year 2000 project will be material. However, if the
required Year 2000 modifications and conversions are not made or are not
completed in a timely manner, the Year 2000 issue could materially affect the
Company's operations.
F-107
<PAGE> 189
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
B&B Sanitation
We have audited the accompanying combined balance sheet of B&B Sanitation
(See Note A1) as of December 31, 1997, and the related combined statements of
earnings, stockholders' deficit, and cash flows for the year then ended. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of B&B
Sanitation as of December 31, 1997, and the combined results of their operations
and their combined cash flows for the year then ended in conformity with
generally accepted accounting principles.
GRANT THORNTON LLP
Oklahoma City, Oklahoma
October 1, 1998
F-108
<PAGE> 190
B&B SANITATION
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash...................................................... $ 28 $ 2
Accounts receivable....................................... 200 194
------ ------
Total current assets.............................. 228 196
PROPERTY AND EQUIPMENT -- AT COST, net...................... 925 975
RESTRICTED INVESTMENTS...................................... 41 41
OTHER ASSETS................................................ 32 26
------ ------
$1,226 $1,238
====== ======
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable.......................................... $ 26 $ 75
Current portion of long-term debt......................... 364 371
Accrued liabilities....................................... 33 26
------ ------
Total current liabilities......................... 423 472
LONG-TERM DEBT, less current maturities..................... 798 774
LANDFILL CLOSURE LIABILITY.................................. 458 477
COMMITMENTS AND CONTINGENCIES (note F)...................... -- --
STOCKHOLDERS' DEFICIT
Common stock.............................................. $ 3 $ 3
Accumulated deficit....................................... (456) (488)
------ ------
(453) (485)
------ ------
$1,226 $1,238
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-109
<PAGE> 191
B&B SANITATION
COMBINED STATEMENTS OF EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------
1997 1997 1998
------------ ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Revenues.................................................... $1,965 $439 $497
Operating expenses
Cost of operations........................................ 1,074 262 275
Selling, general, and administrative expenses............. 320 75 91
Depreciation.............................................. 259 58 63
------ ---- ----
Total Operating Expenses.......................... 1,653 395 429
------ ---- ----
Operating income.................................. 312 44 68
Other income (expense)
Interest.................................................. (108) (25) (27)
Other..................................................... 1 -- --
------ ---- ----
Total other income (expense)...................... (107) (25) (27)
------ ---- ----
NET EARNINGS...................................... $ 205 $ 19 $ 41
------ ---- ----
Pro forma income tax expense (unaudited) (Note I)........... $ 78 $ 7 $ 16
------ ---- ----
Pro forma net earnings (unaudited) (Note I)................. $ 127 $ 12 $ 25
====== ==== ====
</TABLE>
The accompanying notes are an integral part of these statements.
F-110
<PAGE> 192
B&B SANITATION
COMBINED STATEMENT OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON ACCUMULATED
STOCK DEFICIT TOTAL
------ ----------- -----
<S> <C> <C> <C>
Balance at January 1, 1997.................................. $3 $(532) $(529)
Distributions............................................... -- (139) (139)
Contributions............................................... -- 10 10
Net earnings................................................ -- 205 205
-- ----- -----
Balance at December 31, 1997................................ 3 (456) (453)
Distributions, net (unaudited).............................. -- (73) (73)
Net earnings (unaudited).................................... -- 41 41
-- ----- -----
Balance at March 31, 1998 (unaudited)....................... $3 $(488) $(485)
== ===== =====
</TABLE>
The accompanying notes are an integral part of this statement.
F-111
<PAGE> 193
B&B SANITATION
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------
1997 1997 1998
------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Increase (Decrease) in Cash
Cash flows from operating activities
Net earnings.............................................. $ 205 $ 19 $ 41
Adjustments to reconcile net earnings to net cash provided
by operations
Depreciation........................................... 259 57 63
Change in assets and liabilities
Accounts receivable.................................. (45) (18) 6
Other assets......................................... (19) (20) 6
Accounts payable..................................... 10 61 49
Accrued liabilities.................................. 16 2 (7)
Landfill closure liability........................... 56 11 19
----- ----- -----
Net cash provided by operations................... 482 112 177
Cash flows from investing activities
Purchase of property and equipment........................ (383) (120) (113)
Purchase of investments................................... (41) -- --
----- ----- -----
Net cash used in investing activities............. (424) (120) (113)
Cash flows from financing activities
Proceeds from long-term debt.............................. 329 39 --
Payments on long-term debt................................ (253) -- (17)
Distributions to stockholders............................. (139) (24) (73)
Contributions by stockholders............................. 10 -- --
----- ----- -----
Net cash provided by (used in) financing
activities...................................... (53) 15 (90)
----- ----- -----
NET INCREASE (DECREASE) IN CASH................... 5 7 (26)
Cash at beginning of period................................. 23 23 28
----- ----- -----
Cash at end of period....................................... $ 28 $ 30 $ 2
----- ----- -----
Cash paid during the period for interest.................... $ 109 $ 25 $ 27
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
F-112
<PAGE> 194
B&B SANITATION
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
NOTE A -- BASIS OF PRESENTATION AND NATURE OF OPERATIONS
The accompanying combined financial statements include the accounts of B&B
Sanitation, Inc. ("B&B"), Red Carpet Landfill, Inc. ("Red Carpet"), and Darlin
Equipment, Inc. ("Darlin"), collectively referred to as "B&B Sanitation" or the
"Company" which are all owned by the same two shareholders. All significant
intercompany balances and transactions have been eliminated.
B&B's principal operations consist of collection, transfer, and disposal of
nonhazardous solid waste for commercial and residential customers. Red Carpet's
principal operations consist of the operation of the landfill in which B&B
disposes of waste. Darlin's principal operations consist of leasing heavy
equipment to Red Carpet.
NOTE B -- SUMMARY OF ACCOUNTING POLICIES
The summary of the significant accounting policies applied in the
preparation of the accompanying combined financial statements follows.
1. Property and Equipment
Depreciation is provided principally on accelerated methods over estimated
useful lives ranging from three to ten years.
2. Income Taxes
In accordance with B&B's, Red Carpet's, and Darlin's elections under
Subchapter S of the Internal Revenue Code, corporate taxable income is generally
treated as passing directly through to the owners and is not subject to income
tax at the corporate level. Accordingly, no provision has been made for income
taxes.
3. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures; accordingly,
actual results could differ from those estimates.
4. Revenue Recognition
Revenues are recognized as services are provided.
5. Closure and Post-Closure Costs
The Companies have a financial obligation relating to closure and
post-closure costs of its disposal facilities. The Companies have accrued for
these future obligations relating to closure and post-closure costs of its
landfill (generally for a term of thirty years after final closure of the
landfill), based on engineering estimates of current costs of remediation and
consumption of permitted landfill airspace and the remaining useful airspace
volume on the landfill.
6. Restricted Investments
The Companies have placed certain monies to be used only for landfill
closure and post-closure liabilities in a trust account for the benefit of the
State of Oklahoma. The Companies' securities held as restricted investments are
classified as trading and are recorded at fair value on the balance sheet with
the change in fair value for the period included in earnings. The securities
have a fair value of $40 at December 31, 1997 with gross unrealized gains of $0
and gross unrealized losses of $1.
F-113
<PAGE> 195
B&B SANITATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
NOTE B -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
7. Accounts Receivable
The Companies consider accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
8. Interim Financial Information
The unaudited interim 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 ending December 31,
1998.
NOTE C -- PROPERTY AND EQUIPMENT
At December 31, 1997, property and equipment consisted of the following:
<TABLE>
<S> <C>
Equipment................................................... $2,140
Landfill.................................................... 83
Modular buildings........................................... 14
------
2,237
Less accumulated depreciation............................. 1,385
------
852
Land........................................................ 73
------
$ 925
======
</TABLE>
NOTE D -- LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Note payable to bank; payable in monthly installments of
$29, including interest at prime plus 1% (9.5% at December
31, 1997) through May 2001; collateralized by equipment,
accounts receivable, land, and stock of the Companies....... $ 983
Line of credit with bank, monthly interest payments at 9.5%
with principal due May 1998; collateralized by trucks and
equipment................................................... 80
Note payable to individual; payable in monthly installments
of principal and interest at 10.06% through June 2006;
uncollateralized............................................ 34
Note payable to individual; payable in monthly installments
of principal and interest at 8% through March 2001;
uncollateralized............................................ 30
Note payable to individual; payable in monthly installments
of principal and interest at 9% through July 2002;
uncollateralized............................................ 22
Note payable to finance company, payable in monthly
installments of principal and interest at 4.8% through May
2000; collateralized by vehicle............................. 13
----------
1,162
Less current maturities................................... 364
----------
$ 798
==========
</TABLE>
F-114
<PAGE> 196
B&B SANITATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
NOTE D -- LONG-TERM DEBT (CONTINUED)
Aggregate annual maturities of long-term debt for years ending December 31
are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 364
1999........................................................ 312
2000........................................................ 338
2001........................................................ 113
2002........................................................ 6
2003 and thereafter......................................... 29
------
$1,162
======
</TABLE>
The note payable to bank contains certain covenants, the most significant
of which are restrictions on personal draws and salaries of the owners and
maintaining no less than a 125% debt service coverage ratio, as defined.
NOTE E -- COMMON STOCK
The following is a description of the common stock for the Companies:
<TABLE>
<S> <C>
B&B $1 par value; authorized, 50,000 shares; issued and
outstanding, 500 shares
Red Carpet $1 par value; authorized, 1,000 shares; issued and
outstanding, 1,000 shares
Darlin $1 par value; authorized, 1,000 shares, issued and
outstanding, 1,000 shares
</TABLE>
NOTE F -- COMMITMENTS AND CONTINGENCIES
The Companies are 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. The Companies may also be subject to
liability for any off-site environmental contamination caused by pollutants or
hazardous substances whose transportation, treatment, or disposal was performed
by the Companies. Any substantial liability for environmental damage incurred by
the Companies could have a material adverse effect on their financial condition,
results of operations, or cash flows. As of December 31, 1997, the Companies are
not aware of any such environmental liabilities.
The Companies have four operating lease agreements under which the
Companies lease heavy trucks over periods ranging from 48 to 60 months. These
agreements provide for monthly lease payments over the term of the leases and
options to purchase the trucks for fair value at the end of the lease term.
Lease expense was approximately $97 for the year ended December 31, 1997. The
future minimum annual rental commitments on operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
-----------------------
<S> <C>
1998............................................... $ 91
1999............................................... 76
2000............................................... 46
2001............................................... 4
----
$217
====
</TABLE>
F-115
<PAGE> 197
B&B SANITATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS)
NOTE G -- EMPLOYEE BENEFIT PLAN
The Companies have a defined contribution 401(k) savings and retirement
plan in effect for all qualifying employees. General and administrative expense
includes $18 for the year ended December 31, 1997 for this plan. The Companies
match employee contributions at rates determined by management.
NOTE H -- SUBSEQUENT EVENT
On June 5, 1998, the Companies were acquired by Waste Connections, Inc. for
approximately $4,600, including liabilities of the Companies of approximately
$1,400 which were paid off at closing.
NOTE I -- PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
Unaudited pro forma information reflects income tax expense as if the
Companies had been subject to federal and state income taxes on a combined
basis. The pro forma provisions for income taxes for the year ended December 31,
1997 and the three month period ended March 31, 1997 and 1998 differ from the
amounts computed by applying the applicable statutory federal income tax rate
(34%) to income before income taxes primarily due to state income taxes.
The following is a summary of pro forma income taxes for the year ended
December 31, 1997:
<TABLE>
<S> <C>
Current:
Federal................................................... $ 85
State..................................................... 5
Deferred:
Federal................................................... (11)
State..................................................... (1)
----
Pro forma income taxes...................................... $ 78
====
</TABLE>
The Companies' pro forma deferred income tax assets of approximately $268
at December 31, 1997 relate principally to the use of the cash method of
accounting for income tax purposes and certain landfill closure liabilities not
recognized for tax purposes.
F-116
<PAGE> 198
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
J & J Sanitation
We have audited the accompanying combined balance sheet of J & J Sanitation (See
Note A 1.) as of December 31, 1997, and the related combined statements of
operations, stockholders' and partners' deficit, and cash flows for the year
then ended. These financial statements are the responsibility of J & J
Sanitation's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of J & J Sanitation at
December 31, 1997, and the combined results of their operations and their
combined cash flows for the year then ended in conformity with generally
accepted accounting principles.
GRANT THORNTON LLP
Lincoln, Nebraska
October 7, 1998
F-117
<PAGE> 199
J & J SANITATION
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 28 $ 48
Accounts receivable, less allowance for doubtful accounts
of $14 at December 31, 1997............................ 184 220
Prepaid expenses.......................................... 9 14
------ ------
Total current assets.............................. 221 282
Property and equipment, net................................. 1,120 1,054
------ ------
$1,341 $1,336
====== ======
LIABILITIES AND STOCKHOLDERS' AND PARTNERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 96 $ 154
Deferred revenue.......................................... 28 14
Accrued liabilities....................................... 53 54
Note payable.............................................. -- 9
Current portion of long-term debt......................... 67 60
Current portion of capital lease obligations.............. 129 112
------ ------
Total current liabilities......................... 373 403
Long-term debt, net of current portion...................... 616 647
Capital lease obligations, net of current portion........... 372 323
Commitments and contingencies (Note D)
Stockholders' and partners' deficit:
J & J Sanitation Inc. -- common stock: $10 par value;
1,000 shares authorized, issued and outstanding........ 10 10
Big Red Roll Off Inc. -- common stock: $10 par value;
1,000 shares authorized, issued and outstanding........ 10 10
Paid in capital........................................... 77 77
Accumulated deficit....................................... (40) (62)
Partners' deficit -- J & J Sanitation of South Dakota..... (77) (72)
------ ------
Total stockholders' and partners' deficit......... (20) (37)
------ ------
$1,341 $1,336
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-118
<PAGE> 200
J & J SANITATION
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ---------------
1997 1997 1998
------------ ------ ------
(UNAUDITED)
<S> <C> <C> <C>
Revenues.................................................... $2,346 $1,162 $1,210
Operating expenses:
Cost of operations........................................ 1,789 884 854
Selling, general and administrative....................... 319 135 213
Depreciation and amortization............................. 197 101 107
------ ------ ------
2,305 1,120 1,174
------ ------ ------
Income from operations................................. 41 42 36
Interest expense............................................ 108 55 53
------ ------ ------
Loss before income taxes............................... (67) (13) (17)
Income tax benefit.......................................... -- -- --
------ ------ ------
NET LOSS............................................... $ (67) $ (13) $ (17)
====== ====== ======
Pro forma income tax benefit (unaudited) (Note E)........... $ -- $ -- $ --
====== ====== ======
Pro forma net loss (unaudited) (Note E)..................... $ (67) $ (13) $ (17)
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-119
<PAGE> 201
J & J SANITATION
COMBINED STATEMENT OF STOCKHOLDERS' AND PARTNERS' EQUITY
YEAR ENDED DECEMBER 31, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1998
(INFORMATION RELATED TO THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
TOTAL
J & J BIG RED STOCKHOLDERS'
SANITATION, INC. ROLL OFF INC. AND
COMMON STOCK COMMON STOCK PARTNERS' PARTNERS'
----------------- --------------- PAID-IN ACCUMULATED EQUITY EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT) (DEFICIT)
------- ------- ------ ------ ------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997..... -- $-- -- $-- $-- $ -- $ 11 $ 11
Issuance of common stock....... -- -- 1,000 10 15 -- -- 25
Exchange of partners' equity
for common stock............. 1,000 10 -- -- 46 -- (56) --
Net loss....................... -- -- -- -- -- (40) (27) (67)
Partners' drawings............. -- -- -- -- -- -- (5) (5)
Contributions from
stockholders................. -- -- -- -- 16 -- -- 16
----- --- ----- --- --- ---- ---- ----
Balance at December 31, 1997... 1,000 10 1,000 10 77 (40) (77) (20)
Net income (loss).............. -- -- -- -- -- (22) 5 (17)
----- --- ----- --- --- ---- ---- ----
Balance at June 30, 1998....... 1,000 $10 1,000 $10 $77 $(62) $(72) $(37)
===== === ===== === === ==== ==== ====
</TABLE>
The accompanying notes are an integral part of this statement.
F-120
<PAGE> 202
J & J SANITATION
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------
1997 1997 1998
------------ ----- ----
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (67) $ (13) $(17)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 197 101 107
Changes in operating assets and liabilities:
Accounts receivable, net............................... (6) (17) (36)
Prepaid expenses....................................... (3) (10) (5)
Accounts payable....................................... 16 85 58
Deferred revenue....................................... 4 (12) (14)
Accrued liabilities.................................... 15 2 1
----- ----- ----
Net cash provided by operating activities......... 156 136 94
----- ----- ----
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment........... (138) (4) (53)
----- ----- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt and notes payable............ 635 -- 76
Principal payments on long-term debt and capital lease
obligations............................................ (694) (142) (97)
Issuance of common stock.................................. 25 25 --
Contributions from stockholders........................... 16 -- --
Partners' drawings........................................ (5) -- --
----- ----- ----
Net cash used in financing activities............. (23) (117) (21)
----- ----- ----
Net change in cash and cash equivalents..................... (5) 15 20
Cash and cash equivalents:
Beginning of period....................................... 33 33 28
----- ----- ----
End of period............................................. $ 28 $ 48 $ 48
===== ===== ====
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND
NON-CASH TRANSACTIONS:
Cash paid for interest.................................... $ 108 $ 55 $ 53
Capital lease obligations incurred for the purchase of
property and equipment................................. 88 88 --
Partners' equity exchanged for J & J Sanitation Inc.
common stock........................................... 56 56 --
</TABLE>
The accompanying notes are an integral part of these statements.
F-121
<PAGE> 203
J & J SANITATION
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE A -- ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Basis of Presentation and Organization and Business
The combined financial statements include the accounts of J & J Sanitation
Inc., Big Red Roll Off Inc. and J & J Sanitation of South Dakota (a
partnership), collectively referred to as "J & J Sanitation". These entities are
under common control. All material intercompany accounts and transactions have
been eliminated.
J & J Sanitation is a non-hazardous solid waste services company that
provides collection, hauling, disposal and recycling services to residential and
commercial customers in various counties of Nebraska and South Dakota.
J & J Sanitation derives a portion of its revenue from exclusive municipal
contracts, of which a significant number will be subject to competitive bidding
at some time in the future. J & J Sanitation intends to bid on additional
municipal contracts as a means of adding customers. There can be no assurance
that J & J Sanitation will be the successful bidder to obtain or retain
contracts that come up for competitive bidding.
2. Sale of J & J Sanitation
On July 31, 1998, all capital stock and partnership net assets of J & J
Sanitation were sold to Waste Connections, Inc. ("WCI") for cash and common
stock of WCI.
3. Interim Financial Information
The unaudited interim financial statements as of June 30, 1998 and for the
six months ended June 30, 1997 and 1998 have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the six months ended June 30, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998.
4. Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
5. Cash Equivalents
J & J Sanitation considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
6. Concentrations of Credit Risk
Financial instruments that potentially subject J & J Sanitation to
concentrations of credit risk consist primarily of accounts receivable. Credit
risk on accounts receivable is minimized as a result of the large and diverse
nature of J & J Sanitation's customer base. Credit losses have been within
management's expectations.
F-122
<PAGE> 204
J & J SANITATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE A -- ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
7. Property and Equipment
Property and equipment are stated at cost. Improvements or betterments
which significantly extend the life of an asset are capitalized. Expenditures
for maintenance and repair costs are charged to operations as incurred. The cost
of assets retired or otherwise disposed of and the related accumulated
depreciation are eliminated from the accounts in the year of disposal. Gains and
losses resulting from property disposals are included in other income or
expense. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, or lease term, whichever is shorter.
The estimated useful lives of property and equipment are as follows:
<TABLE>
<S> <C>
Machinery and equipment................................. 3 - 10 years
Rolling stock........................................... 5 - 10 years
Containers.............................................. 5 - 12 years
</TABLE>
8. Revenue Recognition
J & J Sanitation 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.
9. Income Taxes
Big Red Roll Off Inc. uses the liability method to account for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between the financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
J & J Sanitation Inc. operates under Subchapter "S" of the Internal Revenue
Code and J & J Sanitation of South Dakota operates as a partnership for federal
and state income tax reporting purposes. Consequently, all of the income tax
attributes and liabilities from the operations of J & J Sanitation Inc. and
J & J Sanitation of South Dakota flow through to the individual shareholders or
partners.
10. Fair Value of Financial Instruments
The carrying values of the long-term debt (Note C) and capital lease
obligations (Note D) approximate their fair values as of December 31, 1997 based
on current incremental borrowing rates for similar types of borrowing
arrangements.
11. Significant Customer
The Company has one major customer which represents 11% of total revenues
for the year ended December 31, 1997.
F-123
<PAGE> 205
J & J SANITATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE B -- PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Rolling stock....................................... $1,107 $1,074
Containers.......................................... 287 287
Other............................................... 161 214
------ ------
1,555 1,575
Less accumulated depreciation and amortization...... 435 521
------ ------
$1,120 $1,054
====== ======
</TABLE>
NOTE C -- FINANCING ARRANGEMENTS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Notes payable to banks bearing interest at fixed and
variable rates ranging from 7.9% to 10% at
December 31, 1997, payable in monthly installments
of principal and interest; maturing through
January 2008...................................... $683 $707
Less current portion................................ 67 60
---- ----
Long-term debt, net of current portion.............. $616 $647
==== ====
</TABLE>
At the end of 1997, J & J Sanitation entered into a new credit arrangement
with a bank which included a $60 line of credit maturing December 31, 1998 and a
term note for $625 maturing January 2008. Borrowings bear interest at a variable
rate based on the bank's index rate less 1.75% to 1.80%. The initial rates of
the line of credit and term note were 10% and 9.95%, respectively. The term note
was used for refinancing certain notes payable to banks, equipment purchases and
general operating purposes. At December 31, 1997, no amounts were outstanding on
the line of credit.
The notes payable to banks and the line of credit are collateralized by
substantially all of J & J Sanitation's assets. J & J Sanitation is subject to
certain restrictive covenants with its primary lender, which among other things,
limit the incurring of additional indebtedness without the lender's written
approval.
Subsequent to December 31, 1997, aggregate contractual future principal
payments by year are $67 in 1998, $63 in 1999, $49 in 2000, $54 in 2001, $57 in
2002 and $393 thereafter.
In conjunction with the acquisition of J & J Sanitation by WCI on July 31,
1998, all of the outstanding long-term debt of J & J Sanitation was repaid.
NOTE D -- COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Leases
J & J Sanitation leases certain rolling stock under long-term leases
expiring through 2002 which have been capitalized. The related assets and
obligations have been recorded using J & J Sanitation's implicit
F-124
<PAGE> 206
J & J SANITATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE D -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
borrowing rate at the inception of the leases. At the expirations of such
leases, J & J Sanitation has the option to purchase the rolling stock at an
agreed-upon residual value.
The following amounts are included in property and equipment as rolling
stock under capital leases:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Rolling stock....................................... $690 $657
Less accumulated amortization....................... 200 236
---- ----
$490 $421
==== ====
</TABLE>
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum lease payments
as of December 31, 1997:
<TABLE>
<S> <C>
1998........................................................ $171
1999........................................................ 131
2000........................................................ 148
2001........................................................ 133
2002........................................................ 18
----
Total minimum lease payments................................ 601
Less amount representing interest........................... 100
----
$501
====
Current portion............................................. $129
Long-term portion........................................... 372
----
$501
====
</TABLE>
J & J Sanitation also leases certain facilities and other equipment under
operating leases expiring through 1999. Minimum rental payments under such
operating leases in 1998, 1999 and in the aggregate are $5, $2 and $7,
respectively. J & J Sanitation recognized rent expense under these operating
leases totaling $39 in 1997.
In conjunction with the acquisition of J & J Sanitation by WCI on July 31,
1998, the rolling stock under capital leases was acquired at values
approximating the capital lease obligation at that date and the related leases
were terminated.
CONTINGENCIES
Legal Proceedings
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, J & J Sanitation 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 J & J Sanitation or to revoke or deny renewal of an
operating permit held by J & J Sanitation. From time to time J & J Sanitation
may also be subject to actions brought by citizens' groups or adjacent
landowners in connection with the permitting and licensing of landfills and
transfer stations, or alleging environmental damage or violations of the permits
and licenses pursuant to which J & J Sanitation operates.
F-125
<PAGE> 207
J & J SANITATION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX
MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE D -- COMMITMENTS AND CONTINGENCIES (CONTINUED)
In addition, J & J Sanitation 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. As of December 31, 1997,
there is no current proceeding or litigation involving J & J Sanitation that
management believes will have a material adverse impact on J & J Sanitation's
business, financial condition, results of operations or cash flows.
NOTE E -- INCOME TAXES
Unaudited pro forma information reflects income taxes as if all of J & J
Sanitation had been subject to federal and state income taxes.
The income tax benefit and unaudited pro forma income tax benefit for the
year ended December 31, 1997 differs from the amounts computed by applying the
applicable statutory federal income tax rate (34%) to loss before income taxes
as follows:
<TABLE>
<CAPTION>
PRO FORMA
INCOME TAX INCOME TAX
BENEFIT BENEFIT
---------- -----------
(UNAUDITED)
<S> <C> <C>
Income tax benefit at the statutory rate................ 34.0% 34.0%
Income taxed at shareholder level....................... (34.0) --
Valuation allowance..................................... -- (34.0)
----- -----
--% --%
===== =====
</TABLE>
Unaudited pro forma deferred income tax assets at December 31, 1997 are
fully offset by a valuation allowance as there is no assurance the deferred tax
assets would be realized. Unaudited pro forma deferred tax assets arise
principally from the loss in the current year, differences between tax and
financial methods of reporting depreciation expense, and the use of the cash
method of accounting for income tax purposes which gives rise to differences
between financial statement and tax return recognition of receivables, prepaid
expenses, accounts payable and accrued liabilities.
NOTE F -- RELATED PARTY TRANSACTIONS
Great Plains Recycling Inc. (GPR) has an arrangement with J & J Sanitation
to perform solid waste processing, recyclable recovery, transfer and disposal
services. J & J Sanitation's stockholders and partners are majority owners of
GPR. Cost of operations in the combined statement of operations for 1997
includes a charge of $672 for these services. At December 31, 1997, J & J
Sanitation owes GPR $84 which is included in accounts payable.
In conjunction with the acquisition of J & J Sanitation by WCI on July 31,
1998, WCI entered into a long-term agreement with GPR to provide comparable
services. WCI also has the option to acquire GPR effective November 1999
provided GPR achieves defined levels of profitability.
F-126
<PAGE> 208
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Amador Disposal Services, Inc. and
Mother Lode Sani-Hut, Inc.
In our opinion, the accompanying combined balance sheet and the related
combined statements of operations and retained earnings and of cash flows
present fairly, in all material respects, the combined financial position of
Amador Disposal Services, Inc. and Mother Lode Sani-Hut, Inc. (collectively, the
Companies) at June 30, 1998, and the combined results of their operations and
their cash flows for the year then ended, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Companies' management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Sacramento, California
December 30, 1998
F-127
<PAGE> 209
AMADOR DISPOSAL SERVICES, INC. AND MOTHER LODE SANI-HUT, INC.
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1998
---------- -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 162,963 $ 239,048
Trade accounts receivable, net............................ 183,369 190,386
Prepaid expenses and other current assets................. 17,680 76,202
---------- ----------
Total current assets.............................. 364,012 505,636
Property, plant and equipment, net.......................... 2,174,042 2,106,705
Other assets................................................ 30,000 30,000
---------- ----------
Total assets...................................... $2,568,054 $2,642,341
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................... 42,631 38,055
Accounts payable.......................................... 95,249 86,984
Accrued liabilities....................................... 100,251 144,640
---------- ----------
Total current liabilities......................... 238,131 269,679
Long-term debt, net......................................... 1,164,720 1,157,766
---------- ----------
Total liabilities................................. 1,402,851 1,427,445
---------- ----------
Commitments and contingencies (Note 5)
Stockholders' equity:
Common stock, no par value; 2,500 shares authorized,
issued and outstanding................................. 181,000 181,000
Common stock, $100 par value; 5,000 shares authorized, 75
shares issued and outstanding.......................... 7,500 7,500
Additional paid-in capital................................ 118,430 118,430
Retained earnings......................................... 858,273 907,966
---------- ----------
Total stockholders' equity........................ 1,165,203 1,214,896
---------- ----------
Total liabilities and stockholders' equity........ $2,568,054 $2,642,341
========== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-128
<PAGE> 210
AMADOR DISPOSAL SERVICES, INC. AND MOTHER LODE SANI-HUT, INC.
COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
JUNE 30, ----------------------
1998 1997 1998
---------- ---------- --------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES................................................ $2,996,013 $ 758,169 $845,601
OPERATING EXPENSES:
Cost of operations.................................... 2,123,800 532,296 563,277
General and administrative............................ 507,256 110,777 129,165
Depreciation and amortization......................... 311,731 70,562 73,656
---------- ---------- --------
Income from operations........................ 53,226 44,534 79,503
OTHER INCOME AND EXPENSE:
Interest expense...................................... (115,702) (25,929) (29,220)
Other (expense) income, net........................... (18,810) 721 1,010
---------- ---------- --------
(Loss) income before income taxes............. (81,286) 19,326 51,293
Income tax provision.................................... 1,600 1,600 1,600
---------- ---------- --------
Net (loss) income............................. (82,886) 17,726 49,693
Balance of retained earnings, beginning of period....... 991,159 989,823 858,273
Dividends paid........................................ (50,000) -- --
---------- ---------- --------
Balance of retained earnings, end of period............. $ 858,273 $1,007,549 $907,966
========== ========== ========
Pro forma income tax (benefit) provision (unaudited)
(Note 6).............................................. $ (19,224) $ 4,059 $ 10,901
========== ========== ========
Pro forma net (loss) income (unaudited) (Note 6)........ $ (62,062) $ 15,267 $ 40,392
========== ========== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-129
<PAGE> 211
AMADOR DISPOSAL SERVICES, INC. AND MOTHER LODE SANI-HUT, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
JUNE 30, ---------------------
1998 1997 1998
---------- --------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income...................................... $ (82,886) $ 17,726 $ 49,693
Adjustments to reconcile net (loss) income to cash
provided by operating activities:
Depreciation and amortization....................... 311,731 70,562 73,656
Loss (gain) on disposals of property and
equipment......................................... 21,152 204 (159)
Cash provided by or (used in) changes in operating
assets and liabilities, net:
Accounts receivable............................... (21,226) 2,323 (7,018)
Prepaid expenses.................................. 7,597 (54,963) (58,520)
Other assets...................................... -- 8,367 --
Accounts payable.................................. 8,671 13,030 (8,265)
Accrued liabilities............................... (1,283) 29,807 44,389
--------- --------- --------
Net cash provided by operating activities...... 243,756 87,056 93,776
--------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment................. (306,658) (256,727) (9,160)
Proceeds from the sale of equipment.................... 1,180 700 3,000
--------- --------- --------
Net cash used in investing activities.......... (305,478) (256,027) (6,160)
--------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt........................... 258,000 258,000 --
Principal payments on long-term debt................... (67,893) (14,640) (11,531)
Dividends paid......................................... (50,000) -- --
--------- --------- --------
Net cash provided by (used in) financing
activities................................... 140,107 243,360 (11,531)
--------- --------- --------
Net increase in cash balance................... 78,385 74,389 76,085
Cash and cash equivalents at beginning of period......... 84,578 84,578 162,963
--------- --------- --------
Cash and cash equivalents at end of period............... $ 162,963 $ 158,967 $239,048
========= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................. $ 115,136 $ 26,042 $ 29,220
========= ========= ========
Cash paid for income taxes............................. $ 2,412 $ 683 $ 400
========= ========= ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-130
<PAGE> 212
AMADOR DISPOSAL SERVICES, INC. AND MOTHER LODE SANI-HUT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF COMBINATION
The combined financial statements include the accounts of Amador Disposal
Services, Inc. (Amador Disposal) and Mother Lode Sani-Hut, Inc. (Mother Lode)
(and collectively, the Companies). Amador Disposal and Mother Lode have common
management which exercise significant influence over their operations. All
material intercompany balances and transactions have been eliminated in
combination.
