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FILED PURSUANT TO RULE 424(b)(1)
REGISTRATION NO. 333-65615
3,000,000 SHARES
[LOGO]
COMMON STOCK
This Prospectus relates to the offer and sale by Waste Connections, Inc. of
shares of its Common Stock at various times as consideration for the Company's
acquisition of solid waste collection, transportation, disposal and recycling
businesses. The prices of these shares will be reasonably related to the Common
Stock's market prices when the parties agree to an acquisition or when the
Company delivers the shares. Each time the Company sells shares under this
Prospectus, it will provide a supplement (a "Prospectus Supplement") or a
post-effective amendment (a "Post-Effective Amendment") to this Prospectus,
which will specify the number of shares issued and the issue price per share,
and will update the information in this Prospectus.
On April 19, 1999, the Company had 17,425,483 shares of Common Stock
outstanding. The Company's Common Stock is traded on the Nasdaq National Market
(symbol: WCNX). On April 19, 1999, the last sale price of the Common Stock on
the Nasdaq National Market was $23.50 per share.
The Company's executive offices are located at 2260 Douglas Boulevard, Suite
280, Roseville, California 95661, and its telephone number is (916) 772-2221.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT
PROSPECTIVE INVESTORS IN COMMON STOCK SHOULD CONSIDER.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED WHETHER
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
The date of this Prospectus is April 29, 1999.
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AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-4 (the "Registration
Statement"). This Prospectus, which forms a part of the Registration Statement,
omits some of the information included in the Registration Statement. You should
refer to the Registration Statement and its exhibits for further information.
The Company files annual, quarterly and special reports, proxy statements and
other information with the Commission. You may read and copy the Registration
Statement and any reports, statements or other information on file at the
Commission's public reference rooms in Washington, D.C., Chicago, Illinois and
New York, New York. Please call the Commission at 1-800-732-0330 for further
information on the public reference rooms. You can also request copies of those
documents by writing to the Commission; you will be charged a duplicating fee.
The Company's Commission filings are also available to the public from
commercial document retrieval services and at the web site the Commission
maintains at "http://www.sec.gov." The Company's Common Stock is listed on the
Nasdaq National Market, and you may also inspect and copy the Company's
Commission filings at the offices of the National Association of Securities
Dealers, Inc., located at 1735 K Street, N.W., Washington, D.C. 20549.
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PROSPECTUS SUMMARY
This summary highlights some information from this Prospectus. It may not
contain all of the information that is important to you. To understand this
offering fully, you should read the entire Prospectus carefully, including the
risk factors and the financial statements. Unless otherwise specified, all
references to the "Company" or "Waste Connections" mean Waste Connections, Inc.
and its subsidiaries, and all references to "solid waste" mean non-hazardous
solid waste.
THE COMPANY
Waste Connections is a regional, integrated solid waste services company that
provides solid waste collection, transfer, disposal and recycling services in
secondary markets of the Western U.S. As of April 15, 1999, the Company served
more than 330,000 commercial, industrial and residential customers in
California, Idaho, Kansas, Minnesota, Nebraska, Oklahoma, Oregon, South Dakota,
Utah, Washington and Wyoming. The Company currently owns and operates 33
collection operations, 11 transfer stations and three Subtitle D landfills, and
operates an additional seven transfer stations, two Subtitle D landfills and
nine recycling facilities. See "Business -- Introduction" and "-- Services."
Waste Connections was founded in September 1997 to execute an acquisition-based
growth strategy in secondary markets of the Western U.S. The Company has
acquired 64 solid waste services related businesses since its formation. It has
identified more than 300 independent operators of such businesses in the states
where it currently operates and believes many of those may be suitable for the
Company to acquire. The Company is also currently assessing potential
acquisitions of solid waste services operations in Colorado, Montana and Texas.
See "Business -- Acquisition Program."
The Company has targeted secondary markets in the Western U.S. because it
believes that (i) a large number of independent solid waste services companies
suitable for acquisition by the Company are located in these markets; (ii) there
is less competition in these markets from large, well-capitalized solid waste
services companies; and (iii) these markets have strong projected economic and
population growth rates. In addition, the Company's senior management team has
extensive experience acquiring and operating solid waste services businesses in
the Western U.S.
The Company has developed a market-based operating strategy tailored to the
competitive and regulatory factors that affect its markets. In certain Western
U.S. markets, where waste collection services are governed by exclusive
franchise agreements, municipal contracts and governmental certificates
(referred to in Washington as "G certificates"), the Company generally intends
to pursue a collection-based operating strategy. In these markets, the Company
believes that controlling the waste stream by providing collection services
under exclusive franchise agreements, municipal contracts and governmental
certificates is often more important to a solid waste services company's growth
and profitability than owning or operating landfills. In markets where the
Company considers ownership of landfills advantageous due to competitive and
regulatory factors, the Company generally intends to pursue an integrated,
disposal-based strategy. See "Business -- Strategy."
The Company's objective is to build a leading solid waste services company in
the secondary markets of the Western U.S. by (i) acquiring collection, transfer,
disposal and
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recycling operations in new markets and through "tuck-in" acquisitions in
existing markets; (ii) securing additional exclusive franchises, municipal
contracts and governmental certificates; (iii) generating internal growth in
existing markets by increasing market penetration and adding services to its
existing operations; and (iv) enhancing profitability by increasing operating
efficiencies of existing and acquired operations. The Company believes that the
experience of the members of its senior management team and their knowledge of
and reputation in the solid waste industry in the Company's targeted markets
will give the Company competitive advantages as it pursues its growth strategy.
See "Business -- Strategy."
The Company was incorporated in Delaware in 1997. Its principal executive
offices are located at 2260 Douglas Boulevard, Suite 280, Roseville, California
95661, and its telephone number is (916) 772-2221.
RECENT DEVELOPMENTS
RECENT ACQUISITIONS
From January 1, 1999 to April 15, 1999, the Company acquired 20 solid waste
services businesses, including 11 collection operations, two Subtitle D
landfills, eight transfer stations and four recycling operations representing
approximately $65 million in annual revenue. These acquisitions took the Company
into one new state, Minnesota. The acquired businesses included "tuck in"
acquisitions in pre-existing markets, new market entries and "tuck in"
acquisitions in the new markets.
EXPANDED CREDIT FACILITY
On April 13, 1999, the Company entered into a new credit facility with a
syndicate of banks led by BankBoston, N.A., which among other things, increased
the Company's borrowing capacity from $125.0 million to $225.0 million, modified
certain covenants and lowered the Company's overall borrowing costs. As of April
16, 1999, the aggregate outstanding principal indebtedness under the credit
facility was approximately $95,700,000.
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WASTE CONNECTIONS, INC.
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
YEAR ENDED
YEAR ENDED DECEMBER 31,
DECEMBER 31, 1998 1998(1)
----------------- ------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................... $ 54,042 $ 102,064
Cost of operations..................................... 36,554 66,576
Selling, general and administrative.................... 5,317 11,064
Depreciation and amortization.......................... 4,112 8,352
Stock compensation..................................... 632 632
---------- -----------
Income from operations................................. 7,427 15,440
Interest expense....................................... (2,257) (9,330)
Other income (expense), net............................ -- 108
---------- -----------
Income before income taxes............................. 5,170 6,218
Income tax provision................................... (2,395) (3,078)
---------- -----------
Net income before extraordinary Item................... 2,775 3,140
Extraordinary item -- early extinguishment of debt, net
of income tax benefit of $264........................ (1,027) (1,027)
---------- -----------
Net income............................................. $ 1,748 $ 2,113
========== ===========
Redeemable convertible preferred stock accretion....... (917) (917)
---------- -----------
Net income applicable to common stockholders........... $ 831 $ 1,196
========== ===========
Basic earnings per common share:
Income before extraordinary item..................... $ 0.29 $ 0.24
Extraordinary item................................... (0.16) (0.11)
---------- -----------
Net income per common share.......................... $ 0.13 $ 0.13
========== ===========
Diluted earnings per common share:
Income before extraordinary item..................... $ 0.22 $ 0.20
Extraordinary item................................... (0.12) (0.09)
---------- -----------
Net income per common share.......................... $ 0.10 $ 0.11
========== ===========
Shares used in calculating basic earnings per share.... 6,460,293 9,349,173
Shares used in calculating diluted earnings per
share................................................ 8,371,415 11,260,295
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
DECEMBER 31, DECEMBER 31,
1998 1998(2)
------------ ------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents..................................... $ 2,675 $ 4,896
Working capital (deficit)................................ (8,717) (10,700)
Property and equipment, net.............................. 33,043 121,028
Total assets............................................. 149,312 254,925
Long-term debt........................................... 60,106 148,349
Total stockholders' equity............................... 61,063 62,329
</TABLE>
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(1) Assumes the Company's acquisitions of Columbia Resource Co., L.P. and
Finley-Buttes Limited Partnership ("CRCFBLP") and the mergers with the
Murrey Companies (accounted for as poolings-of-interests) occurred as of
January 1, 1998. See "Unaudited Pro Forma Financial Statements" included
elsewhere herein.
(2) Assumes the Company's acquisitions of CRCFBLP and the mergers with Murrey's
Disposal Company, Inc., American Disposal Company, Inc., D.M. Disposal Co.,
Inc. and Tacoma Recycling Company, Inc. (together, the "Murrey Companies")
(accounted for as poolings-of-interests) occurred on December 31, 1998. See
"Unaudited Pro Forma Financial Statements" included elsewhere herein.