BUSINESS AND ORGANIZATION
The Companies, both California corporations, are regional, integrated,
non-hazardous solid waste services companies that provide containers,
collection, transfer, disposal, recycling and landfill services to commercial
and residential customers in Northern California.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The interim combined financial statements as of September 30, 1998 and for
the three month periods ended September 30, 1997 and 1998 have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three months ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
year ending June 30, 1999.
CASH AND CASH EQUIVALENTS
The Companies consider all highly liquid investments with maturities of 3
months or less when purchased to be cash equivalents for purposes of the
combined statements of cash flows.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Improvements or
betterments which significantly extend the life of the assets are capitalized.
Interest costs are also capitalized on self-constructed assets. Expenditures for
maintenance and repairs are charged against 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 or losses
resulting from property disposal are included in other income (expense).
Depreciation is computed using the straight-line method over the following
estimated useful lives of the assets:
<TABLE>
<S> <C>
Building................................................. 30 years
Containers, machinery and equipment...................... 3-10 years
Rolling stock and vehicles............................... 5-7 years
</TABLE>
F-131
<PAGE> 213
AMADOR DISPOSAL SERVICES, INC. AND MOTHER LODE SANI-HUT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
REVENUE RECOGNITION
Revenues are recognized as services are provided.
INCOME TAXES
The Companies have elected to be taxed under the provisions of Subchapter S
of the Internal Revenue Code for federal and California state income tax
purposes. Under S corporation status, the Companies' income is taxable to the
stockholders, with only minimal state income taxes charged to the Companies.
CLOSURE AND POST-CLOSURE COSTS
Pursuant to a contract with Amador County to operate the Amador County
Solid Waste Sanitary Landfill (Landfill), Amador Disposal is responsible to
provide specified levels of cover on designated cells on the Landfill in the
normal course of operations; however, the Companies are not responsible for
closure and post-closure activities. The responsibility for closure and
post-closure liabilities is that of Amador County. Consequently, the management
does not believe the Companies have any material financial obligation for
closure and post-closure costs for the Landfill.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents approximates fair value
because of the short-term maturity of these instruments. The carrying values of
the notes payable approximate their fair values as of June 30, 1998, and
September 30, 1997 and 1998, based on current incremental borrowing rates for
similar types of borrowing arrangements.
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.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Companies to
concentrations of credit risks consist primarily of accounts receivable. Credit
risk on accounts receivable is minimized as the Companies' customer base
consists largely of numerous customers with small individual balances. The
Companies maintain allowances for losses based on the expected collectibility of
accounts receivable. Credit losses have been within management's expectations.
The Companies operate under various franchise agreements with local
municipalities. Approximately $1,693,000 or 56% of revenues for the year ended
June 30, 1998, was earned from customers in municipalities covered by five
franchise agreements, which expire from 1998 through 2022, inclusive of options
to extend. One of the five franchise agreements was not renewed upon its
expiration on June 30, 1998. For the year ended June 30, 1998, revenue earned
under this franchise agreement was approximately $425,000.
F-132
<PAGE> 214
AMADOR DISPOSAL SERVICES, INC. AND MOTHER LODE SANI-HUT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. TRADE ACCOUNTS RECEIVABLE:
Trade accounts receivable is presented net of an allowance for doubtful accounts
of approximately $15,000 each at June 30, 1998, and September 30, 1997 and 1998.
3. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1998
----------- -------------
(UNAUDITED)
<S> <C> <C>
Land and buildings................................ $ 1,268,548 $ 1,271,910
Containers, machinery and equipment............... 652,069 652,069
Rolling stock and vehicles........................ 1,760,102 1,735,761
----------- -----------
3,680,719 3,659,740
Less accumulated depreciation..................... (1,506,677) (1,553,035)
----------- -----------
$ 2,174,042 $ 2,106,705
=========== ===========
</TABLE>
4. LONG-TERM DEBT:
Long-term debt as of June 30 and September 30, 1998, consists of the following:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1998
---------- -------------
(UNAUDITED)
<S> <C> <C>
Notes payable to individuals, interest at prime plus 1.5%
(10% at June 30, 1998 and September 30, 1998), payable in
monthly installments, principal due September 2001,
guaranteed by the stockholders of Amador Disposal........ $ 950,000 $ 950,000
Notes payable to individuals, interest at prime (8% at June
30, 1998 and September 30, 1998), payable in monthly
installments of principal and interest of $2,208 through
September 2007, collateralized by a deed of trust on
certain real property.................................... $ 172,804 $ 169,614
Note payable, interest at prime plus 2% (10.5% at June 30,
1998 and September 30, 1998), payable in monthly
installments of principal and interest of $655 through
April 1999, collateralized by certain equipment.......... $ 6,106 $ 4,285
Note payable, interest at 10.5%, payable in monthly
installments of principal and interest of $560 through
October 2002, collateralized by certain equipment........ $ 23,306 $ 22,229
Contract payable, interest at 10.5%, payable in monthly
installments of principal and interest of $1,078 through
October 2002, collateralized by certain equipment........ $ 44,873 $ 42,797
Contract payable, interest at prime plus 2% (10.25% at June
30, 1998 and September 1998), payable in monthly
installments of principal and interest of $1,200 through
March 1999, collateralized by certain equipment.......... 10,262 6,896
---------- ----------
1,207,351 1,195,821
Less current portion 42,631 38,055
---------- ----------
Total long-term debt $1,164,720 $1,157,766
========== ==========
</TABLE>
F-133
<PAGE> 215
AMADOR DISPOSAL SERVICES, INC. AND MOTHER LODE SANI-HUT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
Maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
YEAR ENDING AMOUNT
----------- ----------
<S> <C>
1999................................................... $ 42,631
2000................................................... 28,799
2001................................................... 981,585
2002................................................... 34,647
2003................................................... 24,485
Thereafter............................................. 95,204
----------
$1,207,351
==========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Franchise Agreements, Contracts and Permits
The Companies have various franchise agreements with the counties and cities
that they serve. These franchise agreements typically require a franchise fee of
two to five percent of gross annual revenues earned in that jurisdiction, or a
fee per collection truck operated in that jurisdiction during the year, to be
paid to the municipality. These franchise agreements expire between April 2000
and October 2022, inclusive of options to extend.
The Companies also have contracts to operate the Landfill and a Materials
Recovery Facility (Facility) at the Landfill, expiring July 2002 and March 2016,
respectively, with an option to extend for the Facility. The disposal fee at the
Landfill and the related surcharge fees vary with the type of refuse. Surcharge
fees collected as a part of the landfill revenue are payable to Amador County.
The landfill rate schedule for the Facility is determined by Amador County
annually.
CONTINGENCIES
Environmental Risks
The Companies may be subject to liability for any environmental damage that
their 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 land and facilities by the Companies.
The Companies may also be subject to liability for any off-site environmental
contamination cause by pollutants or hazardous substance whose transportation,
treatment or disposal was arranged by the Companies. Any substantial liability
for environmental damage incurred by the Companies could have a material adverse
effect on the Companies' combined financial condition, results of operations or
cash flows. As of June 30, 1998 and September 30, 1998, the Companies are not
aware of any such environmental liabilities.
Legal Proceedings
In the normal course of their business and as a result of the extensive
governmental regulations of the solid waste industry, the Companies are
periodically 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 Companies or to revoke or deny renewal of an
operating permit held by the Companies. From time to time the Companies are also
subject to actions brought by citizens' groups or adjacent
F-134
<PAGE> 216
AMADOR DISPOSAL SERVICES, INC. AND MOTHER LODE SANI-HUT, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
landowners or residents alleging environmental damage or violations of the
permits and licenses pursuant to which the Companies operate. In addition, the
Companies are parties 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 June 30, 1998 and September 30, 1998, there
is no current proceedings or litigation involving the Companies that the
Companies believe will have a material adverse impact on the Companies'
business, combined financial position, results of operations and cash flows.
6. PENSION PLAN:
Amador Disposal has a defined contribution pension plan for eligible
employees with at least 1,000 hours within one year of employment. Amador
Disposal contributes up to 10% of participants' compensation, which vest based
on years of employment over seven years. Pension expense was approximately
$49,000 for the year ended June 30, 1998, and approximately $12,000 and $13,000
for the three months ended September 30, 1997 and 1998, respectively.
7. SALE OF THE COMPANIES:
On December 30, 1998, the shareholders of the Companies sold their stock to
Waste Connections, Inc. (WCI), a publicly traded company. WCI intends to account
for the acquisition using the purchase method.
8. PRO FORMA INCOME TAX INFORMATION (UNAUDITED):
As described in Note 1, the Companies operate under Subchapter S of the
Internal Revenue Code and are not subject to federal or state income taxes. Upon
the sale of the Companies stock by the Companies stockholders to WCI (Note 7),
the Subchapter S election will be terminated. As a result, the Companies will be
subject to corporate income taxes subsequent to the termination of the S
corporation status.
The following unaudited pro forma information reflects income tax (benefit)
expense for the year ended June 30, 1998 as if the Companies had been subject to
federal and state income taxes:
<TABLE>
<S> <C>
Federal taxes:
Current................................................. $ --
Deferred................................................ (15,887)
State taxes:
Current................................................. 1,600
Deferred................................................ (4,937)
--------
Pro forma income tax benefit.................... $(19,224)
--------
</TABLE>
The pro forma provision for income taxes for the year ended June 30, 1998
differs from the amounts computed by applying the applicable statutory federal
income tax rate (34%) to loss before income taxes due to graduated income tax
rates.
The Companies' unaudited pro forma deferred tax liability at June 30, 1998
would be approximately $11,000 which relates primarily to differences between
tax and financial methods of depreciation.
F-135
<PAGE> 217
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Butler County Landfill, Inc.
Kobus Construction, Inc.
We have audited the accompanying combined balance sheet of Butler County
Landfill, Inc. and Kobus Construction, Inc. (collectively the "Companies") as of
December 31, 1997, and the related combined statements of income and retained
earnings, and cash flows for the year then ended. These financial statements are
the responsibility of the Companies' management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of the Companies at
December 31, 1997, and the combined results of their operations and their cash
flows for the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ ERNST & YOUNG LLP
Sacramento, California
December 30, 1998
F-136
<PAGE> 218
BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC.
COMBINED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 33 $ 47
Short-term investments.................................... 28 47
Accounts receivable....................................... 344 428
Prepaid expenses and other current assets................. 84 107
------ ------
Total current assets.............................. 489 629
Property, plant and equipment, net.......................... 3,219 3,124
Restricted assets........................................... 352 331
Other assets................................................ 18 20
------ ------
$4,078 $4,104
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... $ 27 $ --
Accounts payable.......................................... 114 107
Accrued liabilities....................................... 280 168
Current portion of closure and post closure costs......... 94 46
Current portion of long-term debt......................... 452 608
------ ------
Total current liabilities......................... 967 929
Long-term debt.............................................. 960 816
Closure and post closure costs.............................. 361 474
Commitments and contingencies (Note 5)
Shareholders' equity:
Common stock: at par value; 10,100 shares authorized; 300
shares issued and outstanding.......................... 10 10
Additional paid-in capital................................ 2 2
Retained earnings......................................... 1,778 1,873
------ ------
Total shareholders' equity........................ 1,790 1,885
------ ------
$4,078 $4,104
====== ======
</TABLE>
See accompanying notes.
F-137
<PAGE> 219
BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC.
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ------------------
1997 1997 1998
------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Revenues.................................................... $3,010 $2,470 $2,419
Operating expenses:
Cost of operations........................................ 1,898 1,604 1,659
Depreciation and amortization............................. 631 470 408
Selling, general and administrative....................... 236 183 130
------ ------ ------
Income from operations...................................... 245 213 222
Interest expense............................................ (180) (137) (109)
Other income (expense), net................................. 43 5 109
------ ------ ------
Net income.................................................. 108 81 222
Retained earnings, beginning of period...................... 1,820 1,820 1,778
Distributions to shareholders............................... (150) (121) (127)
------ ------ ------
Retained earnings, end of period............................ $1,778 $1,780 $1,873
====== ====== ======
Pro forma income taxes (unaudited -- Note 6)................ $ (42) $ (32) $ (86)
====== ====== ======
Pro forma net income (unaudited -- Note 6).................. $ 66 $ 49 $ 136
====== ====== ======
</TABLE>
See accompanying notes.
F-138
<PAGE> 220
BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC.
COMBINED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ------------------
1997 1997 1998
------------ -------- ------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 108 $ 81 $ 222
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 631 470 408
Gain on sale of property, plant and equipment.......... (5) (4) (51)
Closure and post closure expenses...................... 101 75 65
Changes in operating assets and liabilities:
Accounts receivable.................................. (38) (46) (84)
Prepaid expenses and other current assets............ 20 34 (23)
Accounts payable..................................... (17) 38 (7)
Accrued liabilities.................................. 106 105 (112)
----- ------- -----
Net cash provided by operating activities................. 906 753 418
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property, plant and equipment.... (385) (283) (473)
Proceeds from the sale of property, plant and equipment... 162 81 212
Purchases of short-term investments....................... -- -- (19)
Change in restricted assets............................... (237) (198) 21
Change in other assets.................................... (3) (3) (2)
----- ------- -----
Net cash used in investing activities..................... (463) (403) (261)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 608 604 436
Principal payments on short-term borrowings and long-term
debt................................................... (972) (831) (452)
Distributions to shareholders............................. (150) (121) (127)
----- ------- -----
Net cash used in financing activities....................... (514) (348) (143)
----- ------- -----
Net (decrease) increase in cash and cash equivalents........ (71) 2 14
Cash and cash equivalents, beginning of period.............. 104 104 33
----- ------- -----
Cash and cash equivalents, end of period.................... $ 33 $ 106 $ 47
===== ======= =====
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND
NON-CASH TRANSACTIONS:
Cash paid for interest...................................... $ 180 $ 137 $ 109
===== ======= =====
</TABLE>
See accompanying notes.
F-139
<PAGE> 221
BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS
Butler County Landfill, Inc. ("Butler") is a solid waste company that owns
and operates a landfill in Butler County, Nebraska. Kobus Construction Inc.
("Kobus") is a solid waste company that provides collection, transfer and
disposal services to residential and commercial customers in Butler County,
Nebraska.
BASIS OF COMBINATION
The combined financial statements include the accounts of Butler and Kobus
(collectively, the "Companies") as a result of their common ownership.
Significant inter-company balances and transactions between the Companies have
been eliminated in combination.
SALE OF THE COMPANIES
On December 11, 1998, the Companies' shareholders entered into an agreement
to sell all capital stock of the Companies to Waste Connections, Inc. ("WCI")
for cash and common stock of WCI.
INTERIM FINANCIAL INFORMATION
The unaudited interim combined financial statements as of September 30,
1998 and for the nine months ended September 30, 1997 and 1998 have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the nine months ended September 30,
1998 are not necessarily indicative of the results that may be expected for the
year ending 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.
CASH EQUIVALENTS
The Companies consider all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
F-140
<PAGE> 222
BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Companies to
concentrations of credit risk consist primarily of accounts receivable. Credit
risk on accounts receivable is minimized as a result of the large and diverse
nature of the Companies' customer bases. Historically, credit losses have been
immaterial.
PROPERTY, PLANT AND EQUIPMENT
Property, plant 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 of property, plant and equipment (excluding
landfill related assets) are as follows:
<TABLE>
<S> <C>
Building and land improvements....................... 15 - 39 years
Equipment and vehicles............................... 3 - 7 years
</TABLE>
Capitalized landfill costs include expenditures for land and related
airspace, permitting costs and preparation costs. Landfill permitting and
preparation costs represent only direct costs related to those activities,
including legal, engineering and construction. Interest is capitalized on
landfill permitting and construction projects and other projects under
development while the assets are undergoing activities to ready them for their
intended use. The interest capitalization rate is based on the Companies'
weighted average cost of indebtedness. Landfill permitting, acquisition and
preparation costs, excluding the estimated residual value of land, are amortized
as permitted airspace of the landfill is consumed. Landfill preparation costs
include the costs of construction associated with excavation, liners, site berms
and the installation of leak detection and leachate collection systems. In
determining the amortization rate for a landfill, preparation costs include the
total estimated costs to complete construction of the landfills' permitted
capacity. Units-of-production amortization rates are determined annually for the
Companies' operating landfill. The rates are based on estimates provided by the
Companies' outside engineers and consider the information provided by surveys
which are performed at least annually.
LONG-LIVED ASSETS
The Companies continually evaluate the value and future benefits of their
long-lived assets. The Companies assess recoverability based on estimates of
future undiscounted cash flows. Under this approach, the carrying value would be
reduced to fair value if it becomes probable that the Companies' best estimates
for expected undiscounted future cash flows would be less than the carrying
amount of the long-lived assets. Through December 31, 1997, there were no
adjustments to the carrying amounts of long-lived assets resulting from these
evaluations.
F-141
<PAGE> 223
BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
RESTRICTED ASSETS
The Companies are required to fund certain portions of their estimated
closure and post closure liabilities. These amounts are held in a trust account
restricted for expenditures on closure and post closure costs.
During 1997, the Companies were awarded two grants from the Nebraska
Department of Environmental Quality ("DEQ") totaling $184 for the purchase of
composting and recycling equipment. Grant funds of $96 were received in 1997,
however at year end no expenditures had been made. During 1996, the Companies
received a $25 grant from the DEQ for the abatement of scrap tires collected at
the landfill. As of December 31, 1997, $17 had been received under this grant
and had not been spent.
As of December 31, 1997, restricted assets consist of the following:
<TABLE>
<S> <C>
Unspent funds received under DEQ grants..................... $113
Closure and post closure trust fund amounts................. 239
----
$352
====
</TABLE>
CLOSURE AND POST CLOSURE COSTS
Accrued closure and post-closure costs include the current and non-current
portion of accruals associated with obligations for closure and post-closure
monitoring and maintenance of the landfill. The Companies, based as input from
outside engineers, estimate future closure and post-closure monitoring and
maintenance costs for sold waste landfills based on its interpretation of the
technical standards of the U.S. Environmental Protection Agency's Subtitle D
regulations and the air emissions standards under the Clean Air Act as they are
being applied on a state-by-state basis. Closure and post closure monitoring and
maintenance costs represent the costs related to cash expenditures yet to be
incurred when a landfill facility ceases to accept waste and closes. Accruals
for closure and post-closure monitoring and maintenance requirements in the U.S.
consider final capping of the site, site inspection, groundwater monitoring,
leachate management, methane gas control and recovery, and operating and
maintenance costs to be incurred during the period after the facility closes.
Certain of these environmental costs, principally capping and methane gas
control costs, are also incurred during the operating life of the site in
accordance with the landfill operation requirements of Subtitle D and the air
emissions standards. Reviews of the future requirements for closure and
post-closure monitoring and maintenance costs for the Companies' operating
landfills are performed by the Companies' consulting engineers at least annually
and are the basis upon which the Companies' estimates of these future costs and
the related accrual rates are revised. The Companies provides accruals for these
estimated costs as the remaining permitted airspace of such facilities is
consumed. The State of Nebraska requires a specified portion of these accrued
closure and post-closure obligations to be funded at any point in time.
REVENUE RECOGNITION
The Companies recognize revenues as services are provided related to
hauling and disposal and upon the receipt and acceptance of waste material at
its landfill and materials recovery facility.
F-142
<PAGE> 224
BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
INCOME TAXES
The Companies operate 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 Companies' operations flow through to the
individual shareholders and no provision for income taxes has been made in the
combined financial statements.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 1997 and September 30,
1998 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Buildings and land improvements.................... $ 737 $ 870
Landfill related assets............................ 2,982 2,982
Equipment and vehicles............................. 1,796 1,780
------- -------
5,515 5,632
Less accumulated depreciation and amortization..... (2,296) (2,508)
------- -------
$ 3,219 $ 3,124
======= =======
</TABLE>
3. SHORT-TERM BORROWINGS
The Companies maintain an equipment line of credit (the "Line") with a
financial institution. Under the Line, the Companies may borrow an amount up to
$100 for the purchase of equipment. Interest on the Line is payable at 9.5%
semi-annually. All outstanding principal plus accrued interest was paid off on
January 15, 1998. The Line was secured by substantially all of the Companies'
assets and was also guaranteed by the Companies' shareholders.
F-143
<PAGE> 225
BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
4. LONG-TERM DEBT
Long-term debt as of December 31, 1997 consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1997
------------
<S> <C>
Construction note payable bearing interest at 10.75%;
payable in monthly installments of principal and interest
of $30; maturing December 2000; secured by the landfill
and Materials Recovery Facility with a net carrying value
of $854 as of December 31, 1997........................... $ 908
Notes payable bearing various rates of interest (ranging
from 8.75% to 9.5%), payable in monthly installments of
principal and interest (aggregating $23), maturing at
various dates through February 2002; secured by
substantially all of the Companies' assets................ 308
Note payable bearing interest at 6%; payable in annual
installments of principal and interest of $10; maturing
February 1, 2012; secured by land with a net carrying
value of $125 as of December 31, 1997..................... 97
Equipment financing notes payable bearing interest at
various rates (ranging from 9.5% to 9.9%); payable in
monthly installments of principal and interest
(aggregating $4); maturing through November 2000; secured
by substantially all of the Companies' assets............. 99
------
1,412
Less current portion........................................ 452
------
Long-term debt.............................................. $ 960
======
</TABLE>
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........................................................ $ 452
1999........................................................ 465
2000........................................................ 392
2001........................................................ 18
2002........................................................ 10
Thereafter.................................................. 75
------
$1,412
======
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
Operating Leases
The Companies leases certain equipment under cancelable and noncancelable
operating leases. Rent expense under these agreements amounted to $106 for the
year ended December 31, 1997.
F-144
<PAGE> 226
BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
As of December 31, 1997, future minimum lease payments under these
noncancelable operating leases, by calendar year, are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 90
1999........................................................ 81
2000........................................................ 38
2001........................................................ 9
----
$218
====
</TABLE>
CONTINGENCIES
Environmental Risks
The Companies are subject to liability for any environmental damage that
the solid waste facilities they operate 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 operation of
such facilities by the Companies. The Companies 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
Companies. Any substantial liability for environmental damage incurred by the
Companies could have a material adverse effect on the Companies' combined
financial condition, results of operations or cash flows.
Legal Proceedings
In the normal course of their business and as a result of the extensive
governmental regulation of the solid waste industry, the Companies 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 Companies or to revoke or deny renewal of an
operating permit held by the Companies. From time to time the Companies may also
be subject to actions brought by citizens' groups or adjacent landowners in
connection with the permitting and licensing of landfills and transfer stations,
or alleging environmental damage or violations of the permits and licenses
pursuant to which the Companies operates.
In addition, the Companies 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 September 30 1998, there are no current proceedings or litigation
involving the Companies that the Companies believe will have a material adverse
impact on the Companies' business, financial condition, results of operations or
cash flows.
6. PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
As described in Note 1, the Companies operate under Subchapter S of the
Internal Revenue Code and are not subject to Federal income taxes. The pro form
income taxes represent estimates of income tax expense had the Companies filed
income tax returns as regular corporations.
F-145
<PAGE> 227
BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
(INFORMATION RELATING TO SEPTEMBER 30, 1998 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
The pro forma provisions for income taxes for the year ended December 31,
1997 and the nine months ended September 30, 1997 and 1998, differ from the
amounts computed by applying the applicable statutory federal income tax rate
(34%) to income before income taxes due primarily to state franchise taxes.
7. YEAR 2000 (UNAUDITED)
The Companies will need to modify or replace portions of its software so
that its computer systems will function properly with respect to dates in the
year 2000 ("Year 2000") and thereafter. To date, the Companies have not incurred
any costs related to the Year 2000 project. The Companies do not believe that
their 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
Companies' operations.
F-146
<PAGE> 228
ANNEX A
AGREEMENT AND PLAN OF MERGER
DATED AS OF OCTOBER 22, 1998, BY AND AMONG
WASTE CONNECTIONS, INC.
WCI ACQUISITION CORPORATION I
WCI ACQUISITION CORPORATION II
WCI ACQUISITION CORPORATION III
WCI ACQUISITION CORPORATION IV
MURREY'S DISPOSAL COMPANY, INC.
AMERICAN DISPOSAL COMPANY, INC.
D. M. DISPOSAL CO., INC.
TACOMA RECYCLING COMPANY, INC.
THE MURREY TRUST
DONALD J. HAWKINS
AND
IRMGARD R. WILCOX
<PAGE> 229
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
1. MERGERS............................................................ A-1
1.1 The Mergers................................................. A-1
1.2 Effective Time.............................................. A-1
1.3 Effects of the Mergers...................................... A-2
1.4 Articles of Incorporation and Bylaws of the Surviving
Corporation................................................. A-2
1.5 Directors................................................... A-2
1.6 Officers.................................................... A-2
1.7 Closing Time and Place...................................... A-2
2. MERGER CONSIDERATION; CONVERSION OF SECURITIES; DISSENTING
SHARES............................................................. A-2
2.1 Merger Consideration........................................ A-2
2.2 Allocation of Aggregate WCI Stock........................... A-3
2.3 Conversion of Capital Stock................................. A-3
2.4 Exchange of Certificates.................................... A-3
2.5 Distributions; Right to Vote................................ A-4
2.6 No Further Ownership Rights in Any Corporations' Stock...... A-4
2.7 Lost Certificates........................................... A-4
3. REPRESENTATIONS AND WARRANTIES OF THE CORPORATIONS AND THE
SHAREHOLDERS....................................................... A-4
3.1 Organization, Standing and Qualification.................... A-4
3.2 Capitalization.............................................. A-4
3.3 No Change in Stock Ownership and Other Pooling
Representations............................................. A-4
3.4 Authority for Agreement and Filed Plans..................... A-5
3.5 No Breach or Default........................................ A-5
3.6 Subsidiaries................................................ A-6
3.7 Financial Statements........................................ A-6
3.8 Liabilities................................................. A-6
3.9 Accurate and Complete Records............................... A-7
3.10 Permits and Licenses........................................ A-7
3.11 Certain Receivables......................................... A-8
3.12 Fixed Assets and Real Property.............................. A-8
3.13 Related Party Transactions.................................. A-9
3.14 Contracts and Agreements; Adverse Restrictions.............. A-9
3.15 Insurance................................................... A-10
3.16 Personnel................................................... A-10
3.17 Benefit Plans and Union Contracts........................... A-10
3.18 Taxes....................................................... A-11
3.19 Copies Complete; Required Consents.......................... A-12
3.20 Customers, Billings, Current Receipts and Receivables....... A-12
3.21 No Change With Respect to the Corporations.................. A-12
3.22 Balance Sheet Date Debt; Balance Sheet Date Current Assets
and Balance Sheet Date Current Liabilities.................. A-13
3.23 Bank Accounts............................................... A-14
3.24 Compliance With Laws........................................ A-14
3.25 Powers of Attorney.......................................... A-15
3.26 Underground Storage Tanks................................... A-16
</TABLE>
i
<PAGE> 230
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
3.27 Patents, Trademarks, Trade Names, etc....................... A-16
3.28 Assets, etc. Necessary to Business.......................... A-16
3.29 Condemnation................................................ A-16
3.30 Suppliers and Customers..................................... A-17
3.31 Absence of Certain Business Practices....................... A-17
3.32 No Misleading Statements.................................... A-17
3.33 Brokers; Finders............................................ A-17
3.34 S Corporation Matters....................................... A-17
3.35 Registration Statements..................................... A-17
3.36 Accredited Investors........................................ A-17
4. REPRESENTATIONS AND WARRANTIES OF WCI AND THE MERGER SUBS.......... A-17
4.1 Existence and Good Standing................................. A-18
4.2 No Contractual Restrictions................................. A-18
4.3 Authorization of Agreement.................................. A-18
4.4 Status of Shares............................................ A-18
4.5 Governmental Authorities; Consents.......................... A-18
4.6 SEC Documents............................................... A-18
4.7 Capital Stock............................................... A-19
4.8 No Misleading Statements.................................... A-19
4.9 Brokers; Finders............................................ A-19
4.10 Disclosure Schedules........................................ A-19
5. COVENANTS OF THE CORPORATIONS AND THE SHAREHOLDERS PRIOR TO
EFFECTIVE TIME..................................................... A-19
5.1 Access; Confidential Information............................ A-19
5.2 Operations.................................................. A-20
5.3 No Change................................................... A-20
5.4 Obtain Consents............................................. A-21
5.5 No Change in Relative Ownership............................. A-21
5.6 Control of the Corporations' Operations..................... A-21
5.7 Acquisition Transactions.................................... A-21
5.8 Bonnie Trust Approval....................................... A-22
6. CONDITIONS PRECEDENT TO OBLIGATION OF WCI AND THE MERGER SUBS. TO
CLOSE.............................................................. A-22
6.1 Representations and Warranties.............................. A-22
6.2 Conditions.................................................. A-22
6.3 No Material Adverse Change.................................. A-22
6.4 Certificates................................................ A-22
6.5 No Litigation............................................... A-22
6.6 Other Deliveries............................................ A-22
6.7 Governmental Approvals...................................... A-22
6.8 Consents to Transfer........................................ A-22
6.9 Opinion of Independent Public Accountants................... A-22
6.10 WCI Shareholders Approval................................... A-22
6.11 NASDAQ Listing.............................................. A-23
6.12 HSR Waiting Period.......................................... A-23
6.13 Registration Statements..................................... A-23
6.14 Dissenting Shares........................................... A-23
</TABLE>
ii
<PAGE> 231
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C> <C>
6.15 Title Insurance............................................. A-23
6.16 Termination of Employment Agreements........................ A-23
6.17 LeMay Agreement............................................. A-23
6.18 All Mergers to Occur........................................ A-23
6.19 Disposal Arrangements....................................... A-23
6.20 Bonnie Trust Approval....................................... A-23
6.21 Real Estate Due Diligence................................... A-23
7. CONDITIONS PRECEDENT TO OBLIGATION OF THE CORPORATIONS AND THE
SHAREHOLDERS TO CLOSE.............................................. A-23
7.1 Representations and Warranties.............................. A-23
7.2 Conditions.................................................. A-23
7.3 No Material Adverse Change.................................. A-23
7.4 Certificate................................................. A-24
7.5 No Litigation............................................... A-24
7.6 Other Deliveries............................................ A-24
7.7 Consents to Transfer........................................ A-24
7.8 NASDAQ Listing.............................................. A-24
7.9 HSR Waiting Period.......................................... A-24
7.10 Registration Statements..................................... A-24
7.11 Governmental Approvals...................................... A-24
7.12 Opinion of Independent Public Accountants................... A-24
7.13 LeMay Agreement............................................. A-24
7.14 All Mergers to Occur........................................ A-24
7.15 Tax Matters................................................. A-24
7.16 Disposal Arrangements....................................... A-24
7.17 Bonnie Trust Approval....................................... A-24
8. CLOSING DELIVERIES................................................. A-24
8.1 WCI Deliveries.............................................. A-24
8.2 Shareholders' Deliveries.................................... A-25
9. ADDITIONAL COVENANTS OF WCI, THE CORPORATIONS AND THE
SHAREHOLDERS....................................................... A-25
9.1 Release of Guaranties....................................... A-25
9.2 Release of Security Interests............................... A-26
9.3 Confidentiality............................................. A-26
9.4 Brokers and Finders Fees.................................... A-26
9.5 Taxes....................................................... A-26
9.6 Short Year Tax Returns...................................... A-26
9.7 Matters Related to Pooling.................................. A-26
9.8 Representation Letter....................................... A-27
9.9 WCI Shareholders' Approval.................................. A-27
9.10 Nasdaq Listing.............................................. A-27
9.11 Agreement to Cooperate...................................... A-27
9.12 Notification of Certain Matters............................. A-27
9.13 Corrections to Registration Statements and Proxy
Statement................................................... A-28
10. INDEMNIFICATION.................................................... A-28
10.1 Indemnification Covenants................................... A-28
10.2 Limitations on Indemnities.................................. A-29
</TABLE>
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10.3 Notice of Indemnity Claim................................... A-30
10.4 Survival of Representations and Warranties.................. A-31
10.5 No Exhaustion of Remedies or Subrogation; Right of Set
Off......................................................... A-32
11. OTHER POST-CLOSING COVENANTS OF THE SHAREHOLDERS AND WCI........... A-32
11.1 Restrictive Covenants....................................... A-32
11.2 Rights and Remedies Upon Breach............................. A-33
11.3 Termination Date............................................ A-34
11.4 Effect of Termination....................................... A-35
11.5 Corrections to Schedules.................................... A-35
12. GENERAL............................................................ A-35
12.1 Additional Conveyances...................................... A-35
12.2 Assignment.................................................. A-35
12.3 No Waiver Relating to Claims for Fraud...................... A-35
12.4 Counterparts................................................ A-36
12.5 Notices..................................................... A-36
12.6 Disclosure Schedules........................................ A-36
12.7 Knowledge................................................... A-36
12.8 Attorneys' Fees............................................. A-36
12.9 Applicable Law.............................................. A-37
12.10 Payment of Fees and Expenses................................ A-37
12.11 Incorporation by Reference.................................. A-37
12.12 Captions.................................................... A-37
12.13 Number and Gender of Words.................................. A-37
12.14 Entire Agreement............................................ A-37
12.15 Waiver...................................................... A-37
12.16 Construction................................................ A-37
13. GLOSSARY........................................................... A-38
</TABLE>
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TABLE OF CONTENTS
EXHIBIT AND SCHEDULE LIST
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Exhibit 1.2 Filed Plan..................................................
Exhibit 6.19 Disposal Agreement..........................................
Exhibit 8.1(b) Employment Agreements.......................................
Exhibit 8.1(c) Opinion of Counsel for WCI..................................
Exhibit 8.1(f) Common Stock Agreement......................................
Exhibit 8.2(b) Opinion of Counsel for Shareholders.........................
Exhibit 8.2(g) Affiliate Letter............................................
Schedule 3.2 Authorized Capital of Corporations..........................
Schedule 3.3 Pooling Affiliates of the Corporations......................
Schedule 3.5 No Breach or Default........................................
Schedule 3.6 Subsidiaries................................................
Schedule 3.7 Financial Statements........................................
Schedule 3.8 Liabilities.................................................
Schedule 3.10(a) Permits and Licenses........................................
Schedule 3.10(b) Records, Notifications and Reports..........................
Schedule 3.10(c) Facilities..................................................
Schedule 3.11 Certain Receivables.........................................
Schedule 3.12(a) Fixed Assets................................................
Schedule 3.12(b) Corporate Property..........................................
Schedule 3.13 Related Party Transactions..................................
Schedule 3.14(a) Material Contracts and Agreements...........................
Schedule 3.14(b) Adverse Judicial Restrictions...............................
Schedule 3.14(c) Adverse Contractual Restrictions............................
Schedule 3.15 Insurance...................................................
Schedule 3.16 Personnel...................................................
Schedule 3.17(a) Benefit Plans...............................................
Schedule 3.17(b) Union Contracts, Agreements and Labor Disputes..............
Schedule 3.17(c) Golden Parachute Payments...................................
Schedule 3.18 Taxes.......................................................
Schedule 3.19 Copies Complete.............................................
Schedule 3.20 Customers, Billings, Current Receipts and Receivables.......
Schedule 3.21 No Change...................................................
Schedule 3.22(a) Balance Sheet Date Debt.....................................
Schedule 3.22(b) Balance Sheet Date Current Assets and Liabilities...........
Schedule 3.23(a) Bank Accounts...............................................
Schedule 3.23(b) Credit Card Accounts........................................
Schedule 3.24 Compliance with Laws........................................
Schedule 3.26 Underground Storage Tanks...................................
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Schedule 3.27 Patents, Trademarks, Trade Names, Etc.......................
Schedule 3.29 Condemnation Proceedings....................................
Schedule 3.30 Suppliers and Customers.....................................
Schedule 3.34 S Corporation Matters.......................................
Schedule 5.3 Changes in Compensation.....................................
Schedule 9.1 Release of Guaranties.......................................
</TABLE>
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AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of October 22, 1998, is entered into
by and among Waste Connections, Inc., a Delaware corporation ("WCI"), WCI
Acquisition Corporation I, a Washington corporation ("Merger Sub. I"), WCI
Acquisition Corporation II, a Washington corporation ("Merger Sub. II"), WCI
Acquisition Corporation III, a Washington corporation ("Merger Sub. III"), WCI
Acquisition Corporation IV, a Washington corporation ("Merger Sub. IV" and
collectively with Merger Sub. I, Merger Sub II. and Merger Sub. III, the "Merger
Subs." and individually without designation a "Merger Sub."), Murrey's Disposal
Company, Inc., a Washington corporation ("MDC"), American Disposal Company,
Inc., a Washington corporation ("AD"), D. M. Disposal Co., Inc., a Washington
corporation ("DM"), Tacoma Recycling Company, Inc. ("TR" and collectively with
MDC, AD and DM, the "Corporations" and individually without designation a
"Corporation"), The Murrey Trust UTA August 5, 1993, as amended (the "Murrey
Trust"), Donald J. Hawkins ("Donald") and Irmgard R. Wilcox ("IRM-GARD" and
collectively with the Murrey Trust, Donald and, on compliance with Section 5.8
of this Agreement, the Bonnie Trust (as defined below), the "Shareholders" and
individually without designation a "Shareholder").
WHEREAS, MDC, AD and DM are engaged in the collection and transport of
solid waste and recyclables in State of Washington, and TR is engaged in the
recycling business in the State of Washington;
WHEREAS, the Murrey Trust, Donald and Irmgard own all of the issued and
outstanding capital stock of MDC and AD, and the Murrey Trust, the Bonnie L.
Murrey Revocable Trust UTA August 5, 1993, as amended (the "Bonnie Trust"),
Donald and Irmgard own all of the issued and outstanding capital stock of DM and
TR, all as set forth on Schedule 3.2;
WHEREAS, at the Closing on the Closing Date (as defined below), WCI will
contribute as a capital contribution to Merger Sub. I, Merger Sub. II, Merger
Sub. III and Merger Sub. IV sufficient shares of WCI Common Stock, $0.01 par
value (the "WCI Stock"), to consummate the transactions contemplated by this
Agreement in exchange for all of the outstanding capital stock of Merger Sub. I,
Merger Sub. II, Merger Sub. III and Merger Sub. IV;
WHEREAS, Merger Sub. I, Merger Sub. II, Merger Sub. III and Merger Sub. IV
will use such shares of WCI Stock to effect the merger of Merger Sub. I into
MDC, the merger of Merger Sub. II into AD, the merger of Merger Sub. III into
DM, and the merger of Merger Sub. IV into TR in accordance with the terms and
subject to the conditions of this Agreement (individually, a "Merger" and
collectively, the "Mergers") in a transaction that qualifies as a pooling of
interests under generally accepted accounting principles and as a tax-free
reorganization under section 368(a) of the Internal Revenue Code of 1986, as
amended (the "CODE");
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, representations, warranties, provisions and covenants herein
contained, the parties hereto, each intending to be bound hereby, agree as
follows:
1. Mergers
1.1 The Mergers. In accordance with the Washington Business Corporation
Act (the "Washington Law"), at the Effective Time (as defined in Section 1.2),
Merger Sub. I shall be merged with and into MDC, Merger Sub. II shall be merged
with and into AD, Merger Sub. III shall be merged with and into DM and Merger
Sub. IV shall be merged with and into TR, in a transaction intended to qualify
as tax-free reorganizations under Section 368(a) of the Code and a "pooling of
interests" under generally accepted accounting principles. Immediately following
each Merger, the separate existence of each of the applicable Merger Subs. shall
cease and the applicable Corporation into which such Merger Sub. (each, a
"Surviving Corporation" and collectively the "Surviving Corporations") merged
shall continue to exist under and be governed by the Washington Law as a direct,
wholly-owned subsidiary of WCI.
1.2 Effective Time. As soon as practicable after the date of this
Agreement (the "Signing Date") and the satisfaction or waiver of all of the
conditions to the Mergers, at the Closing (as defined in Section 1.7), the
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parties shall cause the Mergers to be consummated by causing separate Plans of
Merger (the "Filed Plans") substantially in the form of Exhibit 1.2 to be
executed and filed in accordance with the relevant provisions of the Washington
Law. Each Merger shall become effective at the time specified in the Filed Plans
related to such Merger, which specified time shall be the same in each of the
Filed Plans (the "Effective Time").
1.3 Effects of the Mergers. The Mergers shall have the effect set forth in
Section 23B.11.060 of the Washington Law. Without limiting the generality of the
foregoing, at the Effective Time, all the properties, rights, privileges, powers
and franchises of each Merger Sub. shall vest in the respective Surviving
Corporation into which it is merged, and all debts, liabilities and duties of
each Corporation and each Merger Sub. shall become the debts, liabilities and
duties of the respective Surviving Corporation in the same manner as if the
applicable Surviving Corporation had itself incurred them. All rights of
creditors and all liens upon the property of each Merger Sub. shall thereafter
be preserved unimpaired.
1.4 Articles of Incorporation and Bylaws of the Surviving Corporation. The
Articles of Incorporation of each of the Corporations, as in effect immediately
prior to the Effective Time, shall be the Articles of Incorporation of the
respective Surviving Corporations, until thereafter amended in accordance with
the provisions thereof and applicable law. The Bylaws of each of the
Corporations in effect at the Effective Time shall be the Bylaws of the
respective Surviving Corporations until amended in accordance with the
provisions thereof and applicable law.
1.5 Directors. The directors of the Merger Subs. immediately prior to the
Effective Time shall be the directors of the respective Surviving Corporations
and shall hold office until their respective successors are duly elected and
qualified, or their earlier death, resignation or removal. The Board of
Directors of WCI shall take such action as may be necessary to cause a nominee
of the Shareholders to be elected to WCI's Board of Directors effective as of
the Effective Time with a term of office expiring at WCI's annual meeting of
stockholders in 2001.
1.6 Officers. The officers of Merger Subs. immediately prior to the
Effective Time of each Merger shall be the officers of the respective Surviving
Corporations and shall hold office until their respective successors are duly
elected and qualified, or their earlier death, resignation or removal.
1.7 Closing Time and Place. Subject to the terms and conditions of this
Agreement, the closing of the transactions contemplated herein (the "Closing")
shall take place as promptly as practicable (but in any event within five
business days) following the date on which the last of the conditions set forth
in Sections 6 and 7 is fulfilled or waived, or on such other date as WCI and the
Corporations shall agree (the "Closing Date"). The Closing shall take place at
the law offices of Hillis Clark Martin & Peterson, Suite 500, 1221 2nd Ave.,
Seattle, Washington 98101. At the Closing, WCI, the Merger Subs., the
Corporations and the Shareholders shall deliver to each other the documents,
instruments and other items described in Section 8 of this Agreement. At the
election of WCI and the Corporations, the Closing may take place through an
exchange of consideration and documents using overnight courier service or
facsimile.
2. Merger Consideration; Conversion of Securities; Dissenting Shares
2.1 Merger Consideration. The aggregate merger consideration (the
"Aggregate Merger Consideration") is two million seven hundred fifty thousand
(2,750,000) shares of WCI Stock (the "Aggregate WCI Stock"), subject to
adjustment as follows: (i) the number of shares of Aggregate WCI Stock issued in
the Mergers shall be reduced by one share for each $20.50 by which the Balance
Sheet Date Debt (as hereinafter defined) exceeds six million dollars
($6,000,000); and (ii) if the closing price of WCI Stock as quoted on the NASDAQ
Stock Market on the last trading day before the Closing Date (the "Closing
Price") is less than $20.50, then as of the Effective Time the number of shares
of Aggregate WCI Stock to be issued in the Mergers shall be increased by fifty
five thousand five hundred fifty five (55,555) shares for each whole dollar by
which the Closing Price is less than $20.50 but more than $15.99 and by eighty
three thousand three hundred thirty three and one-third (83,333 1/3) shares for
each whole dollar by which the Closing Price is less than $13.00 but more than
$9.99, and shall be proportionately increased for any such amount less than one
whole dollar, provided that no more than two hundred fifty thousand (250,000)
additional shares shall be issued if the Closing Price is less than $16.00 but
more than $13.00 and provided further in no event shall the
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number of Aggregate WCI Shares to be issued in the Mergers exceed three million
two hundred fifty thousand (3,250,000) shares. The Closing Price and the number
of shares of WCI Stock to be delivered after the Effective Time shall be
appropriately adjusted in the event of any change in WCI Stock between the
Signing Date and the Effective Time, including without limitation any stock
dividend, stock split, reverse stock split, recapitalization, reorganization,
merger or consolidation. WCI shall not be obligated to issue any fractional
shares of WCI Stock, but instead the Shareholders shall be paid cash in lieu of
any fractional share equal to the Closing Price multiplied by the fraction of a
share of WCI Stock that would otherwise have been issued to such Shareholder.
The Shares shall be covered by one or more Registration Statements on Form S-4
(the "Registration Statements"), each of which is effective under the Securities
Act of 1933 (the "ACT") as of the Signing Date. The shares of Aggregate WCI
Stock shall be freely tradable, subject to the restrictions set forth in Section
9.7 and in the Affiliate Letter (as hereinafter defined). WCI shall maintain the
Registration Statements effective for resales of the WCI Stock received by the
Shareholders for a period of one year after the Effective Time pursuant to the
terms of the Common Stock Agreement (as hereinafter defined).
2.2 Allocation of Aggregate WCI Stock. The percentage of the Aggregate WCI
Stock to be received by the Shareholders of each Corporation upon conversion of
the Corporations' Stock shall be as follows: 42% to MDC, 13% to AD, 28% to DM
and 17% to TR.
2.3 Conversion of Capital Stock. As of the Effective Time, by virtue of
the Mergers and without any action on the part of the holder thereof:
(a) All of the shares of common stock of each Merger Sub. issued and
outstanding immediately prior to the Effective Time shall be converted into
and become the number of fully-paid and nonassessable shares of common
stock of the Surviving Corporation into which the Merger Sub. is merging as
shall equal the number of shares of the common stock of such Corporation
(individually, the "Corporation's Stock" and collectively the
"Corporations' Stock") issued and outstanding immediately prior to the
Effective Time.
(b) Subject to Section 2.7, the aggregate shares of each Corporation's
Stock issued and outstanding immediately prior to the Effective Time shall
be converted into a portion of the Aggregate WCI Stock. The actual
conversion ratio for each Merger shall be set forth in the Filed Plans for
that Merger.
2.4 Exchange of Certificates.
(a) After the Effective Time, WCI shall deliver to the Shareholders in
accordance with this Section 2 certificates representing the Shares of WCI Stock
issuable pursuant to Section 2.3(b) in exchange for issued and outstanding
shares of each Corporation's Stock as contemplated by that Section. The WCI
Stock into which each Corporation's Stock shall be converted pursuant to each
Merger shall be deemed to have been issued at the Effective Time.
(b) At the Closing, each Shareholder shall deliver to WCI certificates
evidencing the shares of Corporations' Stock owned by such Shareholder that are
to be converted pursuant to Section 2.3(b) into the right to receive WCI Stock
(for each Corporation, the "Corporation's Certificates" and collectively for all
Corporations, the "Corporations' Certificates"). Promptly after the Effective
Time, each Shareholder who has surrendered the Corporation's Certificates
registered in the name of such Shareholder to WCI, together with such documents
as WCI shall reasonably request, shall be entitled to receive in exchange
therefor certificates representing that number of shares (rounded down to the
nearest whole number) of WCI Stock which such Shareholder has the right to
receive as a result of such Merger pursuant to this Section 2 (together with any
cash in lieu of fractional shares of WCI Stock pursuant to Section 2.7). Each of
the Corporation's Certificates so surrendered shall be canceled immediately
after the Effective Time. Until surrendered as contemplated by this Section 2.4,
each of the Corporations' Certificates shall be deemed canceled as of the
Effective Time and at any time after the Effective Time shall be deemed to
represent only the right to receive upon such surrender (i) the certificates
representing shares of WCI Stock as contemplated by this Section 2.4, (ii) a
cash payment in lieu of any fractional shares of WCI Stock as contemplated by
Section 2.1 and (iii) any dividends or distributions with a record date after
the Effective Time theretofore paid or payable with respect to WCI Stock as
contemplated by Section 2.5.
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2.5 Distributions; Right to Vote. Dividends and other distributions
declared or made after the Effective Time with respect to WCI Stock with a
record date after the Effective Time shall be paid to the holder of any
unsurrendered Corporations' Certificates with respect to the WCI Stock
represented thereby. Further, the holder of any unsurrendered Corporations'
Certificates shall have the right to vote with respect to the WCI Stock
represented thereby on all matters on which the shareholders of WCI vote after
the Effective Time.
2.6 No Further Ownership Rights in any Corporations' Stock. All shares of
WCI Stock issued upon the surrender for exchange of shares of the Corporations'
Stock in accordance with the terms hereof (including any cash paid pursuant to
Section 2.5 or 2.1) shall be deemed to have been issued in full satisfaction of
all rights pertaining to such shares of such Corporations' Stock, and, at and
after the Effective Time, there shall be no further registration of transfers on
the stock transfer books of the Surviving Corporations of shares of the
Corporation's Stock which were outstanding immediately prior to the Effective
Time. If, after the Effective Time, any of the Corporation's Certificates are
presented to the applicable Surviving Corporation for any reason, they shall be
canceled and exchanged as provided in this Section 2.
2.7 Lost Certificates. In the event any of the Corporations' Certificates
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the Shareholder claiming such certificate to be lost, stolen or
destroyed, WCI will issue in exchange for such lost, stolen or destroyed
certificate the shares of WCI Stock (and any dividends or distributions with
respect thereto pursuant to Section 2.5 and any cash pursuant to Section 2.1)
deliverable in respect thereof as determined in accordance with Section 2.4.
When authorizing such payment in exchange for any lost, stolen or destroyed
Corporations' Certificate, the Shareholder to whom the WCI Stock is to be issued
shall, as a condition precedent to the issuance thereof, give WCI a bond
satisfactory to WCI in such sum as it may direct or otherwise indemnify WCI in a
manner reasonably satisfactory to WCI against any claim that may be made against
WCI or the Surviving Corporation with respect to the Certificate alleged to have
been lost, stolen or destroyed.
3. Representations and Warranties of the Corporations and the Shareholders
Each Corporation, severally as to itself, and the Shareholders, jointly and
severally as to each Corporation of which they are shareholders, represent and
warrant that each of the following representations and warranties is true as of
the Signing Date and will be true as of the Closing Date.
3.1 Organization, Standing and Qualification. Each of the Corporations is
duly organized, validly existing and in good standing under the laws of the
State of Washington. Each of the Corporations has full corporate power and
authority to own and lease its properties and to carry on its business as now
conducted. None of the Corporations is required to be qualified or licensed to
conduct business as a foreign corporation in any other jurisdiction.
3.2 Capitalization. Schedule 3.2 sets forth, as of the Signing Date, the
authorized and outstanding capital of each of the Corporations, the names,
addresses and social security numbers or taxpayer identification numbers of the
record and beneficial owners thereof, the number of shares so owned, and the
allocation of the Aggregate Merger Consideration and the shares of the Aggregate
WCI Stock among the Shareholders. All of the issued and outstanding shares of
the capital stock of each Corporation are as of the Signing Date, and will be as
of the Effective Time, owned of record and beneficially by the Shareholders, as
set forth in Schedule 3.2, and are as of the Signing Date, and will be as of the
Effective Time, free and clear of all liens, security interests, encumbrances
and claims of every kind except as set forth in Schedule 3.2. Each share of the
capital stock of each of the Corporations is duly and validly authorized and
issued, fully paid and nonassessable, and was not issued in violation of any
preemptive rights of any past or present shareholder of any of the Corporations.
No option, warrant, call, conversion right or commitment of any kind (including
any of the foregoing created in connection with any indebtedness of any of the
Corporations) exists which obligates any of the Corporations to issue any of its
authorized but unissued capital stock or other equity interest or which
obligates any Shareholder to transfer any Corporations' Stock to any person,
except as set forth on Schedule 3.2.
3.3 No Change in Stock Ownership and Other Pooling Representations. Since
January 1, 1996, no Corporation has acquired any of its own stock. Neither the
voting stock structure of any Corporation, nor the
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relative ownership of shares among any of their respective Shareholders has been
altered or changed within two years preceding the Signing Date. No Corporation
has ever been a subsidiary or division of another corporation nor been a part of
an acquisition that was later rescinded. No Corporation has any treasury stock.
The statements relating to the Corporations in the representation letter to be
delivered to Ernst & Young LLP pursuant to Section 9.8 will be true and correct
as of the date such letter is executed and delivered by the Corporations and the
Shareholders. Upon consummation of the Mergers, WCI will acquire or have the
right to lease all of the assets of the Corporations necessary to the conduct of
the business of the Corporations as conducted on the Signing Date and all assets
owned, directly or indirectly, by the Shareholders and used or involved in the
business of collecting and transporting solid waste, operating the solid waste
transfer stations owned by the Corporations, and recycling. None of the
Corporations nor any of their Affiliates has taken or agreed or intends to take
any action or has any knowledge of any fact or circumstance that is reasonably
likely to prevent any Merger from qualifying as a reorganization within the
meaning of section 368(a) of the Code or would prevent any Merger from being
treated for financial accounting purposes as a pooling of interests. Schedule
3.3 identifies all persons who, to the knowledge of the Corporations and the
Shareholders, may be deemed to be "affiliates" ("Pooling Affiliates") of the
Corporations, as that term is used in Accounting Series Releases No. 130 and No.
135 of the Securities and Exchange Commission ("SEC").
3.4 Authority for Agreement and Filed Plans. MDC and AD have obtained, and
on approval of this Agreement solely by the Bonnie Trust (the "Bonnie Trust
Approval") DM and TR will have obtained, the approval of the percentage of the
holders of the outstanding Corporation's Stock of each Corporation required by
Section 23B.11.030 of the Washington Law (the "Corporations' Shareholders
Approval"). Subject, in the case of DM and TR, to obtaining the Bonnie Trust
Approval, the Corporations and the Shareholders have full right, power and
authority to enter into this Agreement and to perform its, his or her
obligations hereunder. Subject, in the case of DM and TR, to obtaining the
Bonnie Trust Approval, the Corporations have full right, power and authority to
enter into the Filed Plans and to perform their respective obligations
thereunder. The execution and delivery of this Agreement and the Filed Plans by
the Corporations and the consummation of the transactions contemplated hereby by
the Corporations have been duly authorized by each of the Corporations' Board of
Directors. This Agreement has been duly and validly executed and delivered by
the Corporations and the Shareholders other than the Bonnie Trust and, subject
to the due authorization, execution and delivery by WCI, the Merger Subs. and
the Bonnie Trust, constitutes the legal, valid and binding obligations of the
Corporations and the Shareholders, other than the Bonnie Trust, enforceable
against the Corporations and such Shareholders in accordance with its terms.
Subject, in the case of DM and TR, to obtaining the Bonnie Trust Approval, when
executed and delivered by the Bonnie Trust, this Agreement will have been duly
and validly executed and delivered by the Bonnie Trust and, subject to the due
authorization, execution and delivery by WCI and the Merger Subs., will
constitute the legal, valid and binding obligation of the Bonnie Trust,
enforceable against the Bonnie Trust in accordance with its terms. When executed
and delivered by the Corporations, the Filed Plans will have been duly and
validly executed and delivered by the Shareholders and, subject to the due
authorization, execution and delivery by WCI and the Merger Subs., will
constitute the legal, valid and binding obligation of the Corporations,
enforceable against the Corporations in accordance with their respective terms.
3.5 No Breach or Default. Except as disclosed on Schedule 3.5, the
execution and delivery by the Corporations and the Shareholders of this
Agreement and the Filed Plans, and the consummation by the Corporations and the
Shareholders of the transactions contemplated hereby and thereby, will not:
(a) Result in the breach of any of the terms or conditions of, or
constitute a default under, or allow for the acceleration or termination
of, or in any manner release any party from any obligation under, any
mortgage, lease, note, bond, indenture, or material contract, agreement,
license or other instrument or obligation of any kind or nature to which
any of the Corporations or any of the Shareholders is a party, or by which
any of the Corporations or any of the Shareholders, or any of the
Corporations' or the Shareholders' assets, is or may be bound or affected;
or
(b) Violate any law or any order, writ, injunction or decree of any
court, administrative agency or governmental authority, or require the
approval, consent or permission of any governmental or regulatory authority
applicable to the Corporations or the Shareholders; or
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(c) Violate the Articles of Incorporation or Bylaws of any of the
Corporations.
3.6 Subsidiaries. Schedule 3.6 lists as of the Signing Date any and all
subsidiaries of the Corporations and any securities of any other corporation or
any securities or other interest in any other business entity owned by the
Corporations or any of the Corporations' subsidiaries.
3.7 Financial Statements. The Corporations have delivered to WCI, as
Schedule 3.7, copies of combined financial statements ("Financial Statements")
for the Corporations' three most recent fiscal years and interim financial
statements for the Corporations for the period ended September 30, 1998 (the
"Balance Sheet Date"). Such financial combined statements (other than the
interim financial statements) have been audited by Ernst & Young LLP. In the
opinion of Ernst & Young LLP, the Financial Statements for the three most recent
fiscal years present fairly, in all material respects, the financial positions
of the respective Corporations as at the end of such fiscal years and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles, and neither the
Corporations nor the Shareholders have any knowledge that such opinion is
incorrect. The interim Financial Statements are correct and complete and fairly
present the financial position of each of the Corporations as of Balance Sheet
Date, and the results of operations for the period then ended, subject to normal
year-end adjustments. Except to the extent reflected or reserved against in any
of the Corporations' balance sheets as of the Balance Sheet Date, or as
disclosed on Schedule 3.7 or Schedule 3.8, none of the Corporations had as of
the Balance Sheet Date, nor will any of the Corporations have as of the Closing
Date, any liabilities of any nature, whether accrued, absolute, contingent or
otherwise, including, without limitation, tax liabilities due or to become due
other than liabilities incurred in the ordinary course of business since the
Balance Sheet Date.
3.8 Liabilities. Parts I, II, III and IV of Schedule 3.8, are accurate
lists and descriptions of all liabilities of each of the Corporations required
to be described below in the format set forth below.
(a) Part I of Schedule 3.8 lists, as of the Balance Sheet Date, all
indebtedness for money borrowed and all other fixed and uncontested
liabilities of any kind, character and description (excluding Balance Sheet
Date Debt (as defined in Section 3.22(a)) and all real and personal
property leasehold interests included in Part IV of Schedule 3.8), whether
reflected or not reflected on the Financial Statements and whether accrued
or absolute, and states as to each such liability the amount of such
liability and to whom payable. From the Balance Sheet Date through the
Signing Date, trade payables have been incurred only in the ordinary course
of business consistent with comparable prior periods.
(b) Part II of Schedule 3.8 lists, as of the Signing Date, all claims,
suits and proceedings which are pending against any of the Corporations
and, to the knowledge of the Corporations and the Shareholders, all
contingent liabilities and all claims, suits and proceedings threatened or
anticipated against any of the Corporations. Part II of Schedule 3.8
includes a summary description of each such liability, including, without
limitation, (A) the name of each court, agency, bureau, board or body
before which any such claim, suit or proceeding is pending, (B) the parties
to such claim, suit or proceeding, (C) the amount claimed and other relief
sought, and (D) whether such claims are covered by insurance and whether
any insurance carrier has undertaken defense of such claims subject to a
reservation of rights, together with copies of all material documents,
reports and other records relating thereto to the extent that they are in
any of the Corporations' or a Shareholder's possession or control.