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RISK FACTORS
You should carefully consider the following factors and other information in
this Prospectus before purchasing the shares of Common Stock offered by this
Prospectus. This Prospectus contains certain forward-looking statements that
involve risks and uncertainties. Discussions containing such forward-looking
statements are found in the material set forth under "Prospectus Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business," as well as in the Prospectus generally.
The cautionary statements contained in this Prospectus apply to all related
forward-looking statements wherever they appear in this Prospectus. The
Company's actual results could differ materially from those discussed here as a
result of various factors, including, but not limited to, those discussed below
and elsewhere in this Prospectus.
Limited Operating History; Integration of Completed Acquisitions. The Company
was formed in September 1997 and commenced operations on October 1, 1997.
Accordingly, the Company has only a limited operating history on which you may
evaluate its business and its prospects. You should consider the disclosures
about the Company in this Prospectus in light of the risks, expenses and
difficulties that companies frequently encounter in their early stages of
development. The Company's recently assembled senior management team may not be
able to manage the Company successfully or to implement the Company's operating
and growth strategies effectively.
The Company's growth and future financial performance depend significantly on
its ability to integrate acquired businesses into its organization and
operations. Part of the Company's strategy is to achieve economies of scale and
operating efficiencies by increasing its size through acquisitions. The Company
may not achieve these goals unless it effectively combines the operations of
acquired businesses with its existing operations. The Company's recently
assembled senior management team may not be able to integrate the Company's
completed and future acquisitions. Any difficulties the Company encounters in
the integration process could materially and adversely affect its business,
financial condition and operating results.
Growth Strategy Implementation; Ability to Manage Growth. The Company's growth
strategy includes (i) expanding through acquisitions, (ii) acquiring additional
exclusive franchise agreements and municipal contracts and (iii) generating
internal growth. Whether the Company can execute its growth strategy depends on
several factors, including the success of existing and emerging competition, the
availability of acquisition targets, the ability to maintain profit margins in
the face of competitive pressures, the ability to continue to recruit, train and
retain qualified employees, the strength of demand for the Company's services
and the availability of capital to support its growth.
From October 1, 1997, through April 15, 1999, the Company acquired 64 solid
waste services related business. The Company may grow rapidly at times, which
could significantly strain its management, operational, financial and other
resources. To maintain and manage its growth, the Company will need to expand
its management information systems capabilities and its operational and
financial systems and controls. The Company will also need to attract, train,
motivate, retain and manage additional senior managers, technical professionals
and other employees. Failure to do any of these things would materially and
adversely affect the Company's business, financial condition and operating
results. See "Business -- Strategy."
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Availability of Acquisition Targets. Although the Company has identified
numerous acquisition candidates that it believes are suitable, the Company may
not be able to acquire them at prices or on terms and conditions favorable to
the Company. The Company's failure to make acquisitions would limit its growth.
See "Business -- Strategy" and "-- Acquisition Program."
The Company competes for acquisition candidates with other entities, some of
which have greater financial resources than the Company. Increased competition
for acquisition candidates may make fewer acquisition opportunities available to
the Company, and may cause acquisitions to be made on less attractive terms,
such as higher purchase prices. Acquisition costs may increase to levels that
are beyond the Company's financial capability or that would adversely affect the
Company's operating results and financial condition. The Company's ability to
make acquisitions will depend in part on the relative attractiveness of shares
of the Company's Common Stock as consideration for potential acquisition
candidates. This attractiveness may depend largely on the relative market price
and capital appreciation prospects of the Common Stock compared to the stock of
the Company's competitors. If the market price of the Company's Common Stock
were to decline materially over a prolonged period of time, the Company's
acquisition program could be materially adversely affected.
Highly Competitive Industry. The solid waste services industry is highly
competitive and fragmented and requires substantial labor and capital resources.
Some of the markets in which the Company competes or will likely compete are
served by one or more large, national solid waste companies, as well as by
numerous regional and local solid waste companies of varying sizes and
resources, some of which have accumulated substantial goodwill. The Company also
competes with counties, municipalities and solid waste districts that maintain
their own waste collection and disposal operations. These operators may have
financial advantages over the Company, because of their access to user fees and
similar charges, tax revenues and tax-exempt financing. Some of the Company's
competitors may also be better capitalized, have greater name recognition or be
able to provide services at a lower cost than the Company. The Company's
inability to compete with governmental service providers and larger and better
capitalized companies could materially and adversely affect the Company's
business, financial condition and operating results.
The Company derives a substantial portion of its revenue from exclusive
municipal contracts and franchise agreements. Many of these will be subject to
competitive bidding at some time in the future. See "Business -- Services." The
Company intends to bid on additional municipal contracts and franchise
agreements. However, the Company may not be the successful bidder to obtain or
retain contracts that come up for competitive bidding. In addition, some of the
Company's customers may terminate their contracts before the end of the contract
term. Municipalities in Washington may by law annex unincorporated territory,
which would remove such territory from the area covered by G certificates issued
by the Washington Utilities and Transportation Commission. Such annexation could
reduce the areas covered by the Company's G certificates and subject more of the
Company's Washington operations to competitive bidding in the future. Moreover,
legislative action could amend or repeal the laws governing G Certificates,
which could materially and adversely affect the Company. See "Business -- G
Certificates." If the Company were not able to replace revenues from contracts
lost through competitive bidding or early termination or the renegotiation of
existing contracts with other revenues
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within a reasonable time period, the lost revenues could materially and
adversely affect the Company's business, financial condition and operating
results.
Intense competition exists not only to provide services to customers but also to
acquire other businesses within each market. Other companies have adopted or
will probably adopt the Company's strategy of acquiring and consolidating
regional and local businesses to develop a national presence. The Company
expects that increased consolidation in the solid waste services industry will
increase competitive pressures. See "Business -- Competition."
Potential Inability to Finance the Company's Potential Growth. The Company
expects to finance future acquisitions through cash from operations, borrowings
under its bank line of credit, the issuance of shares of the Company's Common
Stock and/or seller financing. If acquisition candidates are unwilling to
accept, or the Company is unwilling to issue, shares of the Company's Common
Stock as part of the consideration for such acquisitions, the Company may have
to use more of its available cash resources or borrowings under its credit
facility to fund acquisitions. If cash from operations and borrowings under the
credit facility are insufficient to fund acquisitions, the Company will need
additional equity and/or debt financing. The Company will also need to make
substantial capital expenditures to fund the development or acquisition of new
landfills, transfer stations and other facilities and the maintenance of such
properties. The Company may not have enough capital or be able to raise enough
additional capital on satisfactory terms to meet its capital requirements.
The Company's credit facility requires the Company to obtain the consent of the
lending banks before acquiring any other business for more than $20.0 million in
cash (including all liabilities assumed). If the Company is not able to obtain
such consent, it may not be able to complete certain acquisitions, which could
inhibit the Company's growth. The Company's credit facility also contains
financial covenants based on the Company's current and projected financial
condition after completing an acquisition. If the Company cannot satisfy these
financial covenants on a pro forma basis after completing an acquisition, it
would not be able to complete the acquisition without a waiver from its lending
banks. Whether or not a waiver is needed, if the results of the Company's future
operations differ materially from what the Company expects, the Company may no
longer be able to comply with the covenants in the credit facility. The
Company's failure to comply with such covenants may result in a default under
the credit facility, which would allow the Company's banks to accelerate the
date for repayment of debt incurred under the credit facility and materially and
adversely affect the Company's business, financial condition and operating
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and Note 12 of Notes
to the Company's Financial Statements.
Dependence on Management. The Company depends significantly on the services of
the members of its senior management team. The departure of any of those persons
might materially and adversely affect the Company's business, financial
condition and operating results. The Company currently maintains "key man" life
insurance with respect to Ronald J. Mittelstaedt, its President, Chief Executive
Officer and Chairman, in the amount of $3.0 million. See "Management." Key
members of the Company's management have entered into employment agreements with
the Company with terms ranging from three to five years. See
"Management -- Employment Agreements." These agreements may not be enforceable
by the Company.
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Geographic Concentration. The Company's operations and customers are located in
California, Idaho, Kansas, Minnesota, Nebraska, Oklahoma, Oregon, South Dakota,
Utah, Washington and Wyoming. The Company expects to focus its operations on the
Western U.S. for at least the foreseeable future. The Company estimates that
more than 46% of its revenues for the year ended December 31, 1998, were derived
from Washington, and the mergers with the Murrey Companies increased the
Company's geographic concentration in Washington. Therefore, the Company's
business, financial condition and operating results would be negatively affected
by downturns in the general economy in the Western U.S., particularly in
Washington, and other factors affecting the region, such as state regulations
affecting the solid waste services industry and severe weather conditions. In
addition, the costs and time involved in permitting, and the scarcity of,
available landfills in the Western U.S. could make it difficult for the Company
to expand vertically in those markets. The Company may not complete enough
acquisitions in other markets to lessen its geographic concentration. See
"Business -- Strategy."
Seasonality of Business. Based on historic trends experienced by the businesses
acquired by the Company, the Company expects its operating results to vary
seasonally, with revenues typically lowest in the first quarter of the year,
higher in the second and third quarters, and lower in the fourth quarter than in
the second and third quarters. This seasonality reflects the lower volume of
solid waste generated during the late fall, winter and early spring months,
because of decreased construction and demolition activities during the winter
months in the Western U.S. In addition, certain of the Company's operating costs
should be generally higher in the winter months, because adverse winter weather
conditions slow waste collection activities, resulting in higher labor costs,
and greater precipitation increases the weight of collected waste, resulting in
higher disposal costs, which are calculated on a per ton basis. Because the
Company expects most of its operating expenses to remain fairly constant
throughout the fiscal year, it expects operating income to be generally lower in
the winter months. Future seasonal and quarterly fluctuations may materially and
adversely affect the Company's business, financial condition and operating
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Government Regulation. The Company is subject to extensive and evolving
environmental laws and regulations. These have been enforced more and more
stringently in recent years because of greater public interest in protecting the
environment. These laws and regulations impose substantial costs on the Company
and affect the Company's business in many ways, including as set forth below and
under "Business -- Regulation." In addition, federal, state and local
governments may change the rights they grant to and the restrictions they impose
on solid waste services companies, and such changes could have a material
adverse effect on the Company.
To own and operate landfills, the Company must obtain and maintain licenses or
permits and zoning, environmental and/or other land use approvals. These
licenses or permits and approvals are difficult and time-consuming to obtain and
renew, and elected officials and citizens' groups frequently oppose them. See
"Business -- Legal Proceedings." The Company may not be able to obtain and
maintain the permits and approvals it needs to own or operate landfills
(including increasing their capacity), and failing to do so could materially and
adversely affect the Company's operating results and financial condition.
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Extensive regulations govern the design, operation and closure of landfills.
These regulations include the regulations ("Subtitle D Regulations") that
establish minimum federal requirements adopted by the U.S. Environmental
Protection Agency (the "EPA") in October 1991 under Subtitle D of the Resource
Conservation and Recovery Act of 1976 ("RCRA"). If the Company fails to comply
with these regulations, it could be required to undertake investigatory or
remedial activities, curtail operations or close a landfill temporarily or
permanently. Future changes to these regulations may require the Company to
modify, supplement or replace equipment or facilities at substantial costs. The
failure of regulatory agencies to enforce these regulations vigorously or
consistently may give an advantage to competitors of the Company whose
facilities do not comply with the Subtitle D Regulations or their state
counterparts. The Company's financial obligations arising from any failure to
comply with these regulations could materially and adversely affect the
Company's business, financial condition and operating results. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
Companies in the solid waste services business are frequently subject in the
normal course of business to judicial and administrative proceedings involving
federal, state or local agencies or citizens' groups. Governmental agencies may
seek to impose fines or penalties on the Company, to revoke or deny renewal of
the Company's operating permits, franchises or licenses for violations or
alleged violations of environmental laws or regulations, or to require the
Company to remediate potential environmental problems relating to waste that the
Company or its predecessors collected, transported, disposed of or stored. The
Company may also be subject to actions brought by individuals or community
groups in connection with its operations. Any adverse outcome in these
proceedings could have a material adverse effect on the Company's business,
financial condition and operating results and create adverse publicity about the
Company. See "Potential Environmental Liability" below and "Business -- Legal
Proceedings."
Potential Environmental Liability. The Company is liable for any environmental
damage that its solid waste facilities cause, including damage to neighboring
landowners or residents, particularly as a result of the contamination of soil,
groundwater or surface water, and especially drinking water. The Company may be
liable for damage resulting from conditions existing before it acquired such
facilities. The Company may also be liable for any off-site environmental
contamination caused by pollutants or hazardous substances whose transportation,
treatment or disposal the Company or its predecessors arranged. Any substantial
liability of the Company for environmental damage could materially and adversely
affect the Company's business, financial condition and operating results. See
"Business -- Regulation."
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA" or "Superfund"), imposes strict, joint and several
liability on the present owners and operators of facilities from which a release
of hazardous substances into the environment has occurred, as well as any party
that owned or operated the facility at the time of disposal of the hazardous
substances, regardless of when the hazardous substance was first detected.
CERCLA defines the term "hazardous substances" very broadly to include more than
700 substances that are specified under RCRA, have specific hazardous
characteristics defined under RCRA or are regulated under any of several other
statutes.
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CERCLA imposes similar liability on generators of waste that contains hazardous
substances and on hazardous substance transporters that select the treatment,
storage or disposal site. All such persons, who are referred to as potentially
responsible parties ("PRPs"), generally are jointly and severally liable for the
expense of waste site investigation, waste site cleanup costs and natural
resource damages, regardless of whether they exercised due care and complied
with all relevant laws and regulations. These costs can be very substantial.
Furthermore, liability under CERCLA can be based on the existence of even very
small amounts of hazardous substances; unlike most of the other laws that
regulate hazardous substances, CERCLA does not require any minimum volume or
concentration of a hazardous substance to be present before imposing liability.
It is likely that hazardous substances have in the past come to be located in
landfills that the Company owns or operates. If any of the Company's sites or
operations ever experiences environmental problems, the Company could be subject
to substantial liability, which could materially and adversely affect its
business, financial condition and operating results. The Company has not been
named as a PRP in any action brought under CERCLA. See "Business -- Regulation."
Each business that the Company acquires or has acquired may have liabilities
that the Company fails or is unable to discover, including liabilities that
arise from prior owners' failure to comply with environmental laws. As a
successor owner, the Company may be legally responsible for these liabilities.
Even if the Company obtains legally enforceable representations, warranties and
indemnities from the sellers of such businesses, they may not cover fully the
liabilities. Some environmental liabilities, even if the Company does not
expressly assume them, may be imposed on the Company under various legal
theories, particularly under CERCLA. The Company's insurance program does not
cover liabilities associated with any environmental cleanup or remediation of
the Company's own sites. A successful uninsured claim against the Company could
materially and adversely affect the Company's business, financial condition and
operating results. See "Business -- Acquisition Program."
Limitations on Landfill Permitting and Expansion. The Company currently owns and
operates three landfills and operates two other landfills. The Company's ability
to meet its growth objectives may depend in part on its ability to acquire,
lease and expand landfills and develop new landfill sites. As of March 31, 1999,
the estimated total remaining permitted disposal capacity of the Fairmead
Landfill in Madera County, California operated by the Company was approximately
2.86 million tons, with approximately 2.04 million additional tons of disposal
capacity in various stages of permitting. As of that date, the estimated total
remaining permitted disposal capacity of the Red Carpet Landfill in Major
County, Oklahoma owned and operated by the Company was approximately 525,000
tons, with approximately 1.75 million additional tons of disposal capacity in
various stages of permitting. As of that date, the estimated total remaining
permitted disposal capacity at the Finley-Buttes Regional Landfill owned and
operated by the Company was approximately 65.99 million tons, with approximately
56.88 million additional tons of disposal capacity in various stages of
permitting. The estimated total remaining permitted disposal capacity of the
Butler County Landfill owned and operated by the Company was approximately 2.32
million tons, with an additional 1.60 million tons of disposal capacity in
various stages of permitting. The Northeast Nebraska Solid Waste Coalition
landfill in Clarkson, Nebraska (the "Coalition Landfill") operated by the
Company had approximately 3.68 million tons of remaining permitted disposal
capacity.
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The Company may not be able to obtain new landfill sites or expand the permitted
capacity of these landfills when necessary.
In some areas in which the Company operates, suitable land for new sites or
expansion of existing landfill sites may be unavailable. Operating permits for
landfills in states where the Company operates must generally be renewed at
least every five years. Obtaining required permits and approvals to build,
operate and expand solid waste management facilities, including landfills and
transfer stations, has become increasingly difficult and expensive. It often
takes several years, requires numerous hearings and compliance with zoning,
environmental and other requirements and is resisted by citizen, public interest
or other groups. The Company may not be able to obtain or maintain the permits
it requires to expand, and such permits may contain burdensome terms and
conditions. Even when granted, final permits to expand are often not approved
until the remaining permitted disposal capacity of a landfill is very low. Local
laws and ordinances also may affect the Company's ability to obtain permits to
expand landfills. If the Company were to exhaust its permitted capacity at a
landfill, its ability to expand internally would be limited, and the Company
could be required to cap and close that landfill and forced to dispose of
collected waste at more distant landfills or at landfills operated by its
competitors. The resulting increased costs would materially and adversely affect
the Company's business, financial condition and operating results. See
"Business -- Services -- Landfills."
Alternatives to Landfill Disposal; Waste Reduction Programs. Alternatives to
landfill disposal, such as recycling, composting and incineration, are available
in some areas in which the Company operates. In addition, state and local
authorities increasingly require recycling and waste reduction at the source and
prohibit the disposal of certain types of wastes, such as yard wastes, at
landfills. These developments may reduce the volume of waste in certain areas.
For example, California has adopted plans that set goals for percentages of
certain solid waste items to be recycled, which are being phased in over the
next several years. Increased use of alternatives to landfill disposal may
materially and adversely affect the Company's business, financial condition and
operating results.
Potential Inadequacy of Accruals for Closure and Post-Closure Costs. The Company
may be required to pay closure and post-closure costs of landfills and any
disposal facilities that it owns or operates. The Company accrues for future
closure and post-closure costs of its owned landfills (generally for a term of
30 years after final closure of a landfill), based on engineering estimates of
consumption of permitted landfill airspace over the useful life of any such
landfill. The Company's obligations to pay closing or post-closing costs may
exceed the amount the Company accrued and reserved and other amounts available
from funds or reserves established to pay such costs. This could materially and
adversely affect the Company's business, financial condition and operating
results. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Services -- Landfills."