(c) Part III of Schedule 3.8 lists, as of the Signing Date and to the
extent not otherwise included in Part I of Schedule 3.8 or Schedule
3.22(a), all liens, claims and encumbrances secured by or otherwise
affecting any asset of any of the Corporations (including any Corporate
Property, as hereafter defined), including a description of the nature of
such lien, claim or encumbrance, the amount secured if it secures a
liability, the nature of the obligation secured, and the party holding such
lien, claim or encumbrance.
(d) Part IV of Schedule 3.8 lists, as of the Signing Date and to the
extent not otherwise included in Part I or Part III of Schedule 3.8 or
Schedule 3.22(a), all real and material personal property leasehold
interests to which any of the Corporations is a party as lessor or lessee
or, to the knowledge of any of the Corporations or a Shareholder, affecting
or relating to any Corporate Property, and includes a description of the
nature and principal terms of such leasehold interest, including, without
limitation, the identity of
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the other party thereto, the term of such leasehold interest (including
renewal options), the base rent and any additional rent owing thereunder
(including any adjustments thereto), security deposits, rights of first
offer or first refusal, purchase options, and restrictions on transfer.
Except as described on the applicable part of Schedule 3.8, neither any of
the Corporations nor any of the Shareholders has made any payment or committed
to make any payment since the Balance Sheet Date on or with respect to any of
the liabilities or obligations listed on Schedule 3.8 or Schedule 3.22(a)
except, in the case of liabilities and obligations listed on Parts I, III and IV
of Schedule 3.8 and Balance Sheet Date Debt, periodic payments required to be
made under the terms of the agreements or instruments governing such obligations
or liabilities or made in the ordinary course of business.
3.9 Accurate and Complete Records. The corporate minute books, stock
ledgers, books, ledgers, financial records and other records of the
Corporations:
(a) Have been made available to WCI and its agents (which for this
purpose includes Ernst & Young LLP) at the respective Corporations' offices
or at the offices of WCI's attorneys or the respective Corporations'
attorneys;
(b) Have been, in all material respects, maintained in accordance with
all applicable laws, rules and regulations, except that annual meetings of
shareholders and directors were not held in each year of the existence of
each of the Corporations; and
(c) Are accurate and complete and reflect either by general or
specific resolution all material corporate transactions authorized by the
Board of Directors and/or shareholders of the Corporations.
3.10 Permits and Licenses.
(a) Schedule 3.10(a) is a full and complete list, and includes copies, of
all material permits, licenses, franchises and service agreements pursuant to
which each of the Corporations is authorized to collect and haul industrial,
commercial and residential solid waste (the "Collection Franchises"), and of all
other material permits, licenses, titles (excluding motor vehicle titles and
current registrations), fuel permits, zoning and land use approvals and
authorizations, including, without limitation, any conditional or special use
approvals or zoning variances, occupancy permits, and any other similar
documents constituting a material authorization or entitlement or otherwise
material to the operation of the business of each of the Corporations
(collectively the "Governmental Permits") owned by, issued to, held by or
otherwise benefiting one or more of the Corporations or the Shareholders as of
the Signing Date. The status of the Governmental Permits related to the disposal
areas owned or operated by the Corporations, including, without limitation, any
conditions thereto and, if applicable, the expiration dates thereof, are also
described in Schedule 3.10(a). Schedule 3.10(a) also sets forth the name of any
governmental agency or other third party from whom the Shareholders, the
Corporations or WCI must obtain consent (the "Required Governmental Consents")
in order to effect a direct or indirect transfer of the Collection Franchises or
other Governmental Permits required as a result of the consummation of the
transactions contemplated by this Agreement. Except for any filings by the
Corporations required by the Hart-Scott-Rodino Antitrust Improvements Act of
1976 (the "HSR Act"), the filing of the Filed Plans with the Secretary of State
of Washington in connection with the Mergers and the Required Governmental
Consents, no declaration, filing or registration with, or notice to, or
authorization, consent or approval or permit of, any governmental or regulatory
body or authority is necessary for the execution and delivery of this Agreement
or the Filed Plans by any Corporation or the consummation by any Corporation of
the transactions contemplated hereby or thereby. Except as set forth on Schedule
3.10(a), all of the Collection Franchises and other Governmental Permits
enumerated and listed on Schedule 3.10(a) are valid and in full force and effect
and have been duly obtained, no other Collection Franchises or Governmental
Permits or other agreements are required to operate the business of any of the
Corporations or any Corporate Property as presently operated, and there are no
proceedings pending or, to the knowledge of the Corporations or the
Shareholders, threatened which may result in the revocation, cancellation,
suspension or adverse modification \of any of the same. Neither any of the
Corporations nor any of the Shareholders has any knowledge of any reason why all
such Collection Franchises and Governmental Permits will not remain in effect
for the period
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or term stated therein, subject to WCI's full compliance therewith, after
consummation of the transactions contemplated hereby.
(b) Schedule 3.10(b) includes (i) all notifications, reports, permit and
license applications (other than items included in Schedule 3.10(a)),
engineering and geologic studies, and environmental impact reports, tests or
assessments applicable to Corporate Property (collectively, "Records,
Notifications and Reports") that are material to the operation of the business
of each of the Corporations, and (A) relate to the discharge or release of
materials into the environment and/or the handling or transportation of waste
materials or hazardous or toxic substances or otherwise relate to the protection
of the public health or the environment, or (B) were filed with or submitted to
appropriate governmental agencies during the 24 months prior to the Signing Date
by any of the Corporations or the Shareholders or their agents with respect to
the business of any of the Corporations, and (ii) all material notifications
from such governmental agencies to the Corporations, the Shareholders or their
agents in response to or relating to any of such Records, Notifications and
Reports.
(c) Schedule 3.10(c) lists each facility owned, leased, operated or
otherwise used by the Corporations, the ownership, lease, operation or use of
which is being transferred to, assumed by or otherwise acquired directly or
indirectly by WCI pursuant to this Agreement (each, a "Facility" and
collectively, the "Facilities"). Except as otherwise disclosed on Schedule
3.10(c):
(i) Each Facility owned by any of the Corporations or owned by any of
the Shareholders or an Affiliate (as hereinafter defined) of any of the
Shareholders and leased to one of the Corporations is fully licensed,
permitted and authorized to carry on its current business under all
applicable federal, state and local statutes, orders, approvals, zoning or
land use requirements, rules and regulations, and, none of such Facilities
or the current use thereof constitutes a non-conforming use or is otherwise
subject to any restrictions regarding the operation, renovation or
reconstruction thereof, except for restrictions of general application
under applicable laws, rules and regulations. To the knowledge of the
Corporations and the Shareholders, no Facility that is leased by any of the
Corporations from a non-Affiliate or the current use thereof constitutes a
material non-conforming use or is otherwise subject to any material
restrictions regarding the operation, renovation or reconstruction thereof,
except for restrictions of general application under applicable laws, rules
and regulations.
(ii) To the knowledge of the Corporations and the Shareholders, there
are no circumstances, conditions or reasons which will cause the revocation
or suspension of any Facility's site assessments, permits, licenses,
consents, authorizations, zoning or land use permits, variances or
approvals relating to any Facility owned by any of the Corporations or
owned by any of the Shareholders or an Affiliate of any of the Shareholders
and leased to any of the Corporations, and to the knowledge of the
Corporations and the Shareholders there are no circumstances, conditions or
reasons which will cause the revocation or suspension of any site
assessment, permits, licenses, consents, authorizations, zoning or land use
permits, variances or approvals relating to any Facility leased by any of
the Corporations from a third party who is not an Affiliate of the
Shareholders.
3.11 Certain Receivables. Schedule 3.11 is an accurate list as of the
Signing Date of the accounts and notes receivable of the Corporations from and
advances to employees, former employees, officers, directors, the Shareholders
and Affiliates of the foregoing which have not been repaid. For purposes of this
Agreement, the term "Affiliate" means, with respect to any person, any person
that directly or indirectly through one or more intermediaries controls or has
an ownership interest in, or is controlled or owned in whole or in part by, or
is under common control or ownership in whole or in part with such person, and
in the case of a corporation includes its directors and officers, in the case of
individuals includes the individual's spouse, father, mother, grandfather,
grandmother, brothers, sisters, children and grandchildren and in the case of a
trust includes the grantors, trustees and beneficiaries of the trust.
3.12 Fixed Assets and Real Property.
(a) Schedule 3.12(a) lists, as of the Signing Date, substantially all the
fixed assets (other than real estate included in Corporate Property (as defined
below)) of the Corporations, including, without limitation, identification of
each vehicle by description and serial number, identification of machinery,
equipment and
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general descriptions of parts, supplies and inventory. Except as described on
Schedule 3.12(a), all of the Corporations' containers, vehicles, machinery and
equipment necessary for the operation of the Corporations' businesses are in
operable condition, ordinary wear and tear excepted, and all of the motor
vehicles and other rolling stock of the Corporations are in material compliance
with all applicable laws, rules and regulations. All leases of such fixed assets
are in full force and effect and binding upon the parties thereto; neither any
of the Corporations nor, to the knowledge of the Corporations or any of the
Shareholders, any other party to such leases is in breach of any of the material
provisions thereof.
(b) Each parcel of real property leased, owned or being purchased by any of
the Corporations as of the Signing Date (the "Corporate Property"), including
the street address thereof, is listed on Schedule 3.12(b), and attached to said
Schedule 3.12(b) are copies of all leases, deeds, outstanding mortgages, other
encumbrances and any existing title insurance policies or lawyer's title
opinions relating to each Corporate Property. At least twenty (20) days prior to
the Closing Date, the Corporations shall deliver to WCI a current commitment for
title insurance issued by a title insurance company satisfactory to WCI (the
"Title Reports") with respect to each Corporate Property owned or being
purchased by any of the Corporations or leased by the Corporations at 4622 70th
Avenue, Fife, Washington, together with copies of all of the title exceptions
referred to in each such commitment. All leases listed on Schedule 3.12(b) are
in full force and effect and binding on the parties thereto; neither any of the
Corporations nor any other party to any such lease that is an Affiliate of any
of the Corporations or any of the Shareholders, nor, to the knowledge of the
Corporations and the Shareholders, any other party to any such lease is in
breach of any of the material provisions thereof; to the knowledge of the
Corporations and the Shareholders, the landlord's interest in each such lease
has not been assigned to any third party nor, except as provided in Schedule
3.12(b), has any such interest been mortgaged, pledged or hypothecated; and none
of the Corporations has assigned any such lease or sublet all or any part of the
Corporate Property which is the subject of any such lease. Except as described
on Schedule 3.12(b), to the knowledge of the Corporations and the Shareholders,
there are no material physical or mechanical latent defects not apparent on
visual inspection in any Facility located on any Corporate Property.
(c) Each of the Corporations has or prior to the Closing will have good,
valid and marketable title to, or the right to lease, all of its properties and
assets, real, personal, and mixed, tangible and intangible, actually used or
necessary for the conduct of its business, free of any encumbrance or charge of
any kind except: (i) liens for current taxes not yet due; (ii) minor
imperfections of title and encumbrances, if any, that are not substantial in
amount, do not materially reduce the value or impair the use of the property
subject thereto, and do not materially impair the value of the Corporations;
(iii) the liens identified on Parts I and III of Schedule 3.8 and Schedule
3.22(a); and (iv) such other covenants, conditions, easements, reservations and
restrictions of record as appear on the Title Reports (collectively, the
"Permitted Liens"). Except as described on Schedule 3.12(b), there are no
leases, occupancy agreements, options, rights of first refusal or any other
agreements or arrangements, either oral or written, that create or confer in any
person or entity the right to acquire, occupy or possess, now or in the future,
any Facility, any Corporate Property, or any portion thereof, or create in or
confer on any person or entity any right, title or interest therein or in any
portion thereof.
3.13 Related Party Transactions. Except as disclosed on Schedule 3.13, none
of the Shareholders or their respective Affiliates has entered into any
transaction with or is a party to any agreement, lease or other instrument, or
as of the date of this Agreement is indebted to or is owed money by, any of the
Corporations not disclosed or reflected in the Financial Statements. Except as
disclosed on Schedule 3.13, none of the Shareholders or their Affiliates owns
any direct or indirect interest of any kind in, or controls or is a director,
officer, employee, shareholder or partner of, or consultant or lender to or
borrower from or has the right to participate in the profits of, any Person
which is a competitor, supplier, customer, landlord, tenant, creditor or debtor
of the Corporations, other than interests as a record or beneficial owner of
less than five percent (5%) of a class of capital stock of a corporation listed
on a national securities exchange or on the NASDAQ Stock Market.
3.14 Contracts and Agreements; Adverse Restrictions.
(a) Schedule 3.14(a) lists, as of the Signing Date, and includes copies of,
all material contracts and agreements (other than leases and documents included
with Schedule 3.12(b) and contracts and agreements
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that are listed on other Schedules to this Agreement) to which each of the
Corporations is a party or by which it or any of its property is bound. Except
as disclosed on Schedule 3.14(a) or such other Schedules, all such contracts and
agreements included in Schedule 3.14(a) or such other Schedules are in full
force and effect and binding upon the parties thereto. Except as described or
cross referenced on Schedule 3.14(a) or such other Schedules, none of the
Corporations nor, to the Corporations' or any Shareholder's knowledge, any other
parties to such contracts and agreements is in breach thereof; and to the
Corporation's or any Shareholder's knowledge none of the parties has threatened
to breach any of the material provisions thereof or notified the Corporations or
any of the Shareholders of a default thereunder, or exercised any options
thereunder.
(b) Except as set forth on Schedule 3.14(b), there is no outstanding
judgment, order, writ, injunction or decree against any of the Corporations, the
result of which could materially adversely affect any of the Corporations or its
business or any of the Corporate Properties, nor has any of the Corporations
been notified that any such judgment, order, writ, injunction or decree has been
requested.
(c) Except as set forth on Schedule 3.14(c), none of the Corporations is a
party to any agreement which (i) purports to restrict or prohibit in any
material respect any of them or any Affiliate corporation from, directly or
indirectly, engaging in any business currently engaged in by the Corporations or
any Affiliate corporation or (ii) would restrict or prohibit WCI or any
subsidiary of WCI from engaging in such business. None of the Corporations'
officers, directors or key employees is a party to any agreement which, by
virtue of such person's relationship with any Corporation, restricts in any
material respect any Corporation or any Affiliate of any Corporation from,
directly or indirectly, engaging in any such business.
3.15 Insurance. Schedule 3.15 is a complete list, and includes copies, as
of the Signing Date, of all insurance policies in effect on the Signing Date or,
with respect to "occurrence" policies that were in effect, carried by any of the
Corporations in respect of the Corporate Properties or any other property used
by the Corporations specifying, for each policy, the name of the insurer, the
type of risks insured, the deductible and limits of coverage, and the annual
premium therefor. During the last five years, there has been no lapse in any
material insurance coverage of any of the Corporations. For each insurer
providing coverage for any of the contingent or other liabilities listed on
Schedule 3.8, except to the extent otherwise set forth in Part II of Schedule
3.8, each such insurer, if required, has been properly and timely notified of
such liability, no reservation of rights letters have been received by any of
the Corporations and the insurer has assumed defense of each suit or legal
proceeding. To the knowledge of the Corporations and the Shareholders, all such
proceedings are fully covered by insurance, subject to normal deductibles.
3.16 Personnel. Schedule 3.16 is a complete list, as of the Signing Date,
of all officers, directors and employees (by type or classification) of each of
the Corporations and their respective rates of compensation, including (i) the
portions thereof attributable to bonuses, (ii) any other salary, bonus, stock
option, equity participation, or other compensation arrangement made with or
promised to any of them, and (iii) copies of all employment agreements with
non-union officers, directors and employees. Schedule 3.16 also lists the
driver's license number for each driver of each of the Corporations' motor
vehicles. Except as set forth on Schedule 3.16, all written or oral employment
contracts with employees of the Corporations are terminable "at will" without
payment of severance or other benefits (including, without limitation, stock
options or other rights to obtain equity in the Corporations).
3.17 Benefit Plans and Union Contracts.
(a) Schedule 3.17(a) is a complete list as of the Signing Date, and
includes copies (or, in the case of oral arrangements, descriptions) of, all
employee benefit plans and agreements (written or oral) currently maintained or
contributed to by each of the Corporations (other than union contracts and
agreements between a Corporation and any collective bargaining group ("Union
Contracts")), including employment agreements and any other agreements
containing "Golden Parachute" provisions, retirement and welfare benefit plans
(including those provided for in or pursuant to all Union Contracts) and
deferred compensation agreements, together with copies of such plans, agreements
and any trusts related thereto, and classifications of employees covered thereby
as of the Signing Date. Except for the employee benefit plans described on
Schedule 3.17(a), none of the Corporations has any other pension, retirement,
welfare, profit sharing, deferred compensation, stock option, employee stock
purchase or other employee benefit plans or arrangements with any party other
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than those arising under a Union Contract. Except as disclosed on Schedule
3.17(a), all employee benefit plans listed on Schedule 3.17(a) are fully funded
and in substantial compliance with all applicable federal, state and local
statutes, ordinances and regulations. Except as disclosed on Schedule 3.17(a),
all such plans that are intended to qualify under Section 401(a) of the Code
have been determined by the Internal Revenue Service to be so qualified, and
copies of such determination letters are included as part of Schedule 3.17(a).
Except as disclosed on Schedule 3.17(a), all reports and other documents
required to be filed with any governmental agency or distributed to plan
participants or beneficiaries (including, but not limited to, actuarial reports,
audits or tax returns) under such plans (other than plans provided for in or
pursuant to all Union Contracts) have been timely filed or distributed, and
copies thereof for the period from January 1, 1996, to the Signing Date, are
included as part of Schedule 3.17(a). All employee benefit plans listed on such
Schedule other than those provided for in or pursuant to Union Contracts have
been operated substantially in accordance with the terms and provisions of the
plan documents and all related documents and policies. None of the Corporations
has incurred any liability for excise tax or penalty due to the Internal Revenue
Service or U.S. Department of Labor nor any liability to the Pension Benefit
Guaranty Corporation for any employee benefit plan, and none of the Corporations
and, to the knowledge of the Corporations and the Shareholders, no
party-in-interest or disqualified person, has engaged in any transaction or
other activity which would give rise to such liability. None of the Corporations
has participated in or made contributions to any "multi-employer plan" as
defined in the Employee Retirement Income Security Act of 1974 ("ERISA"), nor
would any of the Corporations or any Affiliate be subject to any withdrawal
liability with respect to such a plan if any such employer withdrew from such a
plan immediately prior to the Effective Time. No employee pension benefit plan
listed on Schedule 3.17 is under funded on a termination basis as of the date of
this Agreement.
(b) Schedule 3.17(b) is a complete list, and includes copies, of all Union
Contracts. Except as set forth on Schedule 3.17(b), each of the Corporations is
in compliance in all material respects with all Union Contracts and all
applicable federal and state laws respecting employment and employment
practices, terms and conditions of employment, wages and hours, and
nondiscrimination in employment, and none of the Corporations is engaged in any
unfair labor practice. Except as set forth on Schedule 3.17(b), there is no
charge pending or, to any of the Corporations' or any Shareholder's knowledge,
threatened, against any of the Corporations before any court or agency and
alleging unlawful discrimination in employment practices and there is no charge
of or proceeding with regard to any unfair labor practice against any of the
Corporations pending before the National Labor Relations Board. There is no
labor strike, dispute, slow down or stoppage as of the Signing Date, existing or
to the knowledge of the Corporations or the Shareholders threatened, against any
of the Corporations; no union organizational activity exists respecting
employees of any of the Corporations who are not currently subject to a Union
Contract, and Schedule 3.17(b) contains a list of all arbitration or grievance
proceedings that have occurred since the Balance Sheet Date. No one is now
petitioning for union representation of any employees of any of the Corporations
who are not currently subject to a Union Contract. Except as set forth on
Schedule 3.17(b), none of the Corporations has experienced any labor strike,
slow-down, work stoppage or labor difficulty during the last five years.
(c) Except as set forth on Schedule 3.17(c), no payment made to any
employee, officer, director or independent contractor of any of the Corporations
(the "Recipient") pursuant to any employment contract, severance agreement or
other arrangement (the "Golden Parachute Payment") will be nondeductible by any
of the Corporations because of the application of Sections 280G and 4999 of the
Code to the Golden Parachute Payment, nor will any of the Corporations be
required to compensate any Recipient because of the imposition of an excise tax
(including any interest or penalties related thereto) on the Recipient by reason
of Sections 280G and 4999 of the Code.
3.18 Taxes.
(a) Each of the Corporations has timely filed or will timely file all
requisite federal, state, local and other tax and information returns due for
all fiscal periods ended on or before the Closing Date. All such returns are
accurate and complete. Except as set forth on Schedule 3.18, there are no open
years (other than those within the statute of limitations), examinations in
progress, extensions of any statute of limitations or claims against any of the
Corporations relating to federal, state, local or other taxes (including
penalties and interest) for any period or periods prior to and including the
Signing Date and no notice of any claim for taxes has been
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received that remains open. Copies of (i) any tax examinations, (ii) extensions
of statutory limitations, and (iii) the federal income tax returns of each of
the Corporations for its last three fiscal years, are attached as part of
Schedule 3.18. The Corporations are not required to file state income tax
returns or to pay state income tax. Copies of all other federal, state, local
and other tax and information returns for all prior years of each of the
Corporations' existence have been made available to WCI and are among the
records of each of the Corporations that will accrue to WCI at the Closing.
Except as set forth in Schedule 3.18, none of the Corporations has been
contacted by any federal, state or local taxing authority regarding a
prospective examination.
(b) Except as set forth on Schedule 3.18 (which schedule also includes the
amount due with respect to each of the Corporations) each of the Corporations
has duly paid all taxes and other related charges required to be paid prior to
the Signing Date. The reserves for taxes contained in the Financial Statements
of each of the Corporations are adequate to cover its tax liability as of the
Signing Date.
(c) Each of the Corporations has withheld all required amounts from its
employees for all pay periods in full and complete compliance with the
withholding provisions of applicable federal, state and local laws. All required
federal, state and local and other returns with respect to income tax
withholding, social security, and unemployment taxes have been duly filed by the
Corporations for all periods for which returns are due, and the amounts shown on
all such returns to be due and payable have been paid in full.
3.19 Copies Complete; Required Consents. Except as disclosed on Schedule
3.19, the certified copies of the Articles of Incorporation and Bylaws of the
Corporations, as amended to the Signing Date, and the copies of all leases,
instruments, agreements, licenses, permits, certificates or other documents that
have been delivered to WCI in connection with the transactions contemplated
hereby are complete and accurate as of the Signing Date and are true and correct
copies of the originals thereof. Except as specifically disclosed on Schedule
3.19, the rights and benefits of the Corporations under such leases,
instruments, agreements, licenses, permits, certificates or other documents will
not be materially adversely affected by the transactions contemplated hereby.
None of such leases, instruments, agreements, licenses, permits, site
assessments, certificates or other documents requires notice to, or consent or
approval of, any governmental agency or other third party to any of the
transactions contemplated hereby, except the Required Governmental Consents and
such consents and approvals as are listed on Schedule 3.19.
3.20 Customers, Billings, Current Receipts and Receivables. The
Corporations have made available to WCI a current, accurate and complete list,
or computer disk listing, customers that each of the Corporations serves on an
ongoing basis, including name, location and current billing rate, as of the
Balance Sheet Date and an accurate and complete aging of all accounts and notes
receivable from customers as of the Balance Sheet Date, showing amounts due in
30-day aging categories. Except to the extent of the allowance for bad debts
reflected on the Financial Statements or otherwise disclosed on Schedules 3.11
and 3.20, to the knowledge of the Corporations and the Shareholders, each of the
Corporations' accounts and notes receivable are collectible in the amounts shown
on Schedules 3.11 and 3.20. Schedule 3.20 includes the average monthly revenues
of each of the Corporations derived from billings to its customers for the
twelve months preceding the Signing Date. Except as set forth on Schedule 3.20,
none of the Corporations nor any of the Shareholders has knowledge of any fact
(other than general economic and industry conditions) which indicates that any
of the Corporations' average monthly revenues derived from billings to its
customers after the Closing Date should not continue at approximately the same
rate as before the Closing Date.
3.21 No Change with Respect to the Corporations. Except as set forth on
Schedule 3.21, since the Balance Sheet Date, the business of each of the
Corporations has been conducted only in the ordinary course and there has been
no change in the condition (financial or otherwise) of the assets, liabilities
or operations of the Corporations other than changes in the ordinary course of
business, none of which either singly or in the aggregate has been materially
adverse. Specifically, and without limiting the generality of the foregoing,
except as set forth on Schedule 3.21, with respect to each of the Corporations,
since the Balance Sheet Date, there has not been:
(a) Any material change in its financial condition, assets,
liabilities (contingent or otherwise), income, operations or business which
would have a material adverse effect on the financial condition,
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assets, liabilities (contingent or otherwise), income, operations or
business of such Corporation, taken as a whole (a "Material Adverse
Effect");
(b) Any material damage, destruction or loss (whether or not covered
by insurance) adversely affecting any material portion of its properties or
business;
(c) Any change in or agreement to change (i) its shareholders, (ii)
ownership of its authorized capital or outstanding securities, or (iii) its
securities;
(d) Any declaration or payment of, or any agreement to declare or pay,
any dividend or distribution in respect of its capital stock or any direct
or indirect redemption, purchase or other acquisition of any of its capital
stock;
(e) Any increase or bonus or promised increase or bonus in the
compensation payable or to become payable by it, in excess of usual and
customary practices, to any of its directors, officers, employees or
agents, or any accrual or arrangement for or payment of any bonus or other
special compensation to any employee or any severance or termination pay
paid to any of its present or former officers or other key employees;
(f) Any labor dispute or any other event or condition of any character
(other than general economic conditions) with respect to any of its
employees which could have a Material Adverse Effect;
(g) Any sale or transfer, or any agreement to sell or transfer, any of
its material assets, property or rights to any other person, including,
without limitation, the Shareholders and their Affiliates, other than in
the ordinary course of business;
(h) Any cancellation, or agreement to cancel, any material
indebtedness or other material obligation owing to it, including, without
limitation, any indebtedness or obligation of any of the Shareholders or
any Affiliate thereof;
(i) Any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of its assets, property
or rights or requiring consent of any party to the transfer and assignment
of any such assets, property or rights;
(j) Any purchase or acquisition of, or any agreement, plan or
arrangement to purchase or acquire, any of its property, rights or assets
outside the ordinary course of its business;
(k) Any waiver of any of its material rights or claims;
(l) Any new or any amendment or termination of any existing material
contract, agreement, license, permit or other right to which it is a party;
or
(m) Any other material transaction outside the ordinary course of
business.
3.22 Balance Sheet Date Debt; Balance Sheet Date Current Assets and
Balance Sheet Date Current Liabilities.
(a) Schedule 3.22(a) lists, and includes copies of the related notes, loan
agreements, security agreements, pledge agreements, mortgages and other
instruments giving rise to any lien on any Corporation's assets, leases and
other instruments, (i) the amount of the aggregate debt (other than trade
payables) of each of the Corporations outstanding on the Balance Sheet Date to
be repaid by WCI or one of the Surviving Corporations at or immediately after
the Effective Time and all prepayment penalties incurred or to be incurred by
WCI or one of the Surviving Corporations in connection with the repayment of any
such debt, (ii) the amount of the aggregate debt (other than trade payables) of
the Corporations outstanding on the Balance Sheet Date which will remain
outstanding obligations of one of the Surviving Corporations after the Effective
Time, and all prepayment penalties applicable to such debt if repaid prior to
maturity, including in each case all interest accrued through and including the
Balance Sheet Date, (iii) the aggregate amount of the present value as of the
Balance Sheet Date, discounted at the lease rate factor, if known, inherent in
the lease or, if the lease rate factor is not known, at the rate charged to each
of the Corporations by a third party lender in connection with its most recent
borrowing to finance equipment, of all equipment lease obligations of the
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Corporations that are not capitalized lease obligations, and (iv) the aggregate
amount of the present value as of the Balance Sheet Date of all capitalized
equipment lease obligations (determined in accordance with generally accepted
accounting principles) of each of the Corporations (the "Balance Sheet Date
Debt").
(b) Schedule 3.22(b) sets forth the amount of the aggregate current
liabilities (including any reserve for unpaid taxes and excluding the current
and other portions of long-term and other debt to the extent such portions are
included in Balance Sheet Date Debt) and trade payables of each of the
Corporations as of the Balance Sheet Date (the "Balance Sheet Date Current
Liabilities") and the amount of the aggregate cash and other current assets of
each of the Corporations as of the Balance Sheet Date, including prepaid
expenses the benefit of which will survive the Effective Time and the accounts
receivable of the Corporations earned prior to the Balance Sheet Date, and
collectible (less an allowance for doubtful accounts) on or after the Balance
Sheet Date (the "Balance Sheet Date Current Assets").
3.23 Bank Accounts.
(a) Schedule 3.23(a) is a complete and accurate list, as of the Signing
Date, of:
(i) the name of each bank in which each of the Corporations has
accounts or safe deposit boxes;
(ii) the name(s) in which the accounts or boxes are held;
(iii) the type of account; and
(iv) the name of each person authorized to draw thereon or have access
thereto.
(b) Schedule 3.23(b) is a complete and accurate list, as of the Signing
Date, of:
(i) each credit card or other charge account issued to each of the
Corporations; and
(ii) the name of each person to whom such credit cards or other charge
accounts have been issued.
3.24 Compliance with Laws. Except as disclosed on Schedule 3.24, each of
the Corporations has complied with, and each of the Corporations is presently in
compliance with, federal, state and local laws, ordinances, codes, rules,
regulations, Governmental Permits, orders, judgments, awards, decrees, consent
judgments, consent orders and requirements applicable to it (collectively
"Laws"), including, but not limited to, the Americans with Disabilities Act, the
Federal Occupational Safety and Health Act, and Environmental Laws (as defined
below). Except as disclosed on Schedule 3.24, there has been no assertion to the
knowledge of the Corporations or the Shareholders by any party that any of the
Corporations is in violation of any Laws. Specifically and without limiting the
generality of the foregoing, except as disclosed on Schedule 3.24:
(a) Except as permitted under applicable laws and regulations,
including, without limitation, Environmental Laws, none of the Corporations
has accepted, processed, handled, transferred, generated, treated, stored
or disposed of any Hazardous Substances (as defined below) nor has any of
the Corporations accepted, processed, handled, transferred, generated,
treated, stored or disposed of asbestos, medical waste, radioactive waste
or municipal waste, except in compliance with Environmental Laws.