Charges Related to Capitalized Expenditures. In accordance with generally
accepted accounting principles, the Company capitalizes some expenditures and
advances relating to acquisitions, pending acquisitions and landfill development
projects. As of March 31, 1999, the Company had no capitalized expenditures
relating to landfill development projects and $26,973 in capitalized
expenditures relating to pending acquisitions. The Company expenses indirect
acquisition costs such as executive salaries, general corporate overhead, public
affairs and other corporate services as it incurs those costs. The Company
charges
12
<PAGE> 13
against earnings any unamortized capitalized expenditures and advances (net of
any portion thereof that the Company estimates it will recover, through sale or
otherwise) that relate to any operation that is permanently shut down, any
pending acquisition that is not consummated and any landfill development project
that the Company does not expect to complete. Therefore, the Company may incur
charges against earnings in future periods, which could materially and adversely
affect the Company's business, financial condition and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Potential Inability to Obtain Performance or Surety Bonds, Letters of Credit or
Insurance. Municipal solid waste services contracts and landfill closure
obligations may require the Company to obtain performance or surety bonds,
letters of credit, or other means of financial assurance to secure its
performance. Some of the Company's existing solid waste collection and recycling
contracts require the Company to obtain performance bonds, which it has
obtained. If the Company in the future is not able to obtain performance or
surety bonds or letters of credit in sufficient amounts or at acceptable rates,
it may not be able to enter into additional municipal solid waste services
contracts or obtain or retain landfill operating permits. Any future difficulty
in obtaining insurance could also make it more difficult for the Company to
secure future contracts conditioned on the contractor's having adequate
insurance coverage. The Company's failure to obtain means of financial assurance
or adequate insurance coverage could materially and adversely affect its
business, financial condition and operating results. See "Business -- Risk
Management, Insurance and Performance Bonds."
Commodity Risk On Resale of Recyclables. The Company provides recycling services
to some of its customers. The sale prices of and demand for recyclable waste
products, particularly wastepaper, are frequently volatile and may affect the
Company's operating results. See "Business -- Services -- Recycling and Other
Services."
Potential Anti-Takeover Effect of Certain Charter and By-Law Provisions and
Delaware Law. Under the Company's Amended and Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation") and Amended and
Restated By-Laws (the "Restated By-Laws"), the Company's Board of Directors is
divided into three classes of directors who serve staggered three-year terms. As
a result, approximately one-third of the Company's Board is elected each year.
The classified Board is intended to ensure continuity and stability in the
Board's composition and policies if another party attempts a hostile takeover of
the Company or initiates a proxy contest. The classification of the Board
extends the time required to change the control of the Board and may discourage
any hostile takeover bid for the Company. The classified Board may also make it
harder to remove the Company's incumbent management, even if such removal would
generally benefit stockholders. Therefore, it may discourage some tender offers.
The authorized capital of the Company includes 10,000,000 shares of "blank
check" Preferred Stock. No shares of Preferred Stock are currently outstanding.
The Company may issue Preferred Stock and determine its price, rights,
preferences, privileges and restrictions, including voting and dividend rights,
without stockholder approval. The rights of holders of Preferred Stock that the
Company may issue in the future may adversely affect the rights of the holders
of Common Stock. The issuance of Preferred Stock may make it more difficult for
a third party to acquire the Company. The Company has no present plan to issue
Preferred Stock.
13
<PAGE> 14
The Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law. That section generally prohibits the Company
from engaging in a "business combination" with an "interested stockholder" for
three years after the time that such stockholder became an interested
stockholder. Section 203 also could delay or prevent a change of control of the
Company. These provisions, and provisions of the Restated Certificate of
Incorporation and Restated By-Laws, may deter hostile takeovers or delay or
prevent changes in control or management of the Company, including transactions
in which stockholders might be paid more than current market prices for their
shares. These provisions may also limit stockholders' ability to approve
transactions that they believe are in their best interests. See "Description of
Capital Stock -- Preferred Stock" and "-- Certain Statutory, Charter and By-Law
Provisions."
Subsequent Share Issuances; Shares Eligible for Future Sale. The market price of
the Company's Common Stock could drop if a large number of shares of Common
Stock are sold in the public market, or if market participants believe that such
sales could occur, or if the Company issues a large number of shares in
acquisitions. Such issuances could also make it more difficult for the Company
to fund acquisitions by issuing Common Stock. Shares issued under this
Registration Statement may generally be sold in the public market immediately
after they are issued. See "Shares Eligible for Future Sale."
Fluctuations in Quarterly Results; Potential Stock Price Volatility. The Company
believes that investors should not rely on period-to-period comparisons of its
operating results as an indication of future performance. Many factors,
including general economic conditions, government regulatory action,
acquisitions, capital expenditures and other costs related to expanding
operations and services, pricing changes and adverse weather conditions, may
cause the Company's operating results to fall below the expectations of
securities analysts and investors in future quarters. This would likely cause
the price of the Company's Common Stock to drop. In addition, the stock market
sometimes experiences large price and volume fluctuations generally. Although
these broad market fluctuations may not relate to the operating performance of
companies whose securities are publicly traded, they may cause the market price
of such companies' stock, including the Company's Common Stock, to drop. After
periods of volatility in the market price of a company's securities,
shareholders often bring class action lawsuits against that company. The Company
may be the target of such lawsuits in the future, which could be expensive and
divert management's attention and resources. This could materially and adversely
affect the Company's business, financial condition and operating results. In
addition, any adverse determination in any such lawsuit could subject the
Company to significant liabilities.
No Dividends. The Company does not intend to pay cash dividends on the Common
Stock. In addition, the Company's credit facility prohibits the Company from
paying dividends without the consent of the lenders. See "Dividend Policy."
Impact of the Year 2000. The Company will need to modify or replace portions of
its software so that its computer systems will function properly with respect to
dates in the year 2000 ("Year 2000") and afterwards. The Company expects to
complete those modifications and upgrades during 1999, at a total cost of
approximately $100,000. The Company has spent part of its Year 2000 budget on
replacing its billing systems in Maltby and Vancouver. Because the Company's
operations rely primarily on mechanical systems such as trucks to collect solid
waste, the Company does not expect its operations to be significantly affected
by Year 2000 issues. The Company's customers may need to make
14
<PAGE> 15
Year 2000 modifications to software and hardware that they use to generate
records, bills and payments relating to the Company. The Company does not rely
on vendors on a routine basis except for providers of disposal services. The
Company takes waste to a site and is normally billed based on tonnage received.
The Company believes that if its disposal vendors encounter Year 2000 problems,
they will convert to manual billing based on scale recordings until they resolve
those issues.
In assessing the Company's exposure to Year 2000 issues, management believes its
biggest challenges lie in the following areas: Year 2000 issues at the Company's
banks, large (typically municipal) customers, and acquired businesses between
the time the Company acquires them and the time the Company implements its own
systems. The Company is obtaining Year 2000 compliance certifications from its
vendors, banks and customers. If the Company and its vendors, banks and
customers do not complete the required Year 2000 modifications on time, the Year
2000 issue could materially affect the Company's operations. The Company
believes, however, that in the most reasonably likely worst case, the effects of
Year 2000 issues on its operations would be brief and small relative to the
Company's overall operations. The Company has not made a contingency plan to
minimize operational problems if the Company and its vendors, banks and
customers do not timely complete all required Year 2000 modifications.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Company does
not currently anticipate paying any cash dividends on the Common Stock. The
Company intends to retain all earnings to fund the operation and expansion of
its business. In addition, the Company's credit facility restricts the payment
of cash dividends.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "WCNX." The following table shows the high and low sale prices for the
Common Stock for the period from May 22, 1998, the date of the Company's initial
public offering, through April 19, 1999.
<TABLE>
<CAPTION>
1998 HIGH LOW
---- ------ --------
<S> <C> <C>
Second Quarter (from May 22, 1998).......................... $20.75 $13.75
Third Quarter............................................... $23.38 $17.75
Fourth Quarter.............................................. $21.13 $15.88
</TABLE>
<TABLE>
<CAPTION>
1999
----
<S> <C> <C>
First Quarter............................................... $16.50 $24.00
Second Quarter (through April 19, 1999)..................... $22.00 $25.31
</TABLE>
On April 19, 1999, the last sale price of the Common Stock as reported by the
Nasdaq National Market was $23.50 per share. See "Description of Capital Stock."
15
<PAGE> 16
SELECTED HISTORICAL AND SUPPLEMENTAL FINANCIAL AND OPERATING DATA
The following tables present selected historical and supplemental statements of
operations and balance sheet data of Waste Connections and our predecessors for
the periods indicated.
The entities Waste Connections acquired in September 1997 from Browning-Ferris
Industries, Inc. ("BFI") are collectively referred to as Waste Connections'
predecessors. BFI acquired the predecessors during 1995 and 1996. Before being
acquired by BFI, the predecessors operated as separate stand-alone businesses.
The supplemental financial information gives retroactive effect to the business
combinations of Waste Connections with the Murrey Companies (accounted for as
poolings-of-interests) which occurred on January 19, 1999. Generally accepted
accounting principles prohibit giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. The supplemental
financial data does not extend through the date of consummation; however, such
information will be included in the historical consolidated financial statements
of Waste Connections after financial statements covering the date of
consummation of the business combination are issued. This information is based
on the audited supplemental financial statements included elsewhere herein.
16
<PAGE> 17
WASTE CONNECTIONS, INC. AND PREDECESSORS
SELECTED HISTORICAL AND SUPPLEMENTAL
FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
FIBRES
INTER- THE
NATIONAL, DISPOSAL
INC. GROUP
THE PERIOD THE COMBINED
FIBRES DISPOSAL FROM DISPOSAL FROM
INTERNATIONAL, GROUP JANUARY 1, PREDECESSORS GROUP JANUARY 1, PREDECESSORS
INC. COMBINED 1995 ONE MONTH COMBINED 1996 COMBINED
YEAR ENDED YEAR ENDED THROUGH ENDED YEAR ENDED THROUGH PERIOD ENDED
DECEMBER 31, DECEMBER 31, NOVEMBER 30, DECEMBER 31, DECEMBER 31, JULY 31, DECEMBER 31,
1994 1994 1995 1995 1995 1996 1996
-------------- ------------ ------------ ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENTS OF
OPERATIONS DATA(1):
Revenues................ $5,610 $22,004 $7,340 $595 $19,660 $8,738 $13,422
Cost of operations...... 4,432 18,298 5,653 527 16,393 6,174 11,420
Selling, general and
administrative........ 552 3,320 823 72 3,312 2,126 1,649
Depreciation and
amortization.......... 642 606 715 74 628 324 962
------ ------- ------ ---- ------- ------ -------
Income (loss) from
operations............ (16) (220) 149 (78) (673) 114 (609)
Interest expense........ (191) (548) (162) (1) (206) (12) (225)
Other income (expense),
net................... (2) 871 98 5 -- 2,661 (147)
------ ------- ------ ---- ------- ------ -------
Income (loss) before
income taxes.......... (209) 103 85 (74) (879) 2,763 (981)
Income tax (provision)
benefit............... -- -- (29) -- 298 (505) --
------ ------- ------ ---- ------- ------ -------
Net income (loss)....... $ (209) $ 103 $ 56 $(74) $ (581) $2,258 $ (981)
====== ======= ====== ==== ======= ====== =======
</TABLE>
(See footnotes on page 21)
17
<PAGE> 18
<TABLE>
<CAPTION>
WASTE CONNECTIONS, INC.
-----------------------------------------------
PREDECESSORS PERIOD FROM
COMBINED INCEPTION PRO FORMA
NINE MONTHS (SEPTEMBER 9, COMBINED
ENDED 1997) THROUGH YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1997 1998 1998(4)
------------- ----------------- ------------ ------------
<S> <C> <C> <C> <C>
HISTORICAL STATEMENTS OF
OPERATIONS DATA(1):
Revenues................... $18,114 $ 6,237 $ 54,042 $ 102,064
Cost of operations......... 14,753 4,703 36,554 66,576
Selling, general and
administrative.......... 3,009 619 5,317 11,064
Depreciation and
amortization............ 1,083 354 4,112 8,352
Start-up and integration... -- 493 -- --
Stock compensation......... -- 4,395 632 632
------- ---------- ---------- -----------
Income (loss) from
operations.............. (731) (4,327) 7,427 15,440
Interest expense........... (456) (1,035) (2,257) (9,330)
Other income (expense),
net..................... 14 (36) -- 108
------- ---------- ---------- -----------
Income (loss) before income
taxes................... (1,173) (5,398) 5,170 6,218
Income tax (provision)
benefit................. -- 332 (2,395) (3,078)
------- ---------- ---------- -----------
Income (loss) before
extraordinary item...... (1,173) (5,066) 2,775 3,140
Extraordinary item -- early
extinguishment of debt,
net of income tax
benefit of $264......... -- -- (1,027) (1,027)
------- ---------- ---------- -----------
Net income (loss).......... $(1,173) $ (5,066) $ 1,748 $ 2,113
======= ========== ========== ===========
Redeemable convertible
preferred stock
accretion............... (531) (917) (917)
---------- ---------- -----------
Net income (loss)
applicable to common
stockholders............ $ (5,597) $ 831 $ 1,196
========== ========== ===========
Basic income (loss) per
common share:
Income (loss) before
extraordinary item.... $ (2.99) $ 0.29 $ 0.24
Extraordinary item...... -- (0.16) (0.11)
---------- ---------- -----------
Net income (loss) per
common share.......... $ (2.99) $ 0.13 $ 0.13
========== ========== ===========
Diluted income (loss) per
common share:
Income (loss) before
extraordinary item.... $ (2.99) $ 0.22 $ 0.20
Extraordinary item...... -- (0.12) (0.09)
---------- ---------- -----------
Diluted net income
(loss) per common
share................. $ (2.99) $ 0.10 $ 0.11
========== ========== ===========
Shares used in calculating
basic net income (loss)
per share............... 1,872,567 6,460,293 9,349,173
Shares used in calculating
diluted income (loss)
per share............... 1,872,567 8,371,415 11,260,295
</TABLE>
(See footnotes on page 21)
18
<PAGE> 19
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL STATEMENTS OF OPERATIONS
DATA(2):
Revenues............................... $ 23,804 $ 27,786 $ 25,024
Cost of operations..................... 18,829 20,859 20,465
Selling, general and administrative.... 1,940 2,101 2,142
Depreciation and amortization.......... 818 923 1,236
---------- ---------- ----------
Income from operations................. 2,217 3,903 1,181
Interest expense....................... (321) (198) (284)
Other income (expense), net............ (347) 210 309
---------- ---------- ----------
Income before income taxes............. 1,549 3,915 1,206
Income tax provision................... (517) (690) (543)
---------- ---------- ----------
Net income............................. $ 1,032 $ 3,225 $ 663
========== ========== ==========
Basic and diluted net income per
share............................... $ 0.36 $ 1.12 $ 0.23
========== ========== ==========
Shares used in per share calculation... 2,888,880 2,888,880 2,888,880
========== ========== ==========
</TABLE>
(See footnotes on page 21)
19
<PAGE> 20
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1998
---------- -----------
<S> <C> <C>
SUPPLEMENTAL STATEMENTS OF OPERATIONS DATA(2):
Revenues........................................... $ 35,111 $ 86,570
Cost of operations................................. 27,836 62,964
Selling, general and administrative................ 2,942 8,108
Depreciation and amortization...................... 1,725 6,306
Start-up and integration........................... 493 --
Stock compensation................................. 4,395 632
---------- -----------
Income (loss) from operations...................... (2,280) 8,560
Interest expense................................... (1,415) (2,792)
Other income (expense), net........................ 247 79
---------- -----------
Income (loss) before income taxes.................. (3,448) 5,847
Income tax provision............................... (302) (2,930)
---------- -----------
Income (loss) before extraordinary item............ (3,750) 2,917
Extraordinary item -- early extinguishment of debt,
net of income tax benefit of $264............... -- (1,027)
---------- -----------
Net income (loss).................................. $ (3,750) $ 1,890
========== ===========
Redeemable convertible preferred stock accretion... (531) (917)
---------- -----------
Net income (loss) applicable to common
stockholders.................................... $ (4,281) $ 973
========== ===========
Basic income (loss) per common share:
Income (loss) before extraordinary item......... $ (0.90) $ 0.21
---------- -----------
Extraordinary item.............................. -- (0.11)
---------- -----------
Net income (loss) per common share.............. $ (0.90) $ 0.10
========== ===========
Diluted income (loss) per common share:
Income (loss) before extraordinary item......... $ (0.90) $ 0.18
Extraordinary item.............................. -- (0.09)
---------- -----------
Net income (loss) per common share.............. $ (0.90) $ 0.09
========== ===========
Shares used in calculating basic net income (loss)
per share....................................... 4,761,447 9,349,173
========== ===========
Shares used in calculating diluted net income
(loss) per share................................ 4,761,447 11,260,295
========== ===========
</TABLE>
(See footnotes on page 21)
20
<PAGE> 21
<TABLE>
<CAPTION>
THE DISPOSAL DISPOSAL
FIBRES INTERNATIONAL, GROUP PREDECESSORS GROUP PREDECESSORS
INC. COMBINED COMBINED COMBINED COMBINED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1994 1995 1995 1996
--------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET
DATA(1):
Cash and equivalents.......... $ 321 $ 203 $ 184 $ 961 $ 102
Working capital (deficit)..... 155 (4,279) 90 2,498 695
Property and equipment, net... 3,810 2,771 4,035 2,221 5,069
Total assets.................. 6,317 7,318 9,151 6,942 15,291
Long-term debt(3)............. 2,353 90 149 6,890 89
Redeemable convertible
preferred stock............. -- -- -- -- --
Total stockholders' equity
(deficit)................... 3,045 (1,486) -- (2,067) --
<CAPTION>
WASTE CONNECTIONS, INC.