(b) During each of the Corporations' ownership or leasing of the
Corporate Property owned or leased by it and, to the knowledge of the
Corporations and the Shareholders, prior to the Corporations' ownership or
leasing of such Corporate Property, no Hazardous Substances, other than
that allowed under Environmental Laws, has been disposed of, or otherwise
released on any Corporate Property.
(c) During each of the Corporations' ownership or leasing of the
Corporate Property owned or leased by it and, to the knowledge of the
Corporations and the Shareholders, prior to each of the Corporations'
ownership or leasing of such Corporate Property, no Corporate Property has
ever been subject to or received any notice of any private, administrative
or judicial action, or notice of any intended private, administrative or
judicial action relating to the presence or alleged presence of any
Hazardous Substance in, under, upon or emanating from any Corporate
Property or any real property now or previously owned or leased by any of
the Corporations. There are no pending and, to the Corporations' and
Shareholders' knowledge, no threatened actions or proceedings from any
governmental agency or any
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other entity involving remediation of any condition of the Corporate
Property, including, without limitation, petroleum contamination, pursuant
to Environmental Laws.
(d) Except as allowed under Environmental Laws, none of the
Corporations has knowingly sent, transported or arranged for the
transportation or disposal of any Hazardous Substance, to any site,
location or facility.
(e) As used herein, "Environmental Law" means any federal, state,
local or foreign law, statute, ordinance, rule, regulation, code, license,
permit, authorization, approval, consent, legal doctrine, order, judgment,
decree, injunction, requirement or agreement with any governmental entity
applicable to the Corporations relating to (x) the protection, preservation
or restoration of the environment (including, without limitation, air,
water vapor, surface water, groundwater, drinking water supply, surface
land, subsurface land, plant and animal life or any other natural resource)
or to human health or safety or (y) the exposure to, or the use, storage,
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of Hazardous Substances. The term
"Environmental Law" includes, without limitation, (i) the Federal
Comprehensive Environmental Response Compensation and Liability Act of
1980, the Superfund Amendments and Reauthorization Act, the Federal Water
Pollution Control Act of 1972, the Federal Clean Air Act, the Federal Clean
Water Act, the Federal Resource Conservation and Recovery Act of 1976
(including the Hazardous and Solid Waste Amendments thereto (the "RCRA")),
the Federal Solid Waste Disposal Act and the Federal Toxic Substances
Control Act, the Federal Insecticide, Fungicide and Rodenticide Act, and
the Federal Occupational Safety and Health Act of 1970, each as amended,
and (ii) any common law or equitable doctrine applicable to the
Corporations (including, without limitation, injunctive relief and tort
doctrines such as negligence, nuisance, trespass and strict liability) that
may impose liability or obligations for injuries or damages due to, or
threatened as a result of, the presence of, effects of or exposure to any
Hazardous Substance.
(f) As used herein, "Hazardous Substance" means any substance
presently listed, defined, designated or classified as hazardous, toxic,
radioactive, or dangerous, or otherwise regulated, under any Environmental
Law. Hazardous Substance includes any substance to which exposure is
regulated by any government authority or any Environmental Law including,
without limitation, any toxic waste, pollutant, contaminant, hazardous
substance, toxic substance, hazardous waste, special waste, industrial
substance or petroleum or any derivative or by-product thereof, radon,
radioactive material, asbestos, or asbestos containing material, urea
formaldehyde foam insulation, lead or polychlorinated biphenyls.
(g) With respect to the disclosure on Schedule 3.24 that the Hidden
Valley Landfill is a federal Superfund site, to the knowledge of the
Corporations and the Shareholders Pierce County is responsible for closure
and post-closure costs relating to the closure of such landfill and such
costs have been fully funded. None of the Corporations has been notified
that it is a potentially responsible party under Environmental Laws with
respect to any clean-up, closure or post-closure costs relating to such
landfill, and none of the Corporations has entered into any written or oral
agreement or understanding to bear any portion of such costs.
3.25 Powers of Attorney. None of the Corporations has granted any power of
attorney (except routine powers of attorney relating to representation before
governmental agencies) or entered into any agency or similar agreement whereby a
third party may bind or commit any of the Corporations in any manner.
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3.26 Underground Storage Tanks. Except as set forth on Schedule 3.26, no
underground storage tanks containing petroleum products or wastes or other
hazardous substances regulated by 40 CFR 280 or other Environmental Laws have
been put on or under any Corporate Property by the Corporations or the
Shareholders or, to the knowledge of the Corporations or the Shareholders, any
other party, and are currently or have been located on any Corporate Property.
Except as set forth on Schedule 3.26, none of the Corporations has owned or
leased any real property not included in the Corporate Property having any
underground storage tanks containing petroleum products or wastes or other
hazardous substances regulated by 40 CFR 280 or other Environmental Laws that
were put on or under any such real property by the Corporations or the
Shareholders, or, to the knowledge of the Corporations or the Shareholders, any
other party and are currently on such real property. As to each such underground
storage tank ("UST") identified on Schedule 3.26, each of the Corporations has
provided to WCI, on Schedule 3.26:
(a) The location of the UST, information and material, including any
available drawings and photographs, showing the location, and whether any
of the Corporations currently owns or leases the property on which the UST
is located (and if one of the Corporations does not currently own or lease
such property but did own or lease such property at some time, the dates on
which it did and the current owner or lessee of such property);
(b) The date of installation and specific use or uses of the UST;
(c) Copies of tank and piping tightness tests and cathodic protection
tests and similar studies or reports for each UST;
(d) A copy of each notice to or from a governmental body or agency
relating to the UST;
(e) Other material records with regard to the UST, including, without
limitation, repair records, financial assurance compliance records and
records of ownership; and
(f) To the extent not otherwise set forth pursuant to the above, a
summary description of instances, past or present, in which, to any of the
Corporations' or the Shareholders' knowledge, the UST failed to meet
applicable standards and regulations for tightness or otherwise and the
extent of such failure, and any other operational or environmental problems
with regard to the UST, including, without limitation, spills, including
spills in connection with delivery of materials to the UST, releases from
the UST and soil contamination. Except to the extent set forth on Schedule
3.26, each of the Corporations has complied with Environmental Laws
regarding the installation, use, testing, monitoring, operation and closure
of each UST described on Schedule 3.26.
3.27 Patents, Trademarks, Trade Names, Etc. Schedule 3.27 lists all
patents, trade names, fictitious business names, trademarks, service marks, and
copyrights owned by each of the Corporations or which it is licensed to use
(other than licenses to use software for personal computer operating systems
that were provided when the computer was purchased and licenses to use software
for personal computers that are granted to retail purchasers of such software).
Except as set forth on Schedule 3.27, to the knowledge of each of the
Corporations and each of the Shareholders, no trade secrets, know-how,
intellectual property, trademarks, trade names, assumed names, copyrights, or
designations used by any of the Corporations in its business infringe on any
patents, trademarks, or copyrights, or any other rights of any person. Except as
set forth on Schedule 3.27, none of the Corporations nor any of the Shareholders
knows or has any reason to believe that there are any claims of third parties to
the use of any such names or any similar name, or knows of or has any reason to
believe that there exists any basis for any such claim or claims.
3.28 Assets, Etc. Necessary to Business. Each of the Corporations owns or
leases all properties and assets, real, personal, and mixed, tangible and
intangible, that are necessary for it to carry on its business as presently
conducted.
3.29 Condemnation. Except as set forth on Schedule 3.29, no Corporate
Property owned or leased by any of the Corporations is the subject of, or to the
knowledge of the Corporations and the Shareholders would be affected by, any
pending condemnation or eminent domain proceedings, and, to the knowledge of the
Corporations and the Shareholders, no such proceedings are threatened.
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3.30 Suppliers and Customers. Except as set forth on Schedule 3.30, none
of the Corporations nor any of the Shareholders has knowledge of any fact (other
than general economic and industry conditions) which indicates that any of the
suppliers supplying products, components, materials or providing use of, or
access to, landfills or disposal sites to any of the Corporations intends to
cease providing such items, use or access to any of the Corporations, nor does
any of the Corporations or any of the Shareholders have knowledge of any fact
(other than general economic and industry conditions) which indicates that any
of the customers of any of the Corporations intends to terminate, limit or
reduce its business relations with any of the Corporations.
3.31 Absence of Certain Business Practices. Other than lobbying activities
permitted under applicable law and except for gifts of nominal value to public
officials during the holiday season, none of the Corporations nor any of the
Shareholders has directly or indirectly within the past five years given or
agreed to give any gift or similar benefit to any customer, supplier,
governmental employee or other person who is or may be in a position to help or
hinder the business of any of the Corporations in connection with any actual or
proposed transaction which (a) might subject any of the Corporations to any
damage or penalty in any civil, criminal or governmental litigation or
proceeding, (b) if not given in the past, might have had an adverse effect on
the financial condition, business or results of operations of any of the
Corporations, or (c) if not continued in the future, might adversely affect the
financial condition, business or operations of any of the Corporations or which
might subject any of the Corporations to suit or penalty in any private or
governmental litigation or proceeding.
3.32 No Misleading Statements. The representations and warranties of the
Corporations and the Shareholders contained in this Agreement, the Exhibits and
Schedules hereto and all other documents and information furnished to WCI and
its representatives pursuant hereto are complete and accurate in all material
respects and do not include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements made not misleading.
3.33 Brokers; Finders. No person has acted directly or indirectly as a
broker, finder or financial advisor for any of the Corporations or a Shareholder
in connection with the transactions contemplated by this Agreement and no person
is entitled to any broker's, finder's, financial advisory or similar fee or
payment in respect thereof based in any way on any agreement, arrangement or
understanding made by or on behalf of any of the Corporations or a Shareholder.
3.34 S Corporation Matters. Each of the Corporations listed on Schedule
3.34 has elected to be treated as an S Corporations within the meaning of the
Code for the years listed on Schedule 3.34. Schedule 3.34 includes an accurate
disclosure of taxable income reported by each of the Corporations and of all
distributions made by each of the Corporations from January 1, 1993, through the
Signing Date.
3.35 Registration Statements. None of the information to be supplied by
the Corporations or the Shareholders for inclusion in the Registration
Statements or the Proxy Statement (the "Proxy Statement") of WCI prepared in
connection with the WCI Shareholders Approval (as defined below) when used in a
manner approved in writing by the Shareholders will, at the time of the filing
of the Registration Statements or Proxy Statement and any amendments or
supplements thereto, and at the time of the meeting of stockholders of WCI and
the Shareholders of the Corporations to be held in connection with the
transactions contemplated by this Agreement, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they are made, not misleading.
3.36 Accredited Investors. Each of the Shareholders is an "accredited
investor" as defined in Rule 501(a) under the Act.
4. Representations and Warranties of WCI and the Merger Subs
WCI and the Merger Subs, jointly and severally, represent and warrant to
the Corporations and the Shareholders that each of the following representations
and warranties is true as of the Signing Date and will be true as of the Closing
Date:
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4.1 Existence and Good Standing. WCI is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
WCI has full corporate power and authority to own and lease its properties and
to carry on its business as now conducted. WCI is not required to be qualified
or licensed to conduct business as a foreign corporation in any jurisdiction
where the failure to be so qualified would have a Material Adverse Effect. Each
Merger Sub. is a corporation duly organized, validly existing and in good
standing under the laws of the State of Washington. Each Merger Sub. has full
corporate power and authority to own and lease its properties and to carry on
its business as now conducted. No Merger Sub. is required to be qualified or
licensed to conduct business as a foreign corporation in any jurisdiction where
the failure to be so qualified would have a Material Adverse Effect.
4.2 No Contractual Restrictions. No provisions exist in any article,
document or instrument to which WCI is a party or by which it is bound that
would be violated by consummation of the transactions contemplated by this
Agreement or the Filed Plans, other than provisions in WCI's Credit Agreement
with its banks, which have been complied with prior to the Signing Date. No
provisions exist in any article, document or instrument to which any Merger Sub.
is a party or by which any of them is bound that would be violated by
consummation of the transactions contemplated by this Agreement or the Filed
Plans.
4.3 Authorization of Agreement. Subject to obtaining the approval of the
percentage of holders of the outstanding Shares of WCI required by NASDAQ Rule
4310(c)(25)(H)C.2 the ("WCI Shareholders Approval"), this Agreement and the
Filed Plans have been duly authorized, executed and delivered by WCI and each
Merger Sub., and, subject to the due authorization, execution and delivery by
the Corporations and the Shareholders, constitutes a legal, valid and binding
obligation of WCI and each Merger Sub. Each of WCI and the Merger Subs. has full
corporate power, legal right and corporate authority to enter into and perform
its obligations under this Agreement and the Filed Plans and to carry on its
business as presently conducted. The execution and delivery of this Agreement
and the Filed Plans and the consummation of the transactions contemplated hereby
and thereby and the fulfillment of and compliance with the terms and conditions
hereof and thereof do not and will not, after the giving of notice, or the lapse
of time or otherwise: (a) violate any provisions of any law, regulation,
judicial or administrative order, writ, award, judgment or decree applicable to
WCI or any Merger Sub.; (b) conflict with any of the provisions of the Amended
and Restated Certificate of Incorporation or Amended and Restated Bylaws of WCI;
(c) conflict with any of the provisions of the Articles of Incorporation or
Bylaws of any Merger Sub.; or (d) conflict with, result in a breach of or
constitute a default under any material agreement or instrument to which either
WCI or any Merger Sub. is a party or by which it is bound.
4.4 Status of Shares. When delivered to the Shareholders after the
Effective Time in accordance with the terms and conditions of this Agreement,
the Aggregate WCI Stock shall have been duly authorized and delivered shares of
WCI, shall be fully paid and nonassessable, and shall have been registered under
the Act.
4.5 Governmental Authorities; Consents. Except for (i) the filing of the
Filed Plans with the Secretary of State of the State of Washington, (ii) any
filings by WCI and the Merger Subs. required by the HSR Act, (iii) the filing of
the Proxy Statement with the SEC pursuant to the Securities Exchange Act of
1934, as amended (the "Exchange Act") and any necessary filings with various
state securities commissions, (iv) any required filings with or approvals from
The Nasdaq Stock Market, Inc. ("Nasdaq"), and (v) any required filings with
applicable state regulatory authorities, neither WCI nor any Merger Sub. is
required to submit any notice, report or other filing with any governmental
authority in connection with the execution or delivery by it of this Agreement,
the Filed Plans or the consummation of the transactions contemplated hereby or
thereby, and no consent, approval or authorization of any governmental or
regulatory authority or any other party or person is required to be obtained by
either WCI or any Merger Sub. in connection with its execution, delivery and
performance of this Agreement and the Filed Plans or the transactions
contemplated hereby or thereby, except such as shall have been obtained by the
Closing Date.
4.6 SEC Documents. WCI has filed all required reports, schedules, forms,
statements, and other documents with the Securities and Exchange Commission
("SEC") since May 22, 1998, has filed the Registration Statements and will file
the Proxy Statement (together with later filed documents that revise or
supersede earlier filed documents, the "WCI SEC Documents"). As of their
respective dates, the WCI SEC
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Documents complied or will comply in all material respects with the requirements
of the Act or the Exchange Act, as the case may be, and the rules and
regulations of the SEC promulgated thereunder applicable to such WCI SEC
Documents. None of the WCI SEC Documents contained or will contain any untrue
statement of a material fact or omitted or will omit to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were or are made, not
misleading. The financial statements of WCI included in the WCI SEC Documents
complied or will comply as of their respective dates of filing with the SEC in
all material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, have been prepared in
accordance with generally accepted accounting principles (except, in the case of
unaudited statements, as permitted by Regulation S-X promulgated by the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto), and are correct and complete and fairly present
the consolidated financial position of WCI and its consolidated subsidiaries as
of the dates thereof and the consolidated results of their operations and cash
flows for the periods then ended (subject, in the case of unaudited statements,
to normal year-end audit adjustments).
4.7 Capital Stock.
(a) The WCI SEC Documents set forth WCI's capitalization in all material
respects. All outstanding shares of WCI Common Stock have been duly authorized
and validly issued and are fully paid and nonassessable. WCI issued all such
shares in compliance with applicable federal and state securities laws. The WCI
Common Stock is registered pursuant to Section 12(g) of the Exchange Act and has
been approved for listing on the Nasdaq National Market, and the Aggregate WCI
Stock will, upon issuance, be registered under the Exchange Act and listed on
the NASDAQ Stock Market.
(b) WCI owns, beneficially and of record, all issued and outstanding shares
of the Merger Subs., which shares are validly issued, fully paid, and
non-assessable, and free and clear of all liens, other than liens in favor of
WCI's banks pursuant to the terms of its Credit Agreement.
4.8 No Misleading Statements. The representations and warranties of WCI and
the Merger Subs. contained in this Agreement, the Exhibits and Schedules hereto
and all other documents and information furnished to the Corporations, the
Shareholders or their representatives pursuant hereto are accurate and complete
in all material respects, and do not include any untrue statement of a material
fact or omit to state any material fact necessary to make the statements made
not misleading.
4.9 Brokers; Finders. No person has acted directly or indirectly as a
broker, finder or financial advisor for WCI or any Merger Sub. in connection
with the transactions contemplated by this Agreement and no person is entitled
to any broker's, finder's, financial advisory or similar fee or payment in
respect thereof based in any way on any agreement, arrangement or understanding
made by or on behalf of WCI or any Merger Sub.
4.10 Disclosure Schedules. Any matter disclosed by WCI or any Merger Sub.
on any Schedule to this Agreement shall be deemed to have been disclosed on
every other Schedule that refers to such Schedule by cross reference so long as
the nature of the matter disclosed is obvious from a fair reading of the
Schedule on which the matter is disclosed.
5. Covenants of the Corporations and the Shareholders Prior to Effective
Time
5.1 Access; Confidential Information. Between the Signing Date and the
Effective Time, each Corporation will afford to the officers and authorized
representatives of WCI, including, without limitation, its engineers, counsel,
independent auditors and investment bankers, access to the Facilities, plants,
Corporate Properties and other properties, books and records of such Corporation
and will furnish WCI with such additional financial and operating data and other
information as to the business and properties of such Corporation as WCI may
from time to time reasonably request. The Shareholders and each Corporation will
cooperate with WCI, its representatives and counsel in the preparation of any
documents or other material which may be required by any governmental agency
without undo expense to any of the Corporations or the Shareholders. WCI will
cause all information obtained from the Shareholders and the Corporations in
connection with the negotiation and performance of this Agreement to be treated
as confidential (except such information which is in the public domain or which
WCI may be required to disclose in the Registration
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Statements, the Proxy Statement, under the Act or the Exchange Act, to any
governmental agency, or pursuant to any court or regulatory agency order) and
will not use, and will not knowingly permit others to use, any such confidential
information in a manner detrimental to any Corporation or the Shareholders.
Other than to Harold E. LeMay and certain key employees of Harold E. LeMay
Enterprises, Inc., the Corporations and the Shareholders covenant and agree not
to disclose to any third persons other than their accountants, brokers, bankers,
investment advisers or legal counsel any of the terms or provisions of this
Agreement prior to the date the Proxy Statement is filed with the SEC without
the prior written consent of WCI.
5.2 Operations. Between the Signing Date and the Effective Time, each
Corporation will:
(a) carry on its business in substantially the same manner as it has
heretofore and not introduce any material new method, or discontinue any
existing material method, of operation or accounting;
(b) maintain its equipment, assets, Corporate Properties and
Facilities, including those held under leases, in as good working order and
condition as at present, ordinary wear and tear excepted;
(c) perform all of its material obligations under agreements relating
to or affecting its assets, Corporate Properties, Facilities, business
operations and rights;
(d) keep in full force and effect present insurance policies or other
comparable insurance coverage;
(e) use commercially reasonable efforts to maintain and preserve its
business organization intact, retain its present employees and maintain its
relationship with suppliers, customers and others having business relations
with it;
(f) file on a timely basis all notices, reports or other filings
required to be filed with or reported to any federal, state, municipal or
other governmental department, commission, board, bureau, agency or any
instrumentality of any of the foregoing wherever located with respect to
the continuing operations of such Corporation;
(g) maintain material compliance with all Governmental Permits and all
laws, rules, regulations and consent orders;
(h) file on a timely basis all complete and correct applications or
other documents necessary to maintain, renew or extend any site assessment,
permit, license, variance or any other approval required by any
governmental authority necessary and/or required for the continuing
operation of each Corporation's business operations, whether or not such
approval would expire before or after the Effective Time; and
(i) advise WCI promptly in writing of any material change in any
document, Schedule, Exhibit, or other information delivered pursuant to
this Agreement.
5.3 No Change. Between the Signing Date and the Effective Time, no
Corporation and, in the case of paragraphs (m), (n) and (o) below, none of the
Shareholders will, without the prior written consent of WCI:
(a) make any change in its Articles of Incorporation or Bylaws;
(b) authorize, issue, transfer or distribute any of its securities
(including issuance of any option, warrant or right with respect thereto);
(c) declare or pay any dividend or make any distribution in respect of
its capital stock whether now or hereafter outstanding, or purchase, redeem
or otherwise acquire or retire for value any shares of its or any other
Corporation's capital stock;
(d) except in accordance with any contracts or commitments entered
into prior to the Signing Date or in the ordinary course of business after
the Signing Date, enter into any contract or commitment or incur or agree
to incur any liability other than in the ordinary course of business other
than the transactions contemplated by this Agreement, borrow funds, or make
any single capital expenditure in excess of $10,000 or in excess of $25,000
in the aggregate during any consecutive thirty day period without regard to
whether such capital expenditure is in the ordinary course of business;
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(e) except as set forth on Schedule 5.3, change or promise to change
the compensation payable or to become payable to any director, officer,
employee or agent, or make or promise to make any bonus payment to any such
person;
(f) create, assume or otherwise permit the imposition of any mortgage,
pledge or other lien (except for current property taxes) or encumbrance
upon or grant any option or right of first refusal with respect to any
assets or properties whether now owned or hereafter acquired;
(g) sell, assign, lease or otherwise transfer or dispose of any
property or equipment other than in the ordinary course of business;
(h) merge or consolidate or agree to merge or consolidate with or into
any firm, corporation or other entity;
(i) waive any material rights or claims;
(j) amend or terminate any material agreement or any site assessment,
permit, license or other right;
(k) enter into any other transaction outside the ordinary course of
such Corporation's business or prohibited hereunder;
(l) revoke any S corporation election by any of the Corporations;
(m) take any action or suffer or permit any event to occur that would
cause any representation or warranty of any Corporation or any Shareholder
to become untrue as of the Closing Date;
(n) take any action that would jeopardize the treatment of the Mergers
as a pooling of interests under Opinion No. 16 of the Accounting Principles
Board ("APB NO. 16"); or
(o) take or fail to take any action which action or failure to take
action is reasonably likely to cause the Corporations or the Shareholders
(except to the extent of stockholders in special circumstances) to
recognize gain or loss for federal income tax purposes as a result of the
consummation of the Mergers or otherwise is reasonably likely to cause the
Mergers not to qualify as a reorganization under Section 368(a) of the
Code.
5.4 Obtain Consents. Promptly after the Signing Date, the Corporations
shall make all filings and take all steps reasonably necessary to obtain all
approvals and consents required to be obtained by the Corporations or the
Shareholders to consummate the transactions contemplated by this Agreement and
otherwise to satisfy the conditions of Sections 6.7 and 6.8.
5.5 No Change in Relative Ownership. Between the Signing Date and the
Effective Time, there will be no change in voting structure or relative
ownership of any Corporation without the prior consent of WCI.
5.6 Control of the Corporations' Operations. Nothing contained in this
Agreement shall give to WCI, directly or indirectly, rights to control or direct
any Corporation's operations prior to the Effective Time. Prior to the Effective
Time, each Corporation shall exercise, consistent with the terms and conditions
of this Agreement, complete control and supervision of its operations.
5.7 Acquisition Transactions. From the Signing Date to the Effective Time,
or earlier termination of this Agreement, no Corporation nor any Shareholder
shall initiate, solicit, negotiate, encourage or provide information to
facilitate, and each of the Corporations and the Shareholders shall not, and
shall use his, her or its reasonable efforts to cause any officer, director or
employee of each Corporation, or any attorney, accountant, investment banker,
financial advisor or other agent retained by him, her or it not to, initiate,
solicit, negotiate, encourage or provide information to facilitate, any proposal
or offer to acquire all or any substantial part of the business or properties of
any Corporation or any capital stock (including without limitation the
Corporation's Stock) of any Corporation, whether by merger, purchase of assets
or otherwise, whether for cash, securities or any other consideration or
combination thereof (any such transactions being referred to herein as an
"Acquisition Transaction"). Each Corporation and Shareholder shall immediately
notify WCI after receipt of any proposal for an Acquisition Transaction,
indication of interest or request for
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information relating to any Corporation in connection with an Acquisition
Transaction or for access to the properties, books or records of any Corporation
by any person or entity that informs the Board of Directors of any Corporation
that it is considering making, or has made, a proposal for an Acquisition
Transaction. Such notice to WCI shall be made orally and in writing.
5.8 Bonnie Trust Approval. The Corporations shall seek to obtain the
Bonnie Trust Approval prior to the Closing Date. Upon execution of a counterpart
of the signature page of this Agreement in the space provided thereon or a
separate instrument agreeing to be bound to the terms and conditions of this
Agreement, the Bonnie Trust shall be bound by such terms and conditions and
shall be deemed a Shareholder for all purposes of this Agreement.
6. Conditions Precedent to Obligation of WCI and the Merger Subs, to
Close. The obligations of WCI and the Merger Subs. under this Agreement are
subject to the satisfaction, at or before Closing, of all of the following
conditions precedent, unless waived in writing by WCI:
6.1 Representations and Warranties. All representations and warranties of
the Corporations and the Shareholders contained in this Agreement or in any
Exhibit, Schedule, certificate or document delivered by the Corporations and the
Shareholders under this Agreement shall be true, correct and complete on and as
of the date when made and at all times prior to the Closing Date, shall be
deemed to be made again on the Closing Date, and shall then be true, correct and
complete as of the Closing Date.
6.2 Conditions. The Corporations and the Shareholders shall have
performed, satisfied and complied with all covenants, agreements and conditions
required by this Agreement to be performed, satisfied or complied with by them
on or before the Closing Date.
6.3 No Material Adverse Change. Since the Signing Date, there shall not
have been any material adverse change in the financial condition, business,
properties or assets of any Corporation.
6.4 Certificates. The President and Chief Financial Officer of each
Corporation shall have delivered to WCI a certificate, dated as of the Closing
Date, in form and substance satisfactory to WCI, certifying to the fulfillment
of the conditions set forth in Sections 6.1, 6.2 and 6.3, and the Shareholders
shall have delivered to WCI a certificate dated as of the Closing Date, in form
and substance satisfactory to WCI, certifying to the fulfillment of the
conditions set forth in Section 6.1 and 6.2 applicable to the Shareholders.
6.5 No Litigation. None of the transactions contemplated hereby shall have
been enjoined by any court or by any federal or state governmental branch,
agency, commission or regulatory authority and no suit or other proceeding
challenging the transactions contemplated hereby shall have been threatened or
instituted and no investigative or other demand shall have been made by any
federal or state governmental branch, agency, commission or regulatory authority
concerning the transactions contemplated hereby.
6.6 Other Deliveries. The Corporations and Shareholders shall have
delivered the items which they are required to deliver under Section 8.2 of this
Agreement.
6.7 Governmental Approvals. All governmental consents and approvals, if
any, necessary to permit the consummation of the transactions contemplated by
this Agreement, including without limitation those contemplated by Sections 6.12
and 6.13, shall have been received.
6.8 Consents to Transfer. Each party whose consent is required to the
transactions contemplated by this Agreement, including without limitation each
party to any contract with any Corporation and each Required Governmental
Consent shall have been obtained.
6.9 Opinion of Independent Public Accountants. WCI shall have received a
letter from Ernst & Young LLP, its independent auditors, regarding that firm's
concurrence with WCI's management's conclusions as to the appropriateness of
pooling of interests accounting for the Mergers under APB No. 16 if closed and
consummated in accordance with this Agreement.
6.10 WCI Shareholders Approval. The WCI Shareholders Approval by the
requisite vote of the Shareholders of WCI under applicable law and applicable
NASDAQ requirements shall have been obtained.
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6.11 NASDAQ Listing. An additional listing application shall have been
filed with NASDAQ with respect to the shares of Aggregate WCI Stock.
6.12 HSR Waiting Period. The waiting period applicable to the consummation
of the Mergers under the HSR Act, if any, shall have expired or been terminated.
6.13 Registration Statements. The Registration Statements shall then be
effective under the Act.
6.14 Dissenting Shares. No Shareholder shall have exercised appraisal
rights in accordance with Section 23B.13.010 et seq. of the Washington Law with
respect to any shares of any Corporation's Stock.
6.15 Title Insurance. First American Title Insurance Company shall be
irrevocably committed to issue, within three business days after the Effective
Time, at WCI's cost and expense, an ALTA Owner's Standard Policy of title
insurance for each Corporate Property owned by any of the Corporations insuring
fee simple title to such Corporate Property in the Surviving Corporation
succeeding to such Corporate Property, subject only to current real property
taxes and assessments, standard printed conditions and exceptions, and such
title exceptions as shall have been accepted in writing by WCI, containing such
endorsements as WCI may reasonably require.
6.16 Termination of Employment Agreements. The current employment
agreements between MDC, on the one hand, and Donald and Irmgard, on the other
hand, shall have been terminated effective as of the Closing Date.
6.17 LeMay Agreement. Should the Corporations determine that any
additional waiver is required from Harold LeMay Enterprises, Inc., relating to
that certain Agreement dated December 11, 1974, MDC, AD and certain other
persons, such waiver shall have been obtained.
6.18 All Mergers to Occur. All of the Mergers shall occur at substantially
the same time and no Merger shall be deemed closed unless all have closed.
6.19 Disposal Arrangements. The Corporations shall have entered into the
Agreement Regarding Future Disposal (the "Disposal Agreement") substantially in
the form of Exhibit 6.19 attached hereto.
6.20 Bonnie Trust Approval. The Bonnie Trust Approval shall have been
obtained and the Bonnie Trust shall have satisfied its obligations pursuant to
Section 5.8.
6.21 Real Estate Due Diligence. WCI shall have reviewed all of the
Schedules to this Agreement relating to the Corporate Property and all documents
related to each parcel of real property leased, owned or being purchased by any
of the Corporations, and all such Schedules and documents shall be reasonably
satisfactory to WCI or any problems reflected in, or indicated by, such
Schedules or documents shall have been resolved to the reasonable satisfaction
of WCI.
7. Conditions Precedent to Obligation of the Corporations and the
Shareholders to Close. The obligations of the Corporations and the Shareholders
under this Agreement are subject to the satisfaction, at or before Closing, of
all of the following conditions precedent, unless waived in writing by the
Corporations and the Shareholders:
7.1 Representations and Warranties. All representations and warranties of
WCI and the Merger Subs. contained in this Agreement or in any statement,
Exhibit, Schedule, certificate or document delivered by WCI under this Agreement
shall be true, correct and complete on and as of the date when made and at all
times prior to the Closing Date, shall be deemed to be made again on the Closing
Date, and shall then be true, correct and complete in all respects as of the
Closing Date.
7.2 Conditions. WCI and the Merger Subs. shall have each performed,
satisfied and complied with all covenants, agreements and conditions required by
this Agreement to be performed, satisfied or complied with by them on or before
the Closing Date.
7.3 No Material Adverse Change. Since the Signing Date, there shall not
have been any material adverse change in the condition (financial or otherwise),
business, properties or assets of WCI.
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7.4 Certificate. The President of WCI shall have delivered to the
Corporations and the Shareholders a certificate dated as of the Closing Date, in
form and substance satisfactory to the Corporations and the Shareholders,
certifying to the fulfillment of the conditions set forth in Sections 7.1, 7.2
and 7.3.
7.5 No Litigation. None of the transactions contemplated hereby shall have
been enjoined by any court or by any federal or state governmental branch,
agency, commission or regulatory authority and no suit or other proceeding
challenging the transactions contemplated hereby shall have been threatened or
instituted and no investigative or other demand shall have been made by any
federal or state governmental branch, agency, commission or regulatory authority
concerning the transactions contemplated hereby.
7.6 Other Deliveries. WCI shall have delivered the items which it is
required to deliver under Section 8.1 of this Agreement.
7.7 Consents to Transfer. Each party whose consent is required to the
transactions contemplated by this Agreement, including without limitation each
party to any contract with any Corporation and all Required Governmental
Consents shall have been obtained.
7.8 NASDAQ Listing. An additional listing application shall have been
filed with NASDAQ with respect to the shares of Aggregate WCI Stock.
7.9 HSR Waiting Period. The waiting period applicable to the consummation
of the Mergers under the HSR Act, if any, shall have expired or been terminated.
7.10 Registration Statements. The Registration Statements shall then be
effective under the Act.
7.11 Governmental Approvals. All governmental consents and approvals, if
any, necessary to permit the consummation of the transactions contemplated by
this Agreement, including without limitation those contemplated by Sections 6.12
and 6.13, shall have been received.
7.12 Opinion of Independent Public Accountants. WCI shall have received a
letter from Ernst & Young LLP, its independent auditors, regarding that firm's
concurrence with WCI's management's conclusions as to the appropriateness of
pooling of interests accounting for the Mergers under APB No. 16 if closed and
consummated in accordance with this Agreement.
7.13 LeMay Agreement. Should the Corporations determine that any
additional waiver is required from Harold LeMay Enterprises, Inc., relating to
that certain Agreement dated December 11, 1974, MDC and AD and certain other
persons (the "LeMay Agreement"), such waiver shall have been obtained.
7.14 All Mergers to Occur. All of the Mergers shall occur at substantially
the same time and no Merger shall be deemed closed unless all have closed.
7.15 Tax Matters. The Shareholders shall be reasonably satisfied that the
Mergers will constitute reorganizations within the meaning of Section 368(a) of
the Code and no gain or loss will be recognized by the Shareholders upon the
exchange of their Corporations' Stock solely for shares of Aggregate WCI Stock.
7.16 Disposal Arrangements. The Corporations shall have entered into the
Disposal Agreement.
7.17 Bonnie Trust Approval. The Bonnie Trust Approval shall have been
obtained and the Bonnie Trust shall have satisfied its obligations pursuant to
Section 5.8.
8. Closing Deliveries
At the Closing or at or after the Effective Time, as the case may be, the
respective parties shall make the deliveries indicated:
8.1 WCI Deliveries.
(a) At or promptly after the Effective Time of each of the Mergers, WCI
shall deliver to the Shareholders certificates for the shares of WCI Stock in
accordance with Section 2.4.
(b) WCI shall execute and deliver to Donald and Irmgard counterparts of
Employment Agreements substantially in the form of Exhibits 8.1(b) and 8.1(b).2,
respectively (the "Employment Agreements").
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(c) At the Closing, WCI shall deliver to the Shareholders an opinion of
counsel for WCI dated as of the Closing Date in substantially the form attached
hereto as Exhibit 8.1(c).
(d) At the Closing, WCI shall deliver the Filed Plans, duly executed by WCI
and the respective Merger Subs.
(e) At the Closing, WCI and the Merger Subs. shall execute and deliver such
other instruments and items as the Corporations or the Shareholders shall
reasonably request relating to the transactions contemplated by this Agreement.
(f) WCI shall execute and deliver to the Shareholders counterparts of a
Common Stock Agreement substantially in the form of Exhibit 8.1(f) (the "Common
Stock Agreement").
8.2 Shareholders' Deliveries.
(a) At or promptly after the Effective Time, the Shareholders shall deliver
to WCI in accordance with Section 2.4 the certificates representing the
outstanding Corporations' Stock free and clear of all liens, security interests,
claims and encumbrances, accompanied by a stock power duly executed in blank.
(b) At the Closing, the Shareholders shall deliver to WCI an opinion of one
or more counsel for the Shareholders, dated as of the Closing Date, covering in
substance the matters described in Exhibit 8.2(b).
(c) At the Closing, the Shareholders shall deliver evidence reasonably
satisfactory to WCI that all required third-party consents to the transactions
contemplated hereby, including without limitation all Required Governmental
Consents, were obtained and the Corporations or the Shareholders shall deliver
an estoppel certificate from the landlords under all real estate leases to which
each of the Corporations is a party confirming the terms thereof and the rental
amount owing thereunder, certifying that such lease is in full force and effect,
that the Corporation is not in default under any of the terms or conditions
thereof, that there have been no amendments or modifications to any such lease
(or specifying the same), and otherwise containing such statements and
certifications as WCI may reasonably require.
(d) At the Closing, the Shareholders shall cause each officer and director
of each of the Corporations to deliver a resignation as an officer and/or
director of that Corporation, together with a general release releasing the
Corporations from all obligations under any indemnification agreements, the
charter documents of the Corporations, or otherwise, to indemnify such officers
and directors for liabilities and expenses arising out of or relating to this
Agreement or the consummation of the transactions contemplated thereby, other
than obligations arising after the Closing Date under this Agreement.
(e) At the Closing, the Shareholders shall deliver the Filed Plans duly
executed by the respective Corporations.
(f) At the Closing, the Shareholders shall execute and deliver such other
instruments and items as WCI shall reasonably request relating to the
transactions contemplated by this Agreement.
(g) At the Closing, the Shareholders shall execute and deliver the
Affiliate Letter (the "Affiliate Letter") substantially in the form of Exhibit
8.2(g).
(h) Donald and Irmgard shall execute and deliver to WCI counterparts of
their respective Employment Agreements.
(i) The Shareholders shall execute and deliver to WCI the Common Stock
Agreement.
9. Additional Covenants of WCI, the Corporations and the Shareholders
9.1 Release of Guaranties. WCI shall use reasonable efforts to obtain the
termination and release promptly after the Effective Time of the personal
guaranties of the Shareholders listed on Schedule 9.1, all of which relate to
indebtedness of the Corporations included in the Financial Statements as of the
Balance Sheet Date, and WCI shall indemnify the Shareholders and hold them
harmless from and against all losses, expenses or claims by third parties to
enforce or collect indebtedness owed by each Corporation as of the Effective
Time that is personally guaranteed by the Shareholders pursuant to such
guaranties. The
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Shareholders may notify the obligees under such guaranties that they have
terminated their obligations under such guaranties. The Shareholders shall
cooperate with WCI in obtaining such releases.
9.2 Release of Security Interests. After the Effective Time, the
Shareholders and their respective Affiliates shall cause those security
interests in the assets of the Corporations that have been created in favor of
financial institutions or other lenders to secure indebtedness (other than
indebtedness of that Corporation) of the Shareholders or their respective
Affiliates to be released in a manner reasonably satisfactory to WCI, and shall
cause all guaranties by the Corporations relating to the indebtedness of the
Shareholders to be released to the reasonable satisfaction of WCI.
9.3 Confidentiality. Neither WCI, the Corporations nor any of the
Shareholders shall disclose or make any public announcements of the transactions
contemplated by this Agreement except as required by the Act, the Exchange Act,
the HSR Act or in the Registration Statements or the Proxy Statement, without
the prior written consent of the other parties, unless required to make such
disclosure or announcement by law, in which event the party making the
disclosure or announcement shall notify the other parties at least 24 hours
before such disclosure or announcement is expected to be made and allow review
and input as to the form and content of the same.
9.4 Brokers and Finders Fees. Each party shall pay and be responsible for
any broker's, finder's or financial advisory fee incurred by such party in
connection with the transactions contemplated by this Agreement.
9.5 Taxes. WCI shall reasonably cooperate, at the expense of the
Shareholders, with the Shareholders with respect to any matters involving the
Shareholders arising out of the Shareholders' ownership of the Corporations
prior to the Effective Time, including matters relating to tax returns and any
tax audits, appeals, claims or litigation with respect to such tax returns or
the preparation of such tax returns. In connection therewith, WCI shall make
available to the Shareholders such files, documents, books and records of the
Corporations for inspection and copying as may be reasonably requested by the
Shareholders and shall cooperate with the Shareholders with respect to retaining
information and documents which relate to such matters.
9.6 Short Year Tax Returns. After the Effective Time, the Shareholders
shall prepare at their sole cost and expense, all short year federal, state,
county, local and foreign tax returns required by law for the period beginning
with the first day of the applicable Corporation's fiscal year in which the
Effective Time occurs and ending with the Effective Time. Each such return shall
be prepared in a financially responsible and conservative manner and drafts
shall be delivered to WCI together with all necessary supporting schedules
within 120 days following the Effective Time for its approval, which shall not
be unreasonably withheld or delayed. The Shareholders shall each be responsible
for all taxes arising from the conversion of the Corporations from a cash to
accrual basis of reporting whether or not due on such returns or on the first
return filed by a Corporation for the period commencing after the Effective
Time. Each such return shall be prepared in a financially responsible and
conservative manner and drafts shall be delivered to the Shareholders together
with all necessary supporting schedules within 120 days following the Effective
Time for their approval, which shall not be unreasonably withheld or delayed. At
the time of the approval of the returns for each Corporation, the Shareholders
shall contemporaneously deliver to WCI checks payable to the respective taxing
authorities in amounts equal to the amount due from the Shareholders under this
section. WCI shall, upon receipt from the Shareholders, cause the Corporations
to sign tax returns and cause such returns to be timely filed with the
appropriate authorities.
9.7 Matters Related to Pooling. The parties acknowledge that the ability
of WCI to account for the transactions contemplated herein as a "pooling of
interests" is of the essence of the contract. In addition to APB No. 16, the SEC
has issued Accounting Series Release Nos. 130 and 135, as amended (collectively
the "ASRs") setting forth certain restrictions applicable to the availability of
"pooling-of-interests" accounting treatment in transactions of the type
contemplated by this Agreement. No Shareholder and no Pooling Affiliate of any
Corporation or WCI shall take any action subsequent to the Effective Time to
sell or in any other way reduce such person's risk (including, by way of example
and not limitation, engaging in any put, call, short-sale, straddle or similar
market transactions) relative to any shares of WCI Stock held at the
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Effective Time or received pursuant to this Agreement in such a manner as would
cause the transactions contemplated hereby not to be accounted for as a "pooling
of interests," until such time as financial results covering at least 30 days of
post-Closing combined operations of WCI and the Surviving Corporations have been
published.
9.8 Representation Letter. Prior to the Closing, the Corporations and the
Shareholders shall deliver a representation letter to Ernst & Young LLP, to
enable Ernst & Young LLP to deliver the letter contemplated by Section 6.10. The
representation letter provided for in this section will relate to the criteria
for the "pooling of interests" method of accounting and their relevance to the
Mergers as they relate to the Corporations.
9.9 WCI Shareholders' Approval. WCI shall call a shareholders' meeting to
be held as soon as reasonably practicable after the definitive Proxy Statement
is first sent to WCI's Stockholders, for the purpose of voting upon and
obtaining the WCI Shareholder Approval.
9.10 NASDAQ Listing. WCI shall file, at its expense, at or before the
Effective Time, an additional listing application with Nasdaq with respect to
the Aggregate WCI Stock to be issued pursuant to the Mergers.
9.11 Agreement to Cooperate.
(a) Subject to the terms and conditions herein provided and subject to the
fiduciary duties of the respective boards of directors of the Corporations and
WCI, each of the parties hereto shall use all reasonable efforts to take, or
cause to be taken, all action and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement,
including using its reasonable efforts to obtain all necessary or appropriate
waivers, consents or approvals of third parties required in order to preserve
material contractual relationships of WCI and the Corporations, all necessary or
appropriate waivers, consents and approvals and SEC "no-action" letters to
effect all necessary registrations, filings and submissions and to lift any
injunctive or other legal bar to the Mergers (and, in such case, to proceed with
the Mergers as expeditiously as possible). At or immediately after the Closing,
WCI, the Mergers Subs., the Corporations and the Shareholders shall cause the
Filed Plans to be filed with the Secretary of State of the State of Washington.
(b) Without limitation of the foregoing, if required by applicable law,
each of WCI and the Corporations undertakes and agrees to file as soon as
practicable, and in any event prior to 15 days after the Signing Date, a
Notification and Report Form under the HSR Act with the Federal Trade Commission
("FTC") and the Antitrust Division of the Department of Justice (the "Antitrust
Division"). Each of WCI and the Corporations shall (i) respond as promptly as
practicable to any inquiries received from the FTC or the Antitrust Division for
additional information or documentation and to all inquiries and requests
received from any State Attorney General or other governmental authority in
connection with antitrust matters and (ii) not extend any waiting period under
the HSR Act or enter into any agreement with the FTC or the Antitrust Division
not to consummate the transactions contemplated by this Agreement, except with
the prior consent of the other parties hereto. Each party shall promptly notify
the other party of any communication to that party from the FTC, the Antitrust
Division, any State Attorney General or any other governmental entity and permit
the other party to review in advance any proposed communication to any of the
foregoing.
(c) In the event any litigation is commenced by any person or entity
relating to the transactions contemplated by this Agreement, including any
Acquisition Transaction, WCI shall have the right, at its own expense, to
participate therein, and the Corporations will not settle any such litigation
without the consent of WCI, which consent will not be unreasonably withheld.
9.12 Notification of Certain Matters. Each of the Corporations, WCI and
the Shareholders agrees to give prompt notice to each other of, and to use
commercially reasonable efforts to remedy, (i) the occurrence or failure to
occur of any event which occurrence or failure to occur would be likely to cause
any of its representations or warranties in this Agreement to be untrue or
inaccurate in any material respect at the Effective Time and (ii) any material
failure on its part to comply with or satisfy any covenant, condition or
agreement to be complied with or satisfied by it hereunder; provided, however,
that the delivery of any notice
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pursuant to this Section 9.12 shall not limit or otherwise affect the remedies
available hereunder to the party receiving such notice.
9.13 Corrections to Registration Statements and Proxy Statement. Prior to
the Effective Time, each of the Corporations, WCI and the Shareholders shall
correct promptly any information provided by it to be used specifically in the
Registration Statements or the Proxy Statement that shall have become false or
misleading in any material respect and WCI shall take all steps necessary to
file with the SEC and (in the case of the Registration Statements) have declared
effective by the SEC any amendment or supplement to the Registration Statements
or Proxy Statement so as to correct the same and to cause the Registration
Statements or Proxy Statement as so corrected to be disseminated to the
stockholders of WCI, the Shareholders or to other persons, in each case to the
extent required by applicable law.
10. Indemnification
10.1 Indemnification Covenants.
(a) Indemnity by the Shareholders. The Shareholders, jointly and severally,
as to each of the Corporations (in which they are shareholders), severally,
subject to the limitations set forth in Section 10.2, covenant and agree that
they will indemnify and hold harmless WCI, the Surviving Corporations and their
respective directors, officers and agents and their respective successors and
assigns (collectively the "WCI Indemnitees"), from and after the date of this
Agreement against any and all losses, damages, assessments, fines, penalties,
adjustments, liabilities, claims, deficiencies, costs and expenses (including
specifically, but without limitation, reasonable attorneys' fees and expenses of
investigation), including, without limitation, any "Environmental Site Losses"
(as such term is hereinafter defined) resulting from activities prior to the
Closing Date (but not necessarily identified or determined prior to the Closing
Date), identified by a WCI Indemnitee in a Claims Notice (as defined in Section
10.3(a)), or asserted by a WCI Indemnitee in litigation commenced against the
Shareholders provided that in either case any such Claims Notice shall be given
or the litigation commenced prior to the expiration of the applicable period set
forth in Section 10.2(c) (irrespective of the date of discovery), with respect
to each of the following contingencies (all, the "10.1(a) Indemnity Events"):
(i) Any misrepresentation, breach of warranty, or nonfulfillment of
any agreement or covenant on the part of the Shareholders or the
Corporations required to be fulfilled pursuant to the terms of this
Agreement on or before the Closing Date or any misrepresentation in or
omission from any Exhibit, Schedule, list, certificate, or other instrument
furnished or to be furnished to WCI pursuant to the terms of this
Agreement, regardless of whether, in the case of a breach of a
representation or a warranty, WCI relied on the truth of such
representation or warranty or had any knowledge of any breach thereof.
(ii) The design, development, installation, construction or operation
by the Corporations of any Environmental Site (as hereinafter defined)
during any period on or prior to the Effective Time, in excess of the
amount of liability with respect thereto, if any, set forth on Part II of
Schedule 3.8. As used in this Agreement, "Environmental Site" shall mean
any Facility, any UST and any other waste storage, processing, treatment or
disposal facility, and any other business site or any other real property
owned, leased, controlled or operated by a Corporation or by any
predecessor thereof on or prior to the Closing Date. As used in this
Agreement, "Environmental Site Losses" shall mean any and all losses,
damages (including exemplary damages and penalties), liabilities, claims,
deficiencies, costs, expenses, and expenditures (including, without
limitation, expenses in connection with site evaluations, risk assessments
and feasibility studies) arising out of or required by an interim or final
judicial or administrative decree, judgment, injunction, mandate, interim
or final permit condition or restriction, cease and desist order, abatement
order, compliance order, consent order, clean-up order, exhumation order,
reclamation order or any other remedial action that is required to be
undertaken under federal, state or local law in respect of operating
activities prior to the Closing Date on or affecting any Environmental
Site, including, but not limited to (x) any actual or alleged violation of
any Environmental Law or any other law or regulation respecting the
protection of the air, water and land prior to the Closing Date and (y) any
remedies or violations, whether by a private or public action, alleged or
sought to be assessed as a consequence, directly or indirectly, of any
"Release" (as defined below) of pollutants (including odors) or Hazardous
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Substances from any Environmental Site resulting from activities thereat
prior to the Closing Date, whether such Release is into the air, water
(including groundwater) or land and, in the case of any Release caused by
defective design, development, construction or operation of an
Environmental Site, or other circumstance within the control of the
Shareholders, whether such Release arose before, during or after the
Closing Date from activities thereat prior to the Closing Date. The term
"Release" as used herein means any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping or
disposing into the ambient environment. Notwithstanding anything in this
paragraph to the contrary, it is specifically understood and agreed that a
Release composed solely of Hazardous Substances contained in mixed
municipal solid waste lawfully disposed of in a landfill during the time a
Corporation owned and/or operated such landfill does not constitute an
Environmental Site Loss.
(iii) Any claim that the execution and delivery of this Agreement and
consummation of the transactions contemplated hereby did not comply with or
is otherwise in breach of the LeMay Agreement.
(iv) All actions, suits, proceedings or demands incident to any of the
foregoing.
(b) Indemnity by WCI. WCI, subject to the limitations set forth in Section
10.2, covenants and agrees that it will indemnify and hold harmless the
Shareholders and their respective heirs, trustees, beneficiaries, successors and
assigns (collectively the "Shareholder Indemnitees"), from and after the date of
this Agreement against any and all losses, damages, assessments, fines,
penalties, adjustments, liabilities, claims, deficiencies, costs and expenses
(including specifically, but without limitation, reasonable attorneys' fees and
expenses of investigation), identified by a Shareholder Indemnitee in a Claims
Notice (as defined in Section 10.3(a)), or asserted by a Shareholder Indemnitee
in litigation commenced against WCI provided that in either case any such Claims
Notice shall be given or the litigation commenced prior to the expiration of the
applicable period set forth in Section 10.2(c) (irrespective of the date of
discovery), with respect to each of the following contingencies (all, the
"10.1(b) Indemnity Events"):
(i) Any misrepresentation, breach of warranty, or nonfulfillment of
any agreement or covenant on the part of WCI or any Merger Sub. required to
be fulfilled pursuant to the terms of this Agreement on or before the
Closing Date or any misrepresentation in or omission from any Exhibit,
Schedule, list, certificate, or other instrument furnished or to be
furnished to the Shareholders pursuant to the terms of this Agreement,
regardless of whether, in the case of a breach of a representation or
warranty, the Shareholders relied on the truth of such representation or
warranty or had any knowledge of any breach thereof.
(ii) All actions, suits, proceedings or demands incident to any of the
foregoing.
10.2 Limitations on Indemnities.
(a) The obligations of the Shareholders to indemnify the WCI Indemnitees,
and the obligation of WCI to indemnify the Shareholder Indemnitees, as provided
in Section 10.1 shall be equal to the amount by which the cumulative amount of
all such losses, damages, assessments, fines, penalties, adjustments,
liabilities, claims, deficiencies, costs and expenses, (including specifically,
but without limitation, reasonable attorneys' fees and expenses of
investigation) and Environmental Site Losses with respect to any or all 10.1(a)
and 10.1(b) Indemnity Events exceed, in the case of the obligations of the
Shareholders, one million dollars ($1,000,000) in the aggregate with respect to
all of the Corporations; and in the case of the obligations of WCI, one million
dollars ($1,000,000); provided, that the amount of any obligation of indemnity
arising pursuant to Section 10.1(a)(iii) or pursuant to Section 10.1 with
respect to any representation, warranty or covenant contained in Sections 2.1,
3.1 through 3.5; 3.22, 4.4, 4.5, 4.6, 4.7, 9.6 and 9.11 hereof shall not be
subject to the foregoing.
(b) The maximum amount which the Shareholder Indemnitees can recover as a
result of all 10.1(b) Indemnity Events, pursuant to the provisions hereof for
Claims shall not in the aggregate exceed fifty percent (50%) of the Aggregate
Merger Consideration, and the maximum amount that WCI can recover as a result of
all 10.1(a) Indemnity Events pursuant to the provisions hereof for Claims
relating to each Corporation shall
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not exceed the following percentages of the Aggregate Merger Consideration:
MDC-21%); AD-6.5%; DM-14%; and TR-8.5%.
(d) The obligations of the Shareholders under Section 10.1(a) with respect
to all Claims, other than Claims arising under Section 10.1(a)(iii), shall
expire unless a Claims Notice with all information required by Section 10.3(a)
is given or litigation is commenced by filing a complaint on or prior to the
earlier to occur of (irrespective of the date of discovery of the Indemnity
Event) (i) the first anniversary of the Effective Time; or (ii) the date of
issuance of the first audit report after the Effective Time of the financial
statements that contain the combined results of WCI and the Surviving
Corporations. The obligations of WCI under Section 10.1(b) with respect to all
Claims, other than Claims arising from breach of any covenants contained in
Sections 2.1, 4.4, 4.5, 4.6, 4.7 or the Common Stock Agreement, shall expire
unless a Claims Notice with all information required by Section 10.3(a) is given
or litigation is commenced by filing a complaint on or prior to the earlier to
occur of (irrespective of the date of discovery of the Indemnity Event) (i) the
first anniversary of the Effective Time; or (ii) the date of issuance of the
first audit report after the Effective Time of the financial statements that
contain the combined results of WCI and the Surviving Corporations.
(e) Except to the extent the same shall directly result in a material
increase in insurance premiums on a prospective basis, the Shareholders shall
not be required to indemnify any WCI Indemnitee, nor shall WCI be required to
indemnify any Shareholder Indemnitee, for any Claim to the extent that such
Claim has been reimbursed or is reimbursable through insurance proceeds received
or receivable by the Indemnitee. The Indemnitee shall allow the Indemnifying
Party to pursue such insurance proceeds and shall reasonably cooperate with the
Indemnifying Party in connection therewith. In the event the insurance does not
cover the full amount of the Claim, or in the event the Claim shall directly
result in an increase in insurance premiums on a prospective basis, the
Indemnifying Party shall remain liable for the difference in the insurance
payment and the amount of the Claim, or in the case of an increase in insurance
premiums, the amount of such increase directly attributable to the Claim,
subject to the other limitations set forth herein.
(f) All claims for which indemnification payment shall be due shall be
deemed adjustments of the Aggregate Merger Consideration.
(g) Any obligation of indemnity of the Shareholders established pursuant to
the terms of this Agreement shall be expressed in dollar amounts but shall be
satisfied first by the delivery to WCI of a number of shares of WCI Stock
(properly endorsed, with signatures guaranteed by a national bank, and with
respect to which all transfer or other taxes have been paid), each of which
shall be deemed to have a value equal to its closing price as quoted on the
NASDAQ Stock Market on the Closing Date (or the last trading day before the
Closing Date if the Closing Date is not a trading day), adjusted for any stock
splits, stock dividends or other capital adjustments after the Closing Date. To
the extent the Shareholders then own an insufficient quantity of WCI Stock to
satisfy any obligation of indemnity of the Shareholders established pursuant to
the terms of this Section 10.2(f), such obligation of indemnity shall be
satisfied by the payment of cash by the Shareholders.
(h) The indemnification provisions of this Section 10 shall be the
exclusive remedy for any Claim for monetary damages arising under this Agreement
or from the transactions contemplated hereby, except for Fraud, provided that
nothing in this Section 10 (including with out limitation Section 10.2(c)) shall
be deemed to be the exclusive remedy or shall limit the remedies of any party
with respect to the breach or nonfulfillment by any party of any obligation or
covenant in this Agreement or any of the agreements contemplated hereby or
entered into pursuant hereto required to be satisfied or fulfilled after the
Closing Date. In addition, the parties shall be entitled to pursue any claims
for non-monetary relief to which they may be entitled at law or in equity.
10.3 Notice of Indemnity Claim.
(a) In the event that any claim ("Claim") is hereafter asserted against or
arises with respect to any WCI Indemnitee or Shareholder Indemnitee as to which
such WCI Indemnitee or Shareholder Indemnitee (an "Indemnitee") may be entitled
to indemnification hereunder, the Indemnitee shall notify the Shareholders or
WCI (as applicable collectively, the "Indemnifying Party") in writing thereof
(the "Claims Notice") within 60 days after (i) receipt of written notice of
commencement of any third party litigation against such
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Indemnitee, (ii) receipt by such Indemnitee of written notice of any third party
claim pursuant to an invoice, notice of claim or assessment, against such
Indemnitee, or (iii) such Indemnitee becomes aware of the existence of any other
event in respect of which indemnification may be sought from the Indemnifying
Party (including, without limitation, any inaccuracy of any representation or
warranty or breach of any covenant). The Claims Notice shall describe the Claim
and the specific facts and circumstances in reasonable detail, and shall
indicate the amount, if known, or an estimate, if possible, of the losses that
have been or may be incurred or suffered by the Indemnitee.
(b) The Indemnifying Party may elect to defend any Claim for money damages
where the cumulative total of all Claims (including such Claim) do not exceed
the limit set forth in Section 10.2(b) at the time the Claim is made, by the
Indemnifying Party's own counsel. The Indemnitee may participate, at the
Indemnitee's own expense, in the defense of any Claim assumed by the
Indemnifying Party. Without the written approval of the Indemnitee, which
approval shall not be unreasonably withheld, the Indemnifying Party shall not
agree to any compromise of a Claim defended by the Indemnifying Party; provided,
however, that if the Indemnitee does not consent to a compromise and the
ultimate indemnity obligation of the Indemnifying Party would be greater than
the amount of the proposed compromise, the Indemnifying Party's total liability
to the Indemnitee under this Section 10 shall be limited to the amount of the
proposed compromise and costs through that date.
(c) If, within twenty (20) days of the Indemnifying Party's receipt of a
Claims Notice, the Indemnifying Party shall not have elected to defend the
Claim, the Indemnitee shall have the right to assume control of the defense
and/or compromise of such Claim, and the costs and expenses of such defense,
including reasonable attorneys' fees, shall be added to the Claim. The
Indemnifying Party shall promptly, and in any event within ten (10) days after
demand therefor, reimburse the Indemnitee for the costs of defending the Claim,
including attorneys' fees and expenses.
(d) The party assuming the defense of any Claim shall keep the other party
reasonably informed at all times of the progress and development of its or their
defense of and compromise efforts with respect to such Claim and shall furnish
the other party with copies of all relevant pleadings, correspondence and other
papers. In addition, the parties to this Agreement shall cooperate with each
other and make available to each other and their representatives all available
relevant records or other materials required by them for their use in defending,
compromising or contesting any Claim. If the Claims Notice is given prior to the
expiration of the obligations of the Indemnifying Party under Section 10.2(c),
the failure to timely deliver a Claims Notice or otherwise notify the
Indemnifying Party of the commencement of such actions in accordance with this
Section 10.3 shall not relieve the Indemnifying Party from the obligation to
indemnify hereunder except to the extent that the Indemnifying Party establishes
by competent evidence that it has been prejudiced thereby.
(e) In the event both the Indemnitee and the Indemnifying Party are named
as defendants in an action or proceeding initiated by a third party, they shall
both be represented by the same counsel (on whom they shall agree), unless such
counsel, the Indemnitee, or the Indemnifying Party shall determine that such
counsel has a conflict of interest in representing both the Indemnitee and the
Indemnifying Party in the same action or proceeding and the Indemnitee and the
Indemnifying Party do not waive such conflict to the satisfaction of such
counsel.