DECEMBER 31,
----------------------------------
PRO FORMA
COMBINED
DECEMBER 31,
1997 1998 1998(5)
------- -------- ------------
<S> <C> <C> <C>
HISTORICAL BALANCE SHEET
DATA(1):
Cash and equivalents.......... $ 820 $ 2,675 $ 4,896
Working capital (deficit)..... 836 (8,717) (10,700)
Property and equipment, net... 4,185 33,043 121,028
Total assets.................. 18,880 149,312 254,925
Long-term debt(3)............. 6,762 60,106 148,349
Redeemable convertible
preferred stock............. 7,523 -- --
Total stockholders' equity
(deficit)................... (551) 61,063 62,329
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1994 1995 1996 1997 1998
------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL BALANCE SHEET DATA(2):
Cash and equivalents........................................ $ 349 $ 859 $ 81 $ 946 $ 2,848
Working capital (deficit)................................... 626 (63) (3,721) (2,820) (12,324)
Property and equipment, net................................. 6,301 8,027 12,529 19,004 46,986
Total assets................................................ 9,343 12,573 15,065 38,576 168,447
Long-term debt(3)........................................... 4,663 2,359 1,851 11,669 63,985
Redeemable convertible preferred stock...................... -- -- -- 7,523 --
Total stockholders' equity.................................. 2,420 3,439 6,258 6,940 68,529
</TABLE>
- ---------------
(1) The entities Waste Connections acquired in September 1997 from BFI are
collectively referred to as Waste Connections' predecessors. BFI acquired
the predecessors at various times during 1995 and 1996, and prior to being
acquired by BFI, the predecessors operated as separate stand-alone
businesses. Various factors affect the year-to-year comparability of the
amounts presented. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations" for additional
information concerning Waste Connections and our predecessors.
(2) Supplemental financial data gives retroactive effect to the business
combinations with the Murrey Companies which occurred on January 19, 1999.
Generally accepted accounting principles prohibit giving effect to a
consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of consummation.
The supplemental financial data does not extend through the date of
consummation; however, such information will be included in the historical
consolidated financial statements of Waste Connections after financial
statements covering the date of consummation of the business combination are
issued.
(3) Excludes redeemable convertible preferred stock, which converted into common
stock upon our May 1998 initial public offering.
(4) Assumes the Company's acquisitions of Columbia Resource Co., L.P. and
Finley-Buttes Limited Partnership ("CRCFBLP") and the mergers with the
Murrey Companies (accounted for as poolings-of-interests) occurred as of
January 1, 1998. See "Unaudited Pro Forma Financial Statements" included
elsewhere herein.
(5) Assumes the Company's acquisitions of CRCFBLP and the mergers with the
Murrey Companies (accounted for as poolings-of-interests) occurred on
December 31, 1998. See "Unaudited Pro Forma Financial Statements" included
elsewhere herein.
21
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion in conjunction with the audited and unaudited
financial statements and other financial information in this Prospectus. This
Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from those
discussed in the forward-looking statements because of various factors,
including, but not limited to, those listed in "Risk Factors" and the matters
discussed in this Prospectus generally.
OVERVIEW
Waste Connections is a regional, integrated solid waste services company that
provides solid waste collection, transfer, disposal and recycling services in
secondary markets of the Western U.S.
The Company generally intends to pursue an acquisition-based growth strategy and
has acquired 64 companies since its inception in September 1997. The Company
accounted for the mergers with the Murrey Companies, Roche & Sons, Inc. and
Ritters Sanitary Service, Inc. as poolings-of-interests, and for the remainder
of the acquisitions as purchases. Accordingly, the Company has included the
operating results of these acquired businesses in the Company's financial
statements only from the dates that the Company acquired them. The Company
expects a substantial part of its future growth to come from acquiring
additional solid waste collection, transfer and disposal businesses. Additional
acquisitions could continue to affect period-to-period comparisons of its
operating results. The Company also expects to invest in collection vehicles and
equipment, maintenance of existing equipment, and management information
systems, which should enable the Company to expand internally and through
acquisitions based on its existing infrastructure. The Company expects to fund
future acquisitions through cash from operations, borrowings under its bank line
of credit, the issuance of shares of the Company's Common Stock and/or seller
financing. As of April 15, 1999, the Company had consummated the following
acquisitions:
Initial Acquisitions. In September 1997, the Company joined with two other
parties to bid on certain solid waste and recycling businesses offered for sale
by BFI. The Company acquired the stock of Browning-Ferris Industries of
Washington, Inc., a provider of solid waste services to more than 78,000
customers through three municipal contracts and one G certificate in
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, the Company acquired the
stock of Madera, an integrated solid waste services company operating in north
central California. In connection with the Madera acquisition, the Company
acquired one franchise agreement and one municipal contract, pursuant to which
it serves more than 9,000 commercial, industrial and residential customers, and
agreements to operate two transfer
22
<PAGE> 23
stations, one Subtitle D landfill and one recycling facility. On September 9,
1998, the Company acquired certain collection assets from Youngclaus
Enterprises, which "tuck in" to its Madera operations. On September 22, 1998,
Curry Transfer and Recycling, a wholly owned subsidiary of the Company, acquired
certain business assets of Harrell's Septic Service, which provides portable
toilet and septic services in northwestern California and southwestern Oregon
(see "Oregon Acquisitions" below). On December 30, 1998, the Company acquired
the stock of Amador Disposal Service, Inc. and Mother Lode Sani-Hut, Inc., which
provide solid waste collection, recycling and disposal services to approximately
11,000 customers in north central California.
Idaho Acquisitions. On January 30, 1998, the Company acquired the stock of Waste
Connections of Idaho, Inc., which provides solid waste collection services to
more than 10,000 customers in eastern Idaho through subscription agreements with
residential customers and seven municipal contracts. Waste Connections of Idaho,
Inc., was formed in September 1997 by affiliates of the Company for the purpose
of acquiring certain assets of Browning-Ferris Industries of Idaho, Inc.
Effective March 1, 1998, the Company acquired certain solid waste collection
assets from Hunter Enterprises, Inc., a solid waste services company located in
eastern Idaho. These assets "tuck in" to the Company's Idaho operations and
serve approximately 2,800 residential and commercial customers. On October 15,
1998, the Company acquired the stock of R&N, LLC, which provides solid waste
collection and transportation services to approximately 4,300 customers in
southwestern Idaho.
Kansas Acquisitions. On December 21, 1998, a wholly owned subsidiary of the
Company acquired the assets of Heartland Waste Management, Inc., which provides
solid waste collection services to approximately 2,500 customers in southern
Kansas. On March 31, 1999, a wholly owned subsidiary of the Company acquired the
assets of Kansas Industrial Services, Inc. and Williams Trash Service, which
provide solid waste collection services to approximately 50 and 1,000 customers,
respectively, in southern Kansas. These assets "tuck in" to the Company's
western Oklahoma operations.
Minnesota Acquisition. On March 30, 1999, a wholly owned subsidiary of the
Company merged into Ritter's Sanitary Service, Inc., which provides solid waste
collection and recycling services to approximately 4,900 customers in
southwestern Minnesota.
Nebraska Acquisitions. On July 31, 1998, a wholly owned subsidiary of the
Company merged into Shrader, which provides solid waste and recyclables
collection services to more than 22,500 customers in eastern Nebraska. On August
3, 1998, the Company acquired the stock of J&J Sanitation, Inc. and Big Red Roll
Off, Inc. (together, "J&J"), which together serve more than 9,500 customers in
eastern Nebraska. On September 18, 1998, Waste Connections of Nebraska, Inc., a
wholly owned subsidiary of the Company, acquired substantially all the assets of
Affiliated Waste Services, L.L.C., which provides solid waste collection and
transportation services to approximately 4,700 customers in 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.
On January 6, 1999, the Company purchased the stock of Butler County Landfill,
Inc. and certain assets of Kobus Construction, Inc., which provide solid waste
disposal and transportation services to approximately 300 customers in eastern
Nebraska.
23
<PAGE> 24
On February 24, 1999, the Company acquired from affiliates of Allied Waste
Industries, Inc. the stock of CRX, Inc., Dolpheide Sanitation Service, Inc. and
Better Disposal Service, Inc., three Nebraska corporations that provide solid
waste collection, recycling and disposal services to approximately 8,600
customers in eastern Nebraska and operate a landfill in Clarkson, Nebraska.
Concurrently, the Company sold to Allied the stock of Waste Connections
International, Inc., which operated the Company's collection, recycling and
disposal business in Issaquah and Maltby, Washington. On March 23, 1999, and
March 26, 1999, wholly owned subsidiaries of the Company acquired certain assets
of Mrsny Sanitary Service, Inc. and Columbus Sanitation Service, which provide
solid waste collection services to approximately 800 and 1,300 customers,
respectively, in eastern Nebraska. On March 29, 1999, the Company acquired the
stock of Wahoo Sanitation, Inc. and Saunders County Disposal, Inc., two Nebraska
corporations that provide solid waste collection, transfer and recycling
services to approximately 2,000 customers in eastern Nebraska. On March 31,
1999, the Company acquired certain assets of OZ Dispos-All, which provides solid
waste collection services to approximately 2,500 customers in eastern Nebraska.
On April 5, 1999, a wholly owned subsidiary of the Company purchased certain
assets of R&S Cleanup, which provides solid waste collection services to
approximately 1,200 customers in eastern Nebraska.
Oklahoma Acquisitions. On June 5, 1998, the Company acquired the stock of B&B
Sanitation, Inc., Red Carpet Landfill, Inc. and Darlin Equipment, Inc.
(together, "B&B"), which together provide solid waste and recyclables collection
and transportation, landfill, and equipment leasing services to more than 2,600
customers in western Oklahoma.
Oregon Acquisitions. On June 17, 1998, the Company acquired the stock of Arrow,
which provides solid waste and recyclables collection, transportation and
handling services to more than 2,000 customers in northwestern Oregon and
southwestern Washington. On June 25, 1998, the Company acquired the stock of
Curry Transfer and Recycling, Inc. ("Curry") and certain real estate located in
Curry County, Oregon and used in that business. Curry provides solid waste and
recyclables collection and transportation services to more than 5,400 customers
in 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, the Company 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, the Company 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.
On March 26, 1999, a wholly owned subsidiary of the Company acquired certain
assets of Sandy's Disposal Service and Extra Mile Disposal, which provide solid
waste collection services to approximately 1,000 customers in western Oregon. On
March 31, 1999, a wholly owned subsidiary of the Company acquired the assets of
Jack Fleming Sanitary Service, which provides solid waste collection services to
approximately 400 customers in northwestern Oregon.
24
<PAGE> 25
Utah Acquisitions. On June 1, 1998, the Company acquired substantially all of
the business assets of Contractor's Waste Removal, L.C. ("Contractor's"), a
provider of solid waste collection and transportation services to more than 450
customers in central Utah. On July 27, August 10 and August 21, 1998, the
Company 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 the Company's Utah operations. On September 21, 1998, Waste
Connections of Utah, Inc., a wholly owned subsidiary of the Company, acquired
certain assets of Country Garbage Services, Inc., which provides solid waste
collection and transportation services in central Utah. On December 30, 1998,
the Company acquired the stock of City Sanitation, Inc., which provides solid
waste collection services to more than 4,200 customers in central Utah. On
January 8, 1999, a wholly owned subsidiary of the Company merged into Roche &
Sons, Inc. As a result, Roche & Sons, Inc. became a wholly owned subsidiary of
the Company that provides solid waste collection services to approximately 6,000
customers in central Utah. On March 26, 1999, a wholly owned subsidiary of the
Company acquired certain assets of Waste Away, LLC, which provides solid waste
collection services to approximately 2,400 customers in central Utah.
Wyoming Acquisitions. On April 8, 1998, the Company acquired certain solid waste
collection assets from A-1 Disposal, Inc. and Jesse's Disposal, both unrelated
parties operating in northeastern Wyoming, and together serving approximately
2,300 customers. On May 11, 1998, the Company acquired T&T Disposal, Inc., a
provider of solid waste and recyclables collection services to more than 500
customers in northeastern Wyoming. On May 8, 1998, the Company acquired Sowers'
Sanitation, Inc. and Sunshine Sanitation Incorporated, providers of solid waste
and recyclables collection services to an aggregate of more than 7,000 customers
in western South Dakota. On August 3, 1998, the Company acquired certain assets
of a South Dakota waste collection business owned by the shareholders of J&J,
which "tucks in" to the Company's Wyoming and South Dakota operations. (See
"Nebraska Acquisitions" above). On January 22, 1999, a wholly owned subsidiary
of the Company acquired certain assets of Brecke Sanitation, which provides
solid waste collection services to approximately 400 customers in western South
Dakota.
Washington Acquisitions. On September 21, 1998, a wholly owned subsidiary of the
Company merged into Evergreen Waste Systems, Inc. As a result of this merger,
Evergreen Waste Systems, Inc. became a wholly owned subsidiary of the Company
that provides solid waste and recyclables collection and transportation services
to more than 6,500 customers in southwestern Washington and northwestern Oregon.
On January 19, 1999, four wholly owned subsidiaries of the Company merged into
the Murrey Companies, and the Murrey Companies became wholly owned subsidiaries
of the Company. The Murrey Companies provide solid waste services to more than
65,000 customers in the Seattle-Tacoma, Washington area. On March 31, 1999, the
Company purchased the stock of two companies that are the sole partners of
Columbia Resource Co., L.P. ("CRC") and Finley-Buttes Limited Partnership
("FBLP"). CRC provides solid waste collection services to approximately 2,700
customers in southwestern Washington. FBLP operates the Finley-Buttes Regional
Landfill in northern Oregon.
The Company's management does not believe that consummation of any other
acquisitions is probable as of the date of this prospectus.
25
<PAGE> 26
GENERAL
The Company's revenues consist mainly of fees it charges customers for solid
waste collection, transfer, disposal and recycling services. A large part of the
Company's collection revenues come from commercial, industrial and residential
services. The Company frequently performs these services under service
agreements or franchise agreements with counties or municipal contracts. County
franchise agreements and municipal contracts generally last from one to ten
years. The Company's existing franchise agreement and all of its existing
municipal contracts give the Company the exclusive right to provide specified
waste services in the specified territory during the contract term. These
exclusive arrangements are awarded, at least initially, on a competitive bid
basis and subsequently on a bid or negotiated basis. The Company also provides
residential collection services on a subscription basis with individual
households. The Company provides a large part of its collection services in
Washington under G certificates awarded by the Washington Utilities and
Transportation Commission. G certificates grant the Company collection rights in
certain areas, which rights are generally perpetual and exclusive. See
"Business -- G Certificates." Contracts with counties and municipalities and G
certificates provide relatively consistent cash flow during the term of the
contracts. Because the Company bills most residential customers on a
subscription basis quarterly, subscription agreements also are a stable source
of revenues for the Company. The Company's collection business also generates
revenues from the sale of recyclable commodities.
The Company charges transfer station and landfill customers a tipping fee on a
per ton basis for disposing of their solid waste at the transfer stations and
disposal facilities the Company operates in Madera, California and Clarkson,
Nebraska and the landfills the Company owns and operates in Major County,
Oklahoma, Morrow County, Oregon and Butler County, Nebraska. Most of the
Company's transfer and landfill customers are under one to ten year disposal
contracts, most of which provide for annual cost of living increases.
The Company typically determines the prices for its solid waste services by the
collection frequency and level of service, route density, volume, weight and
type of waste collected, type of equipment and containers furnished, the
distance to the disposal or processing facility, the cost of disposal or
processing, and prices charged by competitors for similar services. The terms of
the Company's contracts sometimes limit its ability to pass on price increases.
Long-term solid waste collection contracts typically contain a formula,
generally based on a published price index, that automatically adjusts fees to
cover increases in some, but not all, operating costs.
Costs of operations include labor, fuel, equipment maintenance and tipping fees
paid to third party disposal facilities, worker's compensation and vehicle
insurance, the cost of materials purchased to be recycled, third party
transportation expense, district and state taxes, host community fees and
royalties. The Company owns and/or operates 18 transfer stations, which reduce
the Company's costs by allowing it to use collection personnel and equipment
more fully and by consolidating waste to gain the more favorable disposal rates
that may be available for larger quantities of waste.
Selling, general and administrative ("SG&A") expenses include management,
clerical and administrative compensation and overhead costs associated with the
Company's marketing and sales force, professional services and community
relations expense.
26
<PAGE> 27
Depreciation and amortization expense includes depreciation of fixed assets over
the estimated useful life of the assets using the straight line method and
amortization of goodwill and other intangible assets over the estimated period
of benefit using the straight line method.
The Company capitalizes some third party expenditures related to pending
acquisitions or development projects, such as legal and engineering expenses.
The Company expenses indirect acquisition costs, such as executive and corporate
overhead, public relations and other corporate services, as they are incurred.
The Company charges against net income any unamortized capitalized expenditures
and advances (net of any portion that the Company believes it may recover,
through sale or otherwise) that relate to any operation that is permanently shut
down and any pending acquisition or landfill development project that is not
completed. The Company routinely evaluates all capitalized costs, and expenses
those related to projects that the Company believes are not likely to succeed.
As of March 31, 1999, the Company had no capitalized expenditures relating to
landfill development projects and $26,973 in capitalized expenditures relating
to pending acquisitions.
The Company accrues for estimated landfill closure and post-closure maintenance
costs at the Red Carpet Landfill it owns in Major County, Oklahoma, the Butler
County Landfill it owns in Butler County, Nebraska, and the Finley-Buttes
Regional Landfill it owns in Morrow County, Oregon. Under applicable
regulations, the Company and Madera County, as operator and owner, respectively,
are jointly liable for closure and post-closure liabilities with respect to the
Fairmead landfill. The Company has not accrued for such liabilities because
Madera County, as required by state law, has established a special fund, into
which it deposits a portion of tipping fee surcharges, to pay such liabilities.
Consequently, management of the Company does not believe Madera has any
financial obligation for closure and post-closure costs for the Fairmead
Landfill as of March 31, 1999. The Company will have additional material
financial obligations relating to closure and post-closure costs of any disposal
facilities it may own or operate in the future. In such case, the Company will
accrue for those obligations, based on engineering estimates of consumption of
permitted landfill airspace over the useful life of any such landfill.
27
<PAGE> 28
RESULTS OF OPERATIONS
The following table sets forth items in Waste Connections' consolidated
statement of operations as a percentage of revenues for the period indicated.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1998
-----------------
<S> <C>
Revenues.............................................. 100.0%
Cost of operations.................................... 67.6
Selling, general and administrative expenses.......... 9.8
Depreciation and amortization expense................. 7.6
Stock compensation.................................... 1.3
-----
Operating income...................................... 13.7
Interest expense, net................................. (4.2)
Income tax expense.................................... (4.4)
Extraordinary loss, net of income tax................. (1.9)
-----
Net income (loss)..................................... 3.2%
=====
EBITDA margin(1)...................................... 22.5%
</TABLE>
- -------------------------
(1) EBITDA margin represents EBITDA expressed as a percentage of revenues.