10.4 Survival of Representations and Warranties. The representations and
warranties of the parties contained in this Agreement and in any certificate,
Exhibit or Schedule delivered pursuant hereto, or in any other writing delivered
pursuant to the provisions of this Agreement and the liability of the party
making such representations and warranties for breaches thereof shall survive
the consummation of the transactions contemplated hereby until the later of the
expiration of the period set forth in Section 10.2(c), or the final resolution
of all Claims for which a Claims Notice is given prior to the expiration of the
obligations of the Indemnifying Party under Section 10.2(c) but only as to the
representations and warranties relevant to such Claims, provided that the
representations and warranties shall survive until expiration of the applicable
statute of limitations with respect to any Claim based in whole or in part on
Fraud (as defined in Section 12.3) solely as to the portion of such Claim found
to be Fraud, provided further that the representations and warranties of the
Shareholders set forth in Sections 3.2, 3.3 and 3.4 shall survive until the
later of expiration of the
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applicable statute of limitations or the resolution of all Claims to the extent
the representations and warranties are relevant to such Claims. The parties
hereto in executing and delivering and in carrying out the provisions of this
Agreement are relying solely on the representations, warranties, Schedules,
Exhibits, agreements and covenants contained in this Agreement, or in any
writing or document delivered pursuant to the provisions of this Agreement, and
not upon any representation, warranty, agreement, promise or information,
written or oral, made by any person other than as specifically set forth herein
or therein.
10.5 No Exhaustion of Remedies or Subrogation; Right of Set Off. Except as
otherwise provided herein, the Shareholders waive any right to require any WCI
Indemnitee to (i) proceed against any Corporation; (ii) proceed against any
other person; or (iii) pursue any other remedy whatsoever in the power of any
WCI Indemnitee.
11. Other Post-Closing Covenants of the Shareholders and WCI
11.1 Restrictive Covenants. As to each Surviving Corporation, the
Shareholders and their Affiliates acknowledge that (i) WCI, as the ultimate
purchaser of the Corporations' Stock, is and will be engaged in the same
business as the Corporations were prior to the Closing Date (the "Business");
(ii) the Shareholders and their Affiliates are intimately familiar with the
Business; (iii) the Business is currently conducted in the State of Washington
and WCI intends to continue the Business in Washington and intends, by
acquisition or otherwise, to expand the Business into other geographic areas of
Washington where it is not presently conducted; (iv) the Shareholders and their
Affiliates have had access to trade secrets of, and confidential information
concerning, the Business; (v) the agreements and covenants contained in this
Section 11.1 are essential to protect the Business and the goodwill being
acquired; and (vi) the Shareholders and their Affiliates have the means to
support themselves and their dependents other than by engaging in a business
substantially similar to the Business and the provisions of this Section 11 will
not impair such ability. The Shareholders covenant and agree as set forth in
(a), (b) and (c) below with respect to the Corporations:
(a) Non-Compete. For a period commencing on the Closing Date and
terminating five years thereafter (the "Restricted Period"), neither the
Shareholders nor any of their Affiliates shall, anywhere within the State of
Washington, (the "Restricted Area"), directly or indirectly, acting individually
or as the owner, shareholder, partner, or employee of any entity other than WCI
or one of its subsidiaries, (i) engage in the Business, including without
limitation in the operation of a solid waste collection, transporting, disposal
and/or composting business, transfer facility, recycling facility, materials
recovery facility or solid waste landfill; (ii) enter the employ of, or render
any personal services to or for the benefit of, or assist in or facilitate the
solicitation of customers for, or receive remuneration in the form of salary,
commissions or otherwise from, any business engaged in the same business as the
Business; (iii) as owner or lessor of real estate or personal property, rent to
or lease any facility, equipment or other assets to any business engaged in the
same business as the Business; or (iv) receive or purchase a financial interest
in, make a loan to, or make a gift in support of, any such business in any
capacity, including, without limitation, as a sole proprietor, partner,
shareholder, officer, director, principal, agent, trustee or lender; provided,
however, that (i) any of the Shareholders may own, directly or indirectly,
shares of stock in Land Recovery, Inc., a Washington corporation, or Resource
Investments, Inc., a Washington corporation, and may participate as a director,
officer or employee of either or both of such corporations, or (ii) any of the
Shareholders may own, directly or indirectly, solely as an investment,
securities of any business traded on any national securities exchange or NASDAQ,
provided none of the Shareholders is a controlling person of, or a member of a
group which controls, such business and further provided that the Shareholders
do not, in the aggregate, directly or indirectly, own 5% or more of any class of
securities of such business.
(b) Confidential Information. During the Restricted Period and thereafter,
the Shareholders and their Affiliates shall keep secret and retain in strictest
confidence, and shall not use for the benefit of themselves or others, all data
and information relating to the Business ("Confidential Information"), including
without limitation, know-how, trade secrets, customer lists, supplier lists,
details of contracts, pricing policies, operational methods, marketing plans or
strategies, bidding information, practices, policies or procedures, product
development techniques or plans, and technical processes; provided, however,
that the term "Confidential Information" shall not include information that (i)
is or becomes generally available to the
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public other than as a result of disclosure by the Shareholders or (ii) is
general knowledge in the solid waste handling and landfill business and not
specifically related to the Business or (iii) is disclosed to the Shareholders
or their Affiliates by a third party (other than an agent or representative of
WCI) legally entitled to disclose the same. Notwithstanding the foregoing, (y)
the Shareholders may disclose and discuss confidential information with their
legal and tax advisors, or as is required in connection with any legal
proceedings, and the Shareholders shall give WCI prior written notice of such
disclosure at least forty-eight (48) hours before such disclosure is made, if
possible; and (z) during the time that the Shareholders are employed by WCI or a
Surviving Corporation, the Shareholders may disclose confidential information as
required in the ordinary course and proper performance of their employment
duties, to persons who need to know such information to perform services for or
receive services from WCI or the Surviving Corporation.
(c) Property of the Business. All memoranda, notes, lists, records and
other documents or papers (and all copies thereof) relating to the Business,
including such items stored in computer memories, on microfiche or by any other
means, made or compiled by or on behalf of the Shareholders or the Corporations
or made available to them relating to the Business, but excluding any materials
(other than the minute books of the Corporations) maintained by any attorneys
for the Corporations or the Shareholders prior to the Closing, are and shall be
the property of WCI and have been delivered or will be delivered or made
available to WCI at the Closing.
(d) Non-Solicitation. Without the consent of WCI, which may be granted or
withheld by WCI in its discretion, the Shareholders and their Affiliates shall
not solicit any employees of the Surviving Corporations to leave the employ of
the Surviving Corporations and join the Shareholders or any Affiliate in any
business endeavor owned or pursued by the Shareholders.
(e) No Disparagement. From and after the Closing Date, none of the
Shareholders shall, in any way or to any person or entity or governmental or
regulatory body or agency, denigrate or derogate WCI or any of its subsidiaries,
or any officer, director or employee, or any product or service or procedure of
any such company whether or not such denigrating or derogatory statements shall
be true and are based on acts or omissions which are learned by the Shareholders
from and after the date hereof or on acts or omissions which occur from and
after the date hereof, or otherwise. A statement shall be deemed denigrating or
derogatory to any person or entity if it adversely affects the regard or esteem
in which such person or entity is held by investors, lenders or licensing,
rating, or regulatory entities. Without limiting the generality of the
foregoing, none of the Shareholders shall, directly or indirectly in any way in
respect of any such company or any such directors or officers, communicate with,
or take any action which is adverse to the position of any such company with any
person, entity or governmental or regulatory body or agency who or which has
dealings or prospective dealings with any such company or jurisdiction or
prospective jurisdiction over any such company. This paragraph does not apply to
the extent that testimony is required by legal process, provided that WCI has
received not less than five days' prior written notice of such proposed
testimony, if possible.
11.2 Rights and Remedies Upon Breach. If the Shareholders or any Affiliate
breaches, or threatens to commit a breach of, any of the provisions of Section
11.1 herein (the "Restrictive Covenants"), WCI shall have the following rights
and remedies, each of which rights and remedies shall be independent of the
others and severally enforceable, and each of which is in addition to, and not
in lieu of, any other rights and remedies available to WCI at law or in equity:
(a) Specific Performance. The right and remedy to have the Restrictive
Covenants specifically enforced by any court of competent jurisdiction, it
being agreed that any breach or threatened breach of the Restrictive
Covenants would cause irreparable injury to WCI and that money damages
would not provide an adequate remedy to WCI. Accordingly, in addition to
any other rights or remedies, WCI shall be entitled to injunctive relief to
enforce the terms of the Restrictive Covenants and to restrain the
Shareholders from any violation thereof.
(b) Accounting. The right and remedy to require the Shareholders to
account for and pay over to WCI all compensation, profits, monies,
accruals, increments or other benefits derived or received by the
Shareholders as the result of any transactions constituting a breach of the
Restrictive Covenants.
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(c) Severability of Covenants. The Shareholders acknowledge and agree
that the Restrictive Covenants are reasonable and valid in geographical and
temporal scope and in all other respects. If any court determines that any
of the Restrictive Covenants, or any part thereof, is invalid or
unenforceable, the remainder of the Restrictive Covenants shall not thereby
be affected and shall be given full effect, without regard to the invalid
portions.
(d) Blue-Penciling. If any court determines that any of the
Restrictive Covenants, or any part thereof, is unenforceable because of the
duration or geographic scope of such provision, such court shall reduce the
duration or scope of such provision, as the case may be, to the extent
necessary to render it enforceable and, in its reduced form, such provision
shall then be enforced.
(e) Enforceability in Jurisdiction. WCI and the Shareholders intend to
and hereby confer jurisdiction to enforce the Restrictive Covenants upon
the courts of any jurisdiction within the geographic scope of the
Restrictive Covenants. If the courts of any one or more of such
jurisdictions hold the Restrictive Covenants unenforceable by reason of the
breadth of such scope or otherwise, it is the intention of WCI and the
Shareholders that such determination not bar or in any way affect WCI's
right to the relief provided above in the courts of any other jurisdiction
within the geographic scope of the Restrictive Covenants as to breaches of
such covenants in such other respective jurisdictions, such covenants as
they relate to each jurisdiction being, for this purpose, severable into
diverse and independent covenants.
11.3 Termination Date.
(a) If the Effective Date has not occurred by March 31, 1999, this
Agreement shall be terminated on that date or thereafter (the "Termination
Date"), unless the Corporations have not then obtained all of the consents
required by Sections 6.7 and 6.8, in which event this Agreement shall terminate
10 days after written notice from WCI to the Corporations or 10 days after the
later of (i) if any such consent is denied, the latest time for filing any
appeal or further appeal of such denial has lapsed; and (ii) if any such consent
is denied and such denial is appealed, the day the last appeal of such denial
has been dismissed, refused or decided adversely to the Corporation, provided
that the Termination Date shall, at the option of WCI, be extended to May 31,
1999, if the Bonnie Trust Approval has not been obtained on or before March 31,
1999.
(b) The Corporations and the Shareholders shall have the right to terminate
this Agreement:
(i) Upon a breach of a representation or warranty of WCI or the Merger
Subs. contained in this Agreement which has not been cured in all material
respects and which has had or is likely to have a Material Adverse Effect
and is incapable of being satisfied by the Termination Date;
(ii) If one or more of the Mergers are enjoined by a final,
unappealable court order not entered at the request or with the support of
any Corporation and if the Corporation against which such order is entered
shall have used reasonable efforts to prevent the entry of such order;
(iii) If WCI (A) fails to perform in any material respect any of its
covenants in this Agreement and (B) does not cure such default in all
material respects within 30 days after written notice of such default
specifying such default in reasonable detail is given to WCI by the
Corporation; or
(iv) If WCI fails to obtain the WCI Shareholders Approval prior to
January 31, 1999.
(c) WCI shall have the right to terminate this Agreement:
(i) Upon a breach of a representation or warranty of the Corporation
or the Shareholders contained in this Agreement which has not been cured in
all material respects and which has had or is likely to have a material
adverse effect and is incapable of being satisfied by the Termination Date;
(ii) If one or more of the Mergers is enjoined by a final,
unappealable court order not entered at the request or with the support of
WCI and if WCI shall have used reasonable efforts to prevent the entry of
such order; or
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(iii) If any of the Corporations or the Shareholders (A) fails to
perform in any material respect any of its, his or her covenants in this
Agreement and (B) does not cure such default in all material respects
within 30 days after written notice of such default specifying such default
in reasonable detail is given to such person by WCI; or
(iv) If WCI fails to obtain the WCI Shareholders Approval prior to
January 31, 1999.
(d) WCI and the Corporations shall have the right to terminate the
Agreement by mutual consent.
11.4 Effect of Termination. On termination of this Agreement, the
transactions contemplated herein shall forthwith be abandoned and all continuing
obligations and liabilities of the parties under or in connection with this
Agreement shall be terminated and of no further force or effect; provided,
however, that subject to Section 11.5 nothing herein shall relieve any party
from liability for any misrepresentation, breach of warranty or breach of
covenant contained in this Agreement prior to such termination or release any
party from the obligations under Sections 5.2 and 9.3; and provided further
that, if the reason for such termination is the failure of the conditions set
forth in Sections 6.20, 6.21, or 7.17, then the Shareholders and the
Corporations shall not have any liability to WCI or any other party to this
Agreement.
11.5 Corrections to Schedules. If, up to fifteen (15) days prior to the
Closing Date, the Shareholders or the Corporations determine that any Schedule,
document or other information provided to WCI or its agents by the Shareholders
or the Corporations is incomplete, inaccurate or misleading, the Shareholders or
the Corporations shall promptly give WCI written notice and correct such
Schedule, document or information. In addition, the Corporations shall provide
WCI with such additional information in their control concerning such correction
as WCI shall reasonably request. If such correction does not represent a
material change in the information previously provided to WCI, WCI shall not
have the right to terminate this Agreement based upon such correction. If such
correction does represent a material change in the information previously
provided WCI or its agents and WCI determines that such correction is
unacceptable, such correction shall be deemed to be a failure of the conditions
set forth in Section 6.1 and WCI shall have the right to terminate this
Agreement within five (5) days after receipt of the corrected information;
provided that the Corporations shall first have an opportunity to cure such
matter to the reasonable satisfaction of WCI prior to the later of November 30,
1998 or the then scheduled Closing Date. Upon any such termination, the
transactions contemplated herein shall forthwith be abandoned and all continuing
obligations and liabilities of the parties under or in connection with this
Agreement shall be terminated and of no further force or effect and,
notwithstanding Section 11.4, the Shareholders and the Corporations shall not
have any liability to WCI or any other party to this Agreement.
12. General
12.1 Additional Conveyances. Following the Closing, the Shareholders and
WCI shall each deliver or cause to be delivered at such times and places as
shall be reasonably agreed upon such additional instruments as WCI, the
Surviving Corporations or the Shareholders may reasonably request for the
purpose of carrying out this Agreement. The Shareholders will cooperate with WCI
and/or the Surviving Corporations on and after the Closing Date in furnishing
information, evidence, testimony and other assistance in connection with any
actions, proceedings or disputes of any nature with respect to matters
pertaining to all periods prior to the date of this Agreement. WCI or the
Surviving Corporations will reimburse the Shareholders for all reasonable
expenses incurred by them in providing such information, testimony, evidence or
assistance.
12.2 Assignment. This Agreement shall be binding upon and shall inure to
the benefit of the parties hereto, the successors or assigns of WCI and the
Surviving Corporations and the heirs, legal representatives or assigns of the
Shareholders; provided, however, that any such assignment shall be subject to
the terms of this Agreement and shall not relieve the assignor of its or his
responsibilities under this Agreement.
12.3 No Waiver Relating to Claims for Fraud. Notwithstanding anything
herein to the contrary, the liability of any party under Section 10 shall be in
addition to, and not exclusive of any other liability that such party may have
at law or equity based on such party's fraud, fraudulent inducement or
intentional misrepresentation or concealment ("FRAUD"). Notwithstanding anything
herein to the contrary, none of the provisions set forth in this Agreement,
including, but not limited to, the provisions set forth in Sections 10.1 or
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<PAGE> 270
10.2 shall be deemed a waiver by any party to this Agreement of any right or
remedy which such party may have at law or equity based on any other party's
Fraud, nor shall any such provisions limit, or be deemed to limit, (a) the
amounts of recovery sought or awarded in any such claim for Fraud, (b) the time
period during which such a claim for Fraud may be brought, or (c) the recourse
which any such party may seek against another party with respect to such a claim
for Fraud.
12.4 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall constitute one and the same instrument.
12.5 Notices. All notices, requests, demands and other communications
hereunder shall be deemed to have been duly given if in writing and either
delivered personally, sent by facsimile transmission or by air courier service,
or mailed by postage pre-paid registered or certified U.S. mail, return receipt
requested, to the addresses designated below or such other addresses as may be
designated in writing by notice given hereunder, and shall be effective upon
personal delivery or facsimile transmission thereof or upon delivery by
registered or certified U.S. mail or one business day following deposit with an
air courier service:
<TABLE>
<S> <C>
If to the Shareholders: At their respective addresses set forth on Schedule 3.2
With a copy to: David E. Myre, Jr.
Hillis Clark Martin & Peterson
500 Galland Building, 1221 Second Avenue
Seattle, WA 98101-2925
Phone: (206) 623-1745
Fax: (206) 623-7789
If to WCI: Waste Connections, Inc.
2260 Douglas Boulevard, Suite 280
Roseville, CA 95661
Attention: Ronald J. Mittelstaedt
Fax: (916) 772-2920
With a copy to: Robert D. Evans, Esq.
Shartsis, Friese & Ginsburg LLP
One Maritime Plaza, 18th Floor
San Francisco, CA 94111
Fax: (415) 421-2922
</TABLE>
12.6 Disclosure Schedules. Any matter disclosed on any Schedule to this
Agreement shall be deemed to have been disclosed on every other Schedule that
refers to such Schedule by cross reference so long as the nature of the matter
disclosed is obvious from a fair reading of the Schedule on which the matter is
disclosed.
12.7 Knowledge. Wherever reference is made in this Agreement to the
"Knowledge" of the Shareholders, such term means the actual knowledge of the
Shareholders or any knowledge which should have been obtained by the
Shareholders from information and documentation in his, her or its possession or
control. In the case of a Shareholder that is a trust, the term "knowledge"
means the actual knowledge of the trustee or trustees of the trust or any
knowledge which should have been obtained by the trustee or trustees from
information and documentation in his, her or its possession or control. Wherever
reference is made in this Agreement to the "knowledge" of any of the
Corporations, such term means the actual knowledge of any of the Shareholders,
or any current officer, director or management employee of any Corporation, or
any knowledge which should have been obtained by such person from information
and documentation in his, her or its possession or control.
12.8 Attorneys' Fees. In the event of any dispute or controversy between
WCI on the one hand and the Corporations or the Shareholders on the other hand
relating to the interpretation of this Agreement or to the transactions
contemplated hereby, the prevailing party shall be entitled to recover from the
other party reasonable attorneys' fees and expenses incurred by the prevailing
party, as awarded by the court. Such award shall include post-judgment
attorney's fees and costs.
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<PAGE> 271
12.9 Applicable Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington without regard to its
conflict of laws provisions. Any action or proceeding relating to this Agreement
or the transactions contemplated hereby shall be instituted in a state or
federal court located in Kings County, Washington. The parties hereby consent to
the jurisdiction of such courts and waive any objection to venue laid therein.
12.10 Payment of Fees and Expenses. Whether or not the transactions herein
contemplated shall be consummated, each party hereto will pay its own fees,
expenses and disbursements incurred in connection herewith and all other costs
and expenses incurred in the performance and compliance with all conditions to
be performed hereunder (including, in the case of the Shareholders, any such
fees, expenses and disbursements paid or accrued by, or charged to, the
Corporations); provided that WCI shall pay for the audit of the Corporations by
Ernst & Young LLP as contemplated by Section 3.7 and shall pay all filing fees
under the Act, the Exchange Act and the HSR Act.
12.11 Incorporation by Reference. All Schedules and Exhibits attached
hereto are incorporated herein by reference as though fully set forth at each
point referred to in this Agreement.
12.12 Captions. The captions in this Agreement are for convenience only
and shall not be considered a part hereof or affect the construction or
interpretation of any provisions of this Agreement.
12.13 Number and Gender of Words. Whenever the singular number is used
herein, the same shall include the plural where appropriate, and shall apply to
all of such number, and to each of them, jointly and severally, and words of any
gender shall include each other gender where appropriate.
12.14 Entire Agreement. This Agreement (including the Schedules and
Exhibits hereto) and the other documents delivered pursuant hereto constitute
the entire Agreement and understanding between the Corporations, the
Shareholders, the Merger Subs. and WCI and supersedes any prior agreement and
understanding relating to the subject matter of this Agreement. This Agreement
may be modified or amended only by a written instrument executed by the
Corporations, the Shareholders and WCI acting through its officers, thereunto
duly authorized by its Board of Directors.
12.15 Waiver. No waiver by any party hereto at any time of any breach of,
or compliance with, any condition or provision of this Agreement to be performed
by any other party hereto may be deemed a waiver of similar or dissimilar
provisions or conditions at the same time or at any prior or subsequent time.
12.16 Construction. The language in all parts of this Agreement must be in
all cases construed simply according to its fair meaning and not strictly for or
against any party. Unless expressly set forth otherwise, all references herein
to a "day" are deemed to be a reference to a calendar day. All references to
"business day" mean any day of the year other than a Saturday, Sunday or a
public or bank holiday in Washington or California. Unless expressly stated
otherwise, cross-references herein refer to provisions within this Agreement and
are not references to the overall transaction or to any other document.
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<PAGE> 272
13. Glossary
The definitions of the terms used below can be found at the Section
indicated:
<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
10.1(a) Indemnity Events.................................... Section 7.1(a)
10.1(b) Indemnity Events.................................... Section 7.1
Acquired Operations......................................... Section 2.2
Acquisition Transaction..................................... Section 5.7
Act......................................................... Section 2.1
AD.......................................................... Parties
Affiliate................................................... Section 3.11
Affiliate Letter............................................ Section 8.2(f)
Aggregate Adjusted Purchase Price........................... Section 2.1
Aggregate Merger Consolidation.............................. Section 2.1
Aggregate WCI Stock......................................... Section 2.1
Antitrust Division.......................................... Section 9.11(b)
APB No. 16.................................................. Section 5.2
Balance Sheet Date.......................................... Section 3.7
Balance Sheet Date Current Assets........................... Section 3.22
Balance Sheet Date Current Liabilities...................... Section 3.22
Balance Sheet Date Debt..................................... Section 3.22
Bonnie Trust................................................ Recitals
Bonnie Trust Approval....................................... Section 3.4
Business.................................................... Section 8.1
business day................................................ Section 9.14
Cash........................................................ Section 2.1(a)
Claim....................................................... Section 7.3
Claims Notice............................................... Section 7.3
Claim Section............................................... Section 10.3(a)
Closing..................................................... Section 1.7
Closing Date................................................ Section 1.7
Closing Price............................................... Section 2.1
Code........................................................ Section 3.36
Collection Franchises....................................... Section 3.10
Common Stock Agreement...................................... Section 8.1(f)
Confidential Information.................................... Section 8.1
Contingent Merger Consideration............................. Section 2.2
Contingent Shares........................................... Section 2.2
Corporate Property.......................................... Section 3.12
Corporations................................................ Parties
Corporations' Certificates.................................. Section 2.4
Corporations Shareholders Approval.......................... Section 3.4
Corporations' Stock......................................... Recitals
Day......................................................... Section 9.14
Disposal Agreement.......................................... Section 6.19
DM.......................................................... Parties
Donald...................................................... Parties
Effective Time.............................................. Section 1.2
Employment Agreement........................................ Section 8.1(b)
</TABLE>
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<PAGE> 273
<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
Environmental Laws.......................................... Section 3.24
Environmental Site.......................................... Section 10.1
Environmental Site Losses................................... Section 10.1
ERISA....................................................... Section 3.17
Exchange Act................................................ Section 4.5
Facilities.................................................. Section 3.10
Facility.................................................... Section 3.10
Filed Plans................................................. Section 1.2
Financial Statements........................................ Section 3.7
FTC......................................................... Section 9.11(b)
Fraud....................................................... Section 12.3
Golden Parachute............................................ Section 3.17
Golden Parachute Payment.................................... Section 3.17
Governmental Permits........................................ Section 3.10
Hazardous Substance......................................... Section 3.24
HSR Act..................................................... Section 3.10
Indemnifying Party.......................................... Section 10.3
Indemnitee.................................................. Section 10.3
Irmgard..................................................... Parties
Knowledge................................................... Section 3.34
Laws........................................................ Section 3.24
LeMay Agreement............................................. Section 7.13
Material Adverse Effect..................................... Section 3.21
MDC......................................................... Parties
Merger...................................................... Recitals
Merger Sub. I............................................... Parties
Merger Sub. II.............................................. Parties
Merger Sub. III............................................. Parties
Merger Sub. IV.............................................. Parties
Merger Subs................................................. Parties
multi-employer plan......................................... Section 3.17
Murrey Trust................................................ Parties
Nasdaq...................................................... Section 4.5
occurrence.................................................. Section 3.15
Permitted Liens............................................. Section 3.12
Pooling Affiliates.......................................... Section 3.3
Proxy Statement............................................. Section 3.35
Recipient................................................... Section 3.17
Records, Notifications and Reports.......................... Section 3.10
Registration Statements..................................... Section 2.1(b)
Release..................................................... Section 10.1
Representations and Warranties.............................. Section 10.4
Required Governmental Consents.............................. Section 3.10
Restricted Area............................................. Section 11.1
Restricted Period........................................... Section 11.1
Restrictive Covenants....................................... Section 11.2
SEC......................................................... Section 4.6
Shareholder Indemnitees..................................... Section 10.1
</TABLE>
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<PAGE> 274
<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
Shareholders................................................ Parties
Signing Date................................................ Section 1.2
Surviving Corporation....................................... Section 1.1
10.1(a) Indemnitee Events................................... Section 10.1(a)
10.1(b) Indemnitee Events................................... Section 10.1(b)
Termination Date............................................ Section 11.3(a)
Title Reports............................................... Section 3.12(a)
TR.......................................................... Parties
Union Contracts............................................. Section 3.17(a)
UST......................................................... Section 3.26
Washington Law.............................................. Section 1.1
WCI......................................................... Parties
WCI Indemnitees............................................. Section 7.1
WCI SEC Documents........................................... Section 4.6
WCI Shareholders Approval................................... Section 4.3
WCI Stock................................................... Recitals
</TABLE>
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<PAGE> 275
IN WITNESS WHEREOF, the parties hereto have executed this Agreement by
persons thereunto duly authorized as of the date first above written.
THE CORPORATIONS:
MURREY'S DISPOSAL COMPANY, INC.
By: /s/ DONALD J. HAWKINS
------------------------------------
Donald J. Hawkins
President
AMERICAN DISPOSAL COMPANY, INC.
By: /s/ DONALD J. HAWKINS
------------------------------------
Donald J. Hawkins
President
D. M. DISPOSAL CO., INC.
By: /s/ DONALD J. HAWKINS
------------------------------------
Donald J. Hawkins
President
RECYCLING COMPANY, INC.
By: /s/ DONALD J. HAWKINS
------------------------------------
Donald J. Hawkins
President
WCI:
WASTE CONNECTIONS, INC.
By: /s/ RONALD J. MITTELSTAEDT
------------------------------------
Ronald J. Mittelstaedt
Chief Executive Officer & President
MERGER SUB. I:
WCI Acquisition Corporation I
By: /s/ RONALD J. MITTELSTAEDT
------------------------------------
Ronald J. Mittelstaedt
Chief Executive Officer & President
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<PAGE> 276
MERGER SUB. II:
WCI Acquisition Corporation II
By: /s/ RONALD J. MITTELSTAEDT
------------------------------------
Ronald J. Mittelstaedt
Chief Executive Officer & President
MERGER SUB. III:
WCI Acquisition Corporation III
By: /s/ RONALD J. MITTELSTAEDT
------------------------------------
Ronald J. Mittelstaedt
Chief Executive Officer & President
MERGER SUB. IV:
WCI Acquisition Corporation IV
By: /s/ RONALD J. MITTELSTAEDT
------------------------------------
Ronald J. Mittelstaedt
Chief Executive Officer & President
THE SHAREHOLDERS:
THE MURREY TRUST UTA
dated August 5, 1993
/s/ DONALD J. HAWKINS
--------------------------------------
Donald J. Hawkins, Trustee
/s/ IRMGARD R. WILCOX
--------------------------------------
Irmgard R. Wilcox, Trustee
/s/ DONALD J. HAWKINS
--------------------------------------
Donald J. Hawkins
/s/ IRMGARD R. WILCOX
--------------------------------------
Irmgard R. Wilcox
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<PAGE> 277
In accordance with Section 5.8 of the foregoing Agreement and Plan of
Merger, the undersigned shareholder of D. M. Disposal Co., Inc. and Tacoma
Recycling Company, Inc., hereby approves the transactions contemplated by such
agreement and agrees to be bound by all of the terms and conditions thereof, and
upon execution below shall be deemed a "Shareholder" for all purposes of the
foregoing Agreement and Plan of Merger.
Dated: January 6, 1999
THE BONNIE L. MURREY REVOCABLE
TRUST UTA dated August 5, 1993, as
amended
/s/ RONALD K. FISH
--------------------------------------
Ronald K. Fish, Trustee
/s/ DARREN J. MURREY
--------------------------------------
Darren J. Murrey, Trustee
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<PAGE> 278
ANNEX B
October 22, 1998
Board of Directors
Waste Connections, Inc.
2260 Douglas Blvd., Suite 280
Roseville, CA 95661
Gentlemen:
BT Alex. Brown Incorporated ("BT Alex. Brown") has acted as financial
advisor to Waste Connections, Inc. ("Client") in connection with the proposed
mergers of WCI Acquisition Corporation I ("Merger Sub. I"), WCI Acquisition
Corporation II ("Merger Sub. II"), WCI Acquisition Corporation III ("Merger Sub.
III"), and WCI Acquisition Corporation IV ("Merger Sub. IV"), all wholly owned
subsidiaries of Client and collectively referred to as the "Merger Subs.", with
Murrey's Disposal Company Inc. ("MDC"), American Disposal Company, Inc. ("AD"),
D.M. Disposal Company, Inc. ("DM"), and Tacoma Recycling Company, Inc. ("TR")
collectively referred to as the ("Corporations"), pursuant to the Agreement and
Plan of Merger, dated as of October 22, 1998 among Client, the Merger Subs., the
Corporations, The Murrey Trust, Donald J. Hawkins, and Irmgard R. Wilcox (the
"Merger Agreement").
The Merger Agreement provides, among other things, for the mergers of
Merger Sub. I with and into MDC, Merger Sub. II with and into AD, Merger Sub.
III with and into DM, and Merger Sub. IV with and into TR (these mergers being
collectively referred to herein as the "Transaction"). As a result of the
mergers, each of the Corporations will become a wholly-owned subsidiary of
Client. As set forth more fully in the Merger Agreement, as a result of the
Transaction, owners of the common stock of the Corporations will receive two
million seven hundred fifty thousand (2,750,000) shares of the $0.01 par value
common stock of Client (the "Aggregate Client Stock"), subject to adjustment as
follows: (i) the number of shares of Aggregate Client Stock shall be reduced by
one share for each $20.50 by which Balance Sheet Date Debt exceeds $6,000,000;
and (ii) if the Closing Price of Client Stock as quoted on the NASDAQ Stock
Market on the last trading day before the Closing Date (the "Closing Price") is
less than $20.50, then as of the Effective Time the number of Aggregate Client
Shares to be issued in the Mergers shall be increased by fifty five thousand
five hundred fifty five (55,555) shares for each whole dollar by which the
Closing Price is less than $20.50 but more than $15.99 and by eighty three
thousand three hundred thirty three and one-third (83,333.33) shares for each
whole dollar by which the Closing Price is less than $13.00 but more than $9.99,
and shall be proportionately increased for any such amount less than one whole
dollar, provided that no more than two hundred fifty thousand (250,000)
additional shares shall be issued if the Closing Price is less than $16.00 but
more than $13.00 and provided further in no event shall the number of Aggregate
Client Shares to be issued in the Mergers exceed three million two hundred fifty
thousand (3,250,000) shares. The terms and conditions of the Transaction are
more fully set forth in the Merger Agreement. Defined terms used but not defined
herein shall be deemed to have definitions contained in the Merger Agreement.
You have requested BT Alex. Brown's opinion, as investment bankers, as to
the fairness, from a financial point of view, to Client of the Transaction.
In connection with BT Alex. Brown's role as financial advisor to Client,
and in arriving at its opinion, BT Alex. Brown has reviewed certain publicly
available financial and other information concerning the Corporations and Client
and certain internal analyses and other information furnished to it by the
Corporations and Client. BT Alex. Brown has also held discussions with members
of the senior managements of the Corporations and Client regarding the
businesses and prospects of their respective companies and the joint prospects
of a combined company. In addition, BT Alex. Brown has (i) reviewed the reported
prices and trading activity of the Common Stock of Client, (ii) compared certain
financial and stock market information for the Corporations and Client with
similar information for certain companies whose securities are publicly traded,
(iii) reviewed the financial terms of certain recent business combinations which
it deemed comparable in whole or in part, (iv) reviewed the terms of the Merger
Agreement and certain related documents,
<PAGE> 279
(v) reviewed the potential pro forma effect of the Merger on Client and the
Corporations, and (vi) performed such other studies and analyses and considered
such other factors as it deemed appropriate.
BT Alex. Brown has not assumed responsibility for independent verification
of, and has not independently verified, any information, whether publicly
available or furnished to it, concerning the Corporations or Client, including,
without limitation, any financial information, forecasts or projections
considered in connection with the rendering of its opinion. Accordingly, for
purposes of its opinion, BT Alex. Brown has assumed and relied upon the accuracy
and completeness of all such information and BT Alex. Brown has not prepared or
obtained any independent evaluation or appraisal of any of the assets or
liabilities of the Corporations or Client. With respect to the financial
forecasts and projections, including the analyses and forecasts of certain cost
savings, operating efficiencies, revenue effects and financial synergies
expected by Client and the Corporations to be achieved as a result of the
Transaction (collectively, the "Synergies"), made available to BT Alex. Brown
and considered in connection with its analyses, BT Alex. Brown has assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of the Corporations or
Client, as the case may be, as to the matters covered thereby. In rendering its
opinion, BT Alex. Brown expresses no view as to the reasonableness of such
forecasts and projections, including the Synergies, or the assumptions on which
they are based. BT Alex. Brown's opinion is necessarily based upon economic,
market and other conditions as in effect on, and the information made available
to it as of, the date hereof.
For purposes of rendering its opinion, BT Alex. Brown has assumed that, in
all respects material to its analysis, the representations and warranties of
Client and the Corporations contained in the Merger Agreement are true and
correct, each of Client and the Corporations will perform all of the covenants
and agreements to be performed by them under the Merger Agreement and all
conditions to the obligations of each of Client and the Corporations to
consummate the Transaction will be satisfied without any waiver thereof. BT
Alex. Brown has also assumed that all material governmental, regulatory or other
approvals and consents required in connection with the consummation of the
Transaction will be obtained and that in connection with obtaining any necessary
governmental, regulatory or other approvals and consents, or any amendments,
modifications or waivers to any agreements, instruments or orders to which
either Client or the Corporations is a party or is subject or by which it is
bound, no limitations, restrictions or conditions will be imposed or amendments,
modifications or waivers made that would have a material adverse effect on
Client or the Corporations or materially reduce the contemplated benefits of the
Transaction to Client. In addition, you have informed BT Alex. Brown, and
accordingly for purposes of rendering its opinion BT Alex. Brown has assumed,
that the Transaction will be tax-free to each of Client and the Corporations and
their respective stockholders and that the Transaction will be accounted for as
a pooling of interests.
This opinion is addressed to, and for the use and benefit of, the Board of
Directors of Client and is not a recommendation to the stockholders of Client to
approve the Transaction. This opinion is limited to the fairness, from a
financial point of view, to Client of the Transaction, and BT Alex. Brown
expresses no opinion as to the merits of the underlying decision by Client to
engage in the Transaction.
BT Alex. Brown (together with its affiliates, the "BT Group") is a
registered broker-dealer and member of the New York Stock Exchange. BT Alex.
Brown will be paid a fee for its services as financial advisor to Client in
connection with the Transaction. One or more members of the BT Group have, from
time to time, provided investment banking and other financial services to Client
or its affiliates for which it has received compensation, including the
underwriting of Client's initial public offering of equity on May 22, 1998. In
the ordinary course of business, members of the BT Group may actively trade in
the securities and, if applicable, other instruments and obligations of Client
for their own accounts and for the accounts of their customers. Accordingly, the
BT Group may at any time hold a long or short position in such securities,
instruments and obligations.
Based upon and subject to the foregoing, it is BT Alex. Brown's opinion, as
investment bankers, that the Transaction is fair, from a financial point of
view, to Client.
Very truly yours,
BT Alex. Brown Incorporated
<PAGE> 280
ANNEX C
WASTE CONNECTIONS, INC.
1997 STOCK OPTION PLAN
1. PURPOSE.
The purpose of the Plan is to provide a means for the Company and any
Subsidiary, through the grant of Incentive Stock Options and Nonqualified Stock
Options to selected Employees, Consultants and Directors, to attract and retain
persons of ability as Employees, Consultants and Directors, and to motivate such
persons to exert their best efforts on behalf of the Company and any Subsidiary.
2. DEFINITIONS.
(a) "Board" means the Company's Board of Directors.
(b) "CODE" means the Internal Revenue Code of 1986, as amended from time to
time.
(c) "Committee" means a committee appointed by the Board in accordance with
section 4(b) of the Plan.
(d) "Company" means Waste Connections, Inc., a Delaware corporation.
(e) "Consultant" means any person, including an advisor, engaged by the
Company or a Subsidiary to render consulting services and who is compensated for
such services; provided that the term "Consultant" shall not include Directors
who are paid only a director's fee by the Company or who are not compensated by
the Company for their services as Directors.
(f) "Continuous Status as an Employee, Consultant or Director" means the
employment or relationship as a Consultant or Director is not interrupted or
terminated. The Board, in its sole discretion, may determine whether Continuous
Status as an Employee, Consultant or Director shall be considered interrupted in
the case of (i) any leave of absence approved by the Board, including sick
leave, military leave or any other personal leave, or (ii) transfers between
locations of the Company or between the Company and a Subsidiary or their
successors.
(g) "Director" means a member of the Company's Board.
(h) "Disability" means permanent and total disability within the meaning of
section 422(c)(6) of the Code.
(i) "Employee" means any person, including Officers and Directors, employed
by the Company or any Subsidiary of the Company. Neither service as a Consultant
or a Director nor receipt of a director's fee from the Company shall be
sufficient to constitute "employment" by the Company.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(k) "Incentive Stock Options" means Options that are intended to qualify as
incentive stock options within the meaning of section 422 of the Code.
(l) "Non-Employee Director" means a Director who satisfies the requirements
established from time to time by the Securities and Exchange Commission for
non-employee directors under Rule 16b-3.
(m) "Nonqualified Stock Options" means Options that are not intended to
qualify as Incentive Stock Options.
(n) "Officer" means a person who is an officer of the Company or a
Subsidiary within the meaning of section 16 of the Exchange Act and the rules
and regulations promulgated thereunder.
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<PAGE> 281
(o) "Option Agreement" means a written agreement between the Company and an
Optionee evidencing the terms and conditions of an individual Option grant. Each
Option Agreement shall be subject to the terms and conditions of the Plan.
(p) "Optionee" means an Employee, Consultant or Director who holds an
outstanding Option.
(q) "Options" means, collectively, Incentive Stock Options and Nonqualified
Stock Options.
(r) "Outside Director" means a member of the Board who satisfies the
requirements established from time to time for outside directors under section
162(m) of the Code.
(s) "Plan" means this Waste Connections, Inc., 1997 Stock Option Plan.
(t) "Rule 16b-3" means Rule 16b-3 under the Exchange Act or any successor
to Rule 16b-3, as amended from time to time and as in effect when discretion is
being exercised with respect to the Plan.
(u) "Securities Act" means the Securities Act of 1933, as amended.
(v) "Stock" means the Common Stock of the Company.
(w) "Subsidiary" means any corporation that at the time an Option is
granted under the Plan qualifies as a subsidiary of the Company under the
definition of "subsidiary corporation" contained in section 424(f) of the Code,
or any similar provision hereafter enacted.
(x) "Ten Percent Shareholder" means an individual who, at the time of an
Option grant, owns stock possessing more than ten percent of the total combined
voting power of all classes of stock of the Company.
3. SHARES SUBJECT TO THE PLAN.
Subject to adjustment as provided in section 6 for changes in Stock, the
Stock that may be sold pursuant to Options shall not exceed in the aggregate
1,200,000 shares. That number of shares shall be reserved for Options (subject
to adjustment as provided in section 6). If any Option for any reason
terminates, expires or is cancelled without having been exercised in full, the
Stock not purchased under such Option shall revert to and again become available
for issuance under the Plan.
4. ADMINISTRATION.
(a) The Plan shall be administered by the Board or, at the election of the
Board, by a Committee, as provided in subsection (b). Subject to the Plan, the
Board shall:
(i) determine and designate from time to time those Employees,
Consultants and Directors to whom Options are to be granted, and whether
the Options granted will be Incentive Stock Options or Nonqualified Stock
Options;
(ii) authorize the granting of Incentive Stock Options, Nonqualified
Stock Options or combinations thereof;
(iii) determine the number of shares subject to each Option and the
Exercise Price of each Option;
(iv) determine the time or times when and the manner in which each
Option shall be exercisable and the duration of the exercise period;
(v) construe and interpret the Plan and the Options, and establish,
amend and revoke rules and regulations for the Plan's administration, and
correct any defect, omission or inconsistency in the Plan or any Option
Agreement in a manner and to the extent it deems necessary or expedient to
make the Plan fully effective; and
(vi) make such other determinations as it may be authorized to make in
the Plan and as it may deem necessary and desirable for the purposes of the
Plan.
Notwithstanding the foregoing, however, (1) no Option shall be granted after the
expiration of ten years from the effective date of the Plan specified in section
9 below, (2) the aggregate fair market value (determined as
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<PAGE> 282
of the date the Option is granted) of the Stock subject to Options that become
exercisable for the first time by any Employee during any calendar year under
all Incentive Stock Options of the Company and its Subsidiaries shall not exceed
$100,000, and (3) no person who is not an Employee of the Company or a
Subsidiary shall be entitled to receive Incentive Stock Options under the Plan.
(b) The Board may delegate administration of the Plan to a Committee of the
Board. The Committee shall consist of not less than three members appointed by
the Board. Subject to the foregoing, the Board may from time to time increase
the size of the Committee and appoint additional members, remove members (with
or without cause) and appoint new members in substitution therefor, or fill
vacancies, however caused. If the Board delegates administration of the Plan to
a Committee, the Committee shall have the powers theretofore possessed by the
Board with respect to the administration of the Plan (and references in this
Plan to the Board shall apply to the Committee), subject, however, to such
resolutions, not inconsistent with the provisions of the Plan, as may be adopted
from time to time by the Board. The Board may abolish the Committee at any time
and revest in the Board the administration of the Plan.
(c) Notwithstanding anything in this section 4 to the contrary, beginning
at such time as the Company first registers a class of equity securities under
section 12 of the Exchange Act, all decisions to grant Options shall be made by
the Board or by a Committee comprised solely of two or more Directors, each of
whom is both a Non-Employee Director and an Outside Director, or shall be made
in another manner that satisfies the requirements of Section 16b-3, so that
transactions between the Company and any Officer or Director relating to such
Options may be exempt from section 16(b) of the Exchange Act.
5. TERMS AND CONDITIONS OF OPTIONS.
Each Option granted shall be evidenced by an Option Agreement in
substantially the form attached hereto as Annex A or Annex B or such other form
as may be approved by the Board. Each Option Agreement shall include the
following terms and conditions and such other terms and conditions as the Board
may deem appropriate:
(a) Option Term. Each Option Agreement shall specify the term for which the
Option thereunder is granted and shall provide that such Option shall expire at
the end of such term. The Board may extend such term; provided that, in the case
of an Incentive Stock Option, such extension shall not in any way disqualify the
Option as an Incentive Stock Option. The term of any Option, including any such
extensions, shall not exceed ten years from the date of grant; provided that, in
the case of an Incentive Stock Option granted to a Ten Percent Shareholder, such
term, including extensions, shall not exceed five years from the date of grant.
(b) Exercise Price. Each Option Agreement shall specify the exercise price
per share, as determined by the Board at the time the Option is granted;
provided that the exercise price of an Incentive Stock Option shall be not less
than the fair market value, or if granted to a Ten Percent Shareholder, 110
percent of the fair market value, of one share of Stock on the date the Option
is granted, as such fair market value is determined by the Board.
(c) Vesting. Each Option Agreement shall specify when it is exercisable.
The total number of shares of Stock subject to an Option may, but need not, be
allotted in periodic installments (which may, but need not be, equal). An Option
Agreement may provide that from time to time during each of such installment
periods, the Option may become exercisable ("vest") with respect to some or all
of the shares allotted to that period, and may be exercised with respect to some
or all of the shares allotted to such period or any prior period as to which the
Option shall have become vested but shall not have been fully exercised. An
Option may be subject to such other terms and conditions on the time or times
when it may be exercised (which may be based on performance or other criteria)
as the Board deems appropriate.
(d) Payment of Purchase Price on Exercise. Each Option Agreement shall
provide that the purchase price of the shares as to which such Option may be
exercised shall be paid to the Company at the time of exercise either (i) in
cash, or (ii) in the absolute discretion of the Board (which discretion may be
exercised in a particular case without regard to any other case or cases), at
the time of the grant or thereafter, (A) by the withholding of shares of Stock
issuable on exercise of the Option or the delivery to the Company of other
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Stock owned by the Optionee, provided in either case that the Optionee has owned
shares of Stock equal in number to the shares so withheld for a period
sufficient to avoid a charge to the Company's reported earnings, (B) according
to a deferred payment or other arrangement (which may include, without limiting
the generality of the foregoing, the use of Stock) with the person to whom the
Option is granted or to whom the Option is transferred pursuant to section 5(e),
or (C) in any other form of legal consideration that may be acceptable to the
Board.
In the case of any deferred payment arrangement, interest shall be payable
at least annually and shall be charged at the minimum rate necessary to avoid
the treatment as interest, under any applicable provisions of the Code, of any
amounts other than amounts stated to be interest under the deferred payment
arrangement, or if less, the maximum rate permitted by law.
(e) Nontransferability. An Option shall not be sold, assigned, transferred,
pledged, hypothecated or otherwise disposed of by the Optionee during his or her
lifetime, whether by operation of law or otherwise, other than by will or the
laws of descent and distribution applicable to the Optionee, and shall not be
made subject to execution, attachment or similar process; provided that the
Board may in its discretion at the time of approval of the grant of an Option or
thereafter permit an Optionee to transfer an Option to a trust or other entity
established by the Optionee for estate planning purposes, and may permit further
transferability or impose conditions or limitations on any permitted
transferability. Otherwise, during the lifetime of an Optionee, an Option shall
be exercisable only by such Optionee.
(f) Conditions on Exercise of Options and Issuance of Shares.
(i) Securities Law Compliance. The Plan, the grant and exercise of
Options thereunder and the obligation of the Company to sell and deliver
shares on exercise of Options shall be subject to all applicable Federal
and state laws, rules and regulations and to such approvals by any
government or regulatory agency as may be required, in the opinion of the
Board. Shares shall not be issued on exercise of an Option until (1) the
listing of such shares on any stock exchange on which the Stock may then be
listed and compliance with all requirements of such exchange, and (2) the
completion of any registration or qualification of such shares under any
Federal or state law, including without limitation the Securities Act and
the Exchange Act, or any rule or regulation of any government body which
the Company determines in its sole discretion to be necessary or advisable.
(ii) Investment Representation. The Company may require any Optionee,
or any person to whom an Option is transferred, as a condition of
exercising such Option, to (1) give written assurances satisfactory to the
Company as to the Optionee's knowledge and experience in financial and
business matters or to employ a purchaser representative reasonably
satisfactory to the Company who is knowledgeable and experienced in
financial and business matters, and that he or she is capable of
evaluating, alone or together with the purchaser representative, the merits
and risks of exercising the Option; and (2) to give written assurances
satisfactory to the Company stating that such person is acquiring the Stock
subject to the Option for such person's own account and not with any
present intention of selling or otherwise distributing the Stock. The
foregoing requirements, and any assurances given pursuant to such
requirements, shall not apply if (A) the issuance of the Stock on the
exercise of the Option has been registered under a then currently effective
registration statement under the Securities Act, or (B) counsel for the
Company determines as to any particular requirement that such requirement
need not be met in the circumstances under the then applicable securities
laws. The Company may, with the advice of its counsel, place such legends
on stock certificates issued under the Plan as the Company deems necessary
or appropriate to comply with applicable securities laws, including, but
not limited to, legends restricting the transfer of the Stock.
(g) Exercise After Death of Optionee. If an Optionee dies (i) while an
Employee, Consultant or Director, or (ii) within three months after termination
of the Optionee's Continuous Status as an Employee, Consultant or Director
because of his or her Disability or retirement, his or her Options may be
exercised (to the extent that the Optionee was entitled to do so on the date of
death or termination) by the Optionee's estate or by a person who shall have
acquired the right to exercise the Options by bequest or inheritance, but only
within the period ending on the earlier of (1) one year after the Optionee's
death (or such shorter or longer
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period specified in the Option Agreement, which period shall not be less than
six months), or (2) the expiration date specified in the Option Agreement. If
after the Optionee's death, the Optionee's estate or the person who acquired the
right to exercise the Optionee's Options does not exercise the Options within
the time specified herein, the Options shall terminate and the shares covered by
such Options shall revert to and again become available for issuance under the
Plan.
(h) Exercise After Termination of Optionee's Continuous Status as an
Employee, Consultant or Director as a Result of Disability or Retirement. If an
Optionee's Continuous Status as an Employee, Consultant or Director terminates
as a result of the Optionee's Disability or retirement, and the Optionee does
not die within the following three months, the Optionee may exercise his or her
Options (to the extent that the Optionee was entitled to exercise them on the
date of termination), but only within the period ending on the earlier of (i)
six months after such termination (or such longer period specified in the Option
Agreement), or (ii) the expiration of the term set forth in the Option
Agreement. If after termination, the Optionee does not exercise his or her
Options within the time specified herein, the Options shall terminate, and the
shares covered by such Options shall revert to and again become available for
issuance under the Plan.
(i) No Exercise After Termination of Optionee's Continuous Status as an
Employment, Consultant or Director other than as a Result of Death, Disability
or Retirement. If an Optionee's Continuous Status as an Employee, Consultant or
Director terminates other than as a result of the Optionee's death, Disability
or retirement, all right of the Optionee to exercise his or her Options shall
terminate on the date of termination of such Continuous Status as an Employee,
Consultant or Director. The Options shall terminate on such termination date,
and the shares covered by such Options shall revert to and again become
available for issuance under the Plan.
(j) Exceptions. Notwithstanding subsections (h), (i) and (j), the Board
shall have the authority to extend the expiration date of any outstanding Option
in circumstances in which it deems such action to be appropriate, provided that
no such extension shall extend the term of an Option beyond the expiration date
of the term of such Option as set forth in the Option Agreement.
(k) Incentive Stock Options. Each Option Agreement that provides for the
grant of an Incentive Stock Option shall contain such terms and conditions as
the Board determines to be necessary or desirable to qualify such Option as an
Incentive Stock Option within the meaning of section 422 of the Code.
(l) Company's Repurchase Right. Each Option Agreement may, but is not
required to, include provisions whereby the Company shall have the right to
repurchase any and all shares acquired by an Optionee on exercise of any Option
granted under the Plan, at such price and on such other terms and conditions as
the Board may approve and as may be set forth in the Option Agreement. Such
right shall be exercisable by the Company after termination of an Optionee's
Continuous Status as an Employee, Consultant or Director, whenever such
termination may occur and whether such termination is voluntary or involuntary,
with cause or without cause, without regard to the reason therefor, if any.
6. ADJUSTMENTS ON CHANGES IN STOCK.
(a) If any change in the Stock subject to the Plan or subject to any Option
occurs (through stock dividend, dividend in property other than cash,
recapitalization, reorganization, reclassification, stock split or reverse stock
split, liquidating dividend, combination or exchange of shares, merger or
consolidation, any direct or indirect offering of Stock at a price substantially
below fair market value, or any similar change affecting the Stock), the Board
will appropriately adjust the class(es) and maximum number of shares subject to
the Plan and the class(es) and number of shares and price per share of Stock
subject to the outstanding Options.
(b) In the event of (i) a merger or consolidation in which the Company is
not the surviving corporation, or (ii) a reverse merger in which the Company is
the surviving corporation but the shares of the Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise, then to the extent
permitted by applicable law: (1) any surviving corporation shall assume any
Options outstanding under the Plan or shall substitute similar options
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for those outstanding under the Plan, or (2) any Options outstanding under the
Plan shall continue in full force and effect. If any surviving corporation
refuses to assume or continue such Options, or to substitute similar options for
those outstanding under the Plan, then such Options shall be terminated if not
exercised prior to the merger or reverse merger. If the Company dissolves or is
liquidated, any Options outstanding under the Plan shall terminate if not
exercise prior to such event.
7. AMENDMENT OF THE PLAN.
(a) The Board may from time to time amend or modify the Plan for any
reason; provided that the Company will seek shareholder approval for any change
if and to the extent required by applicable law, regulation or rule.
(b) It is expressly contemplated that the Board may amend the Plan in any
respect the Board deems necessary or advisable to provide Optionees with the
maximum benefits provided or to be provided under the Code and the regulations
promulgated thereunder relating to Incentive Stock Options or to cause the Plan
or Incentive Stock Options to comply therewith.
(c) Rights and obligations under any Option granted before amendment of the
Plan shall not be altered or impaired by any amendment, unless the Optionee
consents in writing.
8. TERMINATION OR SUSPENSION OF THE PLAN.
The Board may suspend or terminate the Plan at any time for any reason.
Unless sooner terminated, the Plan shall terminate on the day prior to the tenth
anniversary of the earlier of the date the Plan is adopted by the Board or the
date the Plan is approved by the Company's shareholders. No Options may be
granted under the Plan while the Plan is suspended or after it is terminated.
Rights and obligations under any Option granted while the Plan is in effect
shall not be altered or impaired by suspension or termination of the Plan,
except with the written consent of the Optionee.
9. EFFECTIVE DATE OF THE PLAN.
The effective date of the Plan shall be determined by the Board, subject to
approval by the shareholders of the Company holding not less than a majority of
the shares present and voting at an annual or special meeting or by written
consent. Notwithstanding the foregoing, if the Plan is approved by the Board
prior to such meeting or the giving of such consent, Options may be granted by
the Board as provided herein subject to such subsequent shareholder approval.
10. WITHHOLDING TAXES.
Whenever the Company proposes or is required to issue or transfer shares of
Stock under the Plan, the Company shall have the right to require the grantee to
remit to the Company an amount sufficient to satisfy any Federal, state or local
withholding tax requirements prior to the delivery of any certificate or
certificates for such shares. Alternatively, the Company may issue or transfer
such shares net of the number of shares sufficient to satisfy the withholding
tax requirements. For withholding tax purposes, the shares of Stock shall be
valued on the date the withholding obligation is incurred.
11. MISCELLANEOUS.
(a) No Rights as Shareholder. No Optionee, as such, shall have any rights
as a shareholder of the Company.
(b) No Rights to Continued Employment or Engagement. The Plan and any
Options granted under the Plan shall not confer on any Optionee any right with
respect to continuation of employment by the Company or any Subsidiary or
engagement as a Consultant or Director, nor shall they interfere in any way with
the right of the Company or any Subsidiary that employs or engages an Optionee
to terminate the Optionee's employment or engagement at any time.
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(c) Compliance with Section 16 of the Exchange Act. Beginning at such time
as the Company first registers a class of equity securities under section 12 of
the Exchange Act, the Company intends that the Plan shall comply in all respects
with Rule 16b-3. If after such time any provision of this Plan is found not to
be in compliance with Rule 16b-3, that provision shall be deemed to have been
amended or deleted as and to the extent necessary to comply with Rule 16b-3, and
the remaining provisions of the Plan shall continue in full force and effect
without change. All transactions under the Plan after such time shall be
executed in accordance with the requirements of section 16 of the Exchange Act
and the applicable regulations promulgated thereunder.
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WASTE CONNECTIONS, INC.
2260 DOUGLAS BOULEVARD, SUITE 280
ROSEVILLE, CALIFORNIA 95661
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS ON JANUARY , 1999
The undersigned holder of Common Stock of Waste Connections, Inc. ("WCI")
acknowledges receipt of WCI's Proxy Statement dated January , 1999. The
undersigned revokes all prior proxies and appoints Ronald J. Mittelstaedt and
Steven F. Bouck, and each of them, individually and with full powers of
substitution and resubstitution, proxies for the undersigned to vote all shares
of WCI Common Stock that the undersigned would be entitled to vote at the
Special Meeting of Stockholders to be held at Courtyard by Marriott, 1920 Taylor
Road, Roseville, California, 9:00 a.m. (Pacific Time) on January , 1999, and
any adjournment thereof, as designated on the reverse side of this Proxy Card.
THIS PROXY WILL BE VOTED ACCORDING TO THE SPECIFICATIONS YOU MAKE BELOW. IF
YOU DO NOT SPECIFY BELOW BUT YOU DO SIGN AND DATE THIS PROXY CARD, THIS PROXY
WILL BE VOTED FOR THE PROPOSALS REFERRED TO IN (1) AND (2) BELOW, AND IN THE
DISCRETION OF THE PERSONS NAMED AS PROXIES AS TO ANY OTHER MATTERS THAT PROPERLY
COME BEFORE THE MEETING OR ANY ADJOURNMENTS THEREOF.
PLEASE MARK, SIGN AND DATE THIS PROXY CARD ON THE REVERSE SIDE AND RETURN IT
PROMPTLY IN THE ENCLOSED ENVELOPE.
(CONTINUED AND TO BE SIGNED ON REVERSE SIDE)
<PAGE> 288
(CONTINUED FROM FACE OF CARD)
/X/ PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE.
THE WCI BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 1.
1. MERGER PROPOSAL. To approve the issuance of 2,750,000, and possibly up to
3,250,000, shares of WCI Common Stock under the Agreement and Plan of Merger
dated as of October 22, 1998, by and among WCI, WCI Acquisition Corporation I,
WCI Acquisition Corporation II, WCI Acquisition Corporation III, WCI Acquisition
Corporation IV, Murrey's Disposal Company, Inc., American Disposal Company,
Inc., DM Disposal Co., Inc., Tacoma Recycling Company, Inc., the Murrey Trust
UTA August 5, 1993, as amended, the Bonnie L. Murrey Revocable Trust UTA August
5, 1993, as amended, Donald J. Hawkins and Irmgard R. Wilcox, and the mergers
contemplated by that Agreement, as described in the accompanying Proxy
Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THE WCI BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 2.
2. OPTION PLAN PROPOSAL. To approve an amendment to WCI's 1997 Stock Option
Plan to increase the number of shares reserved for issuance under that plan to
12% of the number of shares of Common Stock outstanding at any given time. [ ]
FOR [ ] AGAINST [ ] ABSTAIN
3. OTHER BUSINESS. To transact such other matters as may properly come before
the special meeting or any adjournments thereof. [ ] AUTHORIZED [ ] NOT
AUTHORIZED
If you plan to attend the Special Meeting of Stockholders, please mark the
following box and promptly return this Proxy Card. [ ]
DATED:____________________, 1999
- -------------------------------- -------------------------------
SIGNATURE OF STOCKHOLDER TITLE, IF ANY
- -------------------------------- -------------------------------
SIGNATURE OF STOCKHOLDER IF HELD TITLE, IF ANY
JOINTLY
PLEASE SIGN EXACTLY AS YOUR
NAME OR NAMES APPEAR ON THIS
PROXY CARD. IF YOU HOLD SHARES
JOINTLY, EACH STOCKHOLDER
SHOULD SIGN. IF YOU SIGN AS AN
ATTORNEY, EXECUTOR,
ADMINISTRATOR, TRUSTEE OR
GUARDIAN, PLEASE GIVE YOUR FULL
TITLE.
IF THE SIGNER IS A CORPORATION,
PLEASE SIGN THE FULL CORPORATE
NAME BY THE PRESIDENT OR AN
AUTHORIZED OFFICER. IF THE
SIGNER IS A PARTNERSHIP, PLEASE
SIGN THE FULL PARTNERSHIP NAME
BY AN AUTHORIZED PERSON. PLEASE
MARK, SIGN, DATE AND MAIL THIS
PROXY CARD PROMPTLY, USING THE
ENCLOSED POSTAGE-PAID ENVELOPE.