EBITDA represents earnings presented above before extraordinary loss,
interest, (other) expense, income taxes, depreciation and amortization
expense and stock compensation expense. EBITDA is not a measure of cash
flow, operating results or liquidity, as determined in accordance with
generally accepted accounting principles.
The financial information for Waste Connections and our predecessors for the
years ended December 31, 1996 and 1997 included in this section relates to the
following entities for the periods indicated:
<TABLE>
<S> <C>
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 (September 9, 1997) through
December 31, 1997
</TABLE>
The Disposal Group Combined consists of three entities that were under common
control before their acquisition by BFI: Diamond Fab and Welding Service, Inc.,
Buchmann Sanitary Service, Inc. and The Disposal Group.
28
<PAGE> 29
1998 VS. 1997
Revenues. Revenues for 1998 increased $47.8 million, or 766% to $54.0 million
from $6.2 million for 1997. Our revenues in 1997 resulted primarily from the
purchase of Waste Connections' predecessors on September 30, 1997. Approximately
$47.6 million of the increase resulted primarily from the acquisitions of our
predecessors and the inclusion of their revenues for a full 12 months in 1998
and other acquisitions closed since the beginning of 1998. Approximately
$244,000 of the increase in revenues during 1998 resulted from growth in the
underlying operations of the business acquired from BFI. Revenues related to
Waste Connections' Predecessors Combined for the nine months ended September 30,
1997 were $18.1 million.
Cost of Operations. Cost of operations for 1998 increased $31.9 million, or
677%, to $36.6 million from $4.7 million for 1997. Our cost of operations in
1997 was attributable to the purchase of Waste Connections' predecessors on
September 30, 1997. The increase resulted primarily from the acquisitions of our
predecessors and the inclusion of their cost of operations for a full 12 months
in 1998 and other acquisitions closed since the beginning of 1998. This increase
in 1998 was offset slightly by a decline in expenses in the predecessors
operations as a result of cost reduction measures. Cost of operations as a
percentage of revenues declined 7.8% to 67.6% in 1998 from 75.4% in 1997. The
decline in cost of operations as a percent of revenues was as a result of
operating improvements implemented in the acquired businesses. Cost of
operations of Waste Connections' Predecessors Combined for the nine months ended
September 30, 1997 was $14.8 million, or 81.4% of revenues.
SG&A. SG&A expenses increased $4.7 million, or 759.0%, to $5.3 million for 1998
from $619,000 for 1997. Our SG&A expense in 1997 was attributable to the
purchase of Waste Connections' predecessors on September 30, 1997. The increase
resulted primarily from the acquisitions of our predecessors and the inclusion
of their SG&A expenses for a full 12 months in 1998 and other acquisitions
closed since the beginning of 1998, combined with an increase in corporate
overhead to accommodate our growth. SG&A as a percentage of revenues declined
0.1% to 9.8% for 1998 from 9.9% for 1997. The decline in SG&A as a percentage of
revenues was a result of spreading of overhead expenses over a larger base of
revenue from the acquisitions completed in 1998, offset by increases in
corporate overhead and the costs associated with being a public company.
Depreciation and Amortization. Depreciation and amortization expense increased
$3.8 million, or 1061.5%, to $4.1 million for 1998 from $354,000 for 1997. Our
depreciation and amortization expense in 1997 was attributable to the purchase
of Waste Connections' predecessors on September 30, 1997. The increase resulted
primarily from the acquisitions of our predecessors and the inclusion of their
depreciation and amortization for a full 12 months in 1998 and other
acquisitions closed since the beginning of 1998. Depreciation and amortization
as a percentage of revenues increased 1.9% to 7.6% for 1998 from 5.7% for 1997.
The increase in depreciation and amortization as a percentage of revenues was
primarily a result of amortization of goodwill associated with acquisitions.
Stock Compensation Expense. Stock compensation expense decreased $3.8 million,
or 85.6%, to $632,000 for 1998 from $4.4 million for 1997. Our stock
compensation expense in 1997 was attributable to the valuation of common stock
issued upon the initial formation of the company. Stock compensation as a
percentage of revenues decreased
29
<PAGE> 30
69.3% to 1.2% for 1998 from 70.5% for 1997. Our stock compensation expense in
1998 was attributable to stock options granted with exercise prices less than
the estimated fair value of our common stock on the date of grant.
Start Up and Integration Expense. Start up and integration expenses relate to
expenses incurred in connection with our formation and integration costs
relating to our initial acquisitions.
Operating Income. Operating income increased $11.7 million from a loss of $4.3
million in 1997 to $7.4 million in 1998. The increase was attributable to the
decline in stock compensation expense combined with improved operating
performance and the inclusion of a full year of our predecessors' operating
results and other acquisitions closed since the beginning of 1998.
Interest Expense. Interest expense increased $1.2 million, or 118%, to $2.3
million for 1998 from $1.0 million for 1997. The increase was primarily
attributable to higher debt levels incurred to fund certain of our acquisitions.
Provision for Income Taxes. Income taxes increased $2.7 million to $2.4 million
for 1998 from a benefit of $332,000 for 1997. The effective income tax rate in
1998 was 46.3%, which is above the federal statutory rate of 34.0% as the result
of state and local taxes, non-deductible goodwill associated with certain
acquisitions and the non-deductibility of the stock compensation expense.
Extraordinary Charges. Extraordinary charges relate to the early termination of
our bank credit facility when it was replaced by a new and larger facility. We
had two new credit facilities during 1998.
Net Income. Net income increased by $6.8 million to $1.7 million for 1998, from
a loss of $5.1 million for 1997. The increase was attributable to the decline in
stock compensation expense combined with improved operating performance and the
inclusion of a full year of our predecessors' operating results and other
acquisitions closed since the beginning of 1998.
1997 VS. 1996
Because the predecessors existed for different periods, year-to-year comparisons
are not meaningful and therefore we have not included discussions of SG&A,
depreciation and amortization and interest.
Revenues. Our revenues for 1997 were $6.2 million. The revenues resulted
primarily from the purchase of Waste Connections' predecessors on September 30,
1997. Revenues related to Waste Connections' Predecessors Combined for the nine
months ended September 30, 1997 were $18.1 million. Waste Connections'
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 revenues for Waste
Connections and Waste Connections' Predecessors Combined were essentially the
same in 1997 and 1996.
Cost of Operations. Cost of operations in 1997 was $4.7 million, or 75.4% of
revenues. The cost of operations was attributable to the purchase of Waste
Connections' predecessors on September 30, 1997. Cost of operations of Waste
Connections' Predecessors Combined for the nine months ended September 30, 1997
was $14.8 million, or 81.4% of revenues.
30
<PAGE> 31
Waste Connections' Predecessors Combined for the period ended December 31, 1996
had cost of operations of $11.4 million, or 85.1% of revenues. During the period
from January 1, 1996 to July 31, 1996, the Disposal Group had cost of operations
of $6.2 million, or 70.7% of revenues. Our cost of operations as a percentage of
revenues in 1997 declined from Waste Connections' 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. Waste Connections' Predecessors Combined cost of
operations as a percentage of revenues 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.
SUPPLEMENTAL WASTE CONNECTIONS, INC. AND PREDECESSORS
1998 VS. 1997
Revenues. Total revenues increased $51.5 million, or 146.6%, to $86.6 million
for 1998 from $35.1 million for 1997. Substantially all of the increase resulted
primarily from the acquisitions of BFI's Washington operations and acquisitions
closed since the beginning of 1998. Approximately $1.8 million resulted from
growth in the base business.
Cost of Operations. Total cost of operations increased $35.2 million, or 126.2%,
to $63.0 million for 1998 from $27.8 million for 1997. The increase resulted
primarily from the acquisitions of BFI's Washington operations and acquisitions
closed since the beginning of 1998. Cost of operations as a percentage of
revenues declined 6.6% to 72.7% for 1998 from 79.3% for 1997. The decline in
cost of operations as a percentage of revenues was a result of cost reductions
at acquired businesses.
SG&A. SG&A expenses increased $5.2 million, or 175.6%, to $8.1 million for 1998
from $2.9 million for 1997. The increase was primarily attributable to the
inclusion of BFI's Washington operations for 12 months and acquisitions closed
since the beginning of 1998 and the additional corporate costs of being a public
company and supporting the rapid pace of growth. SG&A as a percentage of
revenues increased 0.9% to 9.4% for 1998 from 8.4% for 1997. The increase in
SG&A as a percentage of revenues was a result of the acquisitions, which had
generally higher overhead expenses and the additional corporate costs of being a
public company and supporting the rapid pace of growth.
Depreciation and Amortization. Depreciation and amortization expense increased
$4.6 million, or 265.6%, to $6.3 million for 1998 from $1.7 million for 1997.
The increase was primarily attributable to depreciation from acquired assets and
increased amortization of goodwill from acquisitions. Depreciation and
amortization as a percentage of revenues increased 2.3% to 7.2% for 1998 from
4.9% for 1997. The increase in depreciation and amortization as a percentage of
revenues was primarily a result of amortization of goodwill associated with
acquisitions.
Stock Compensation Expense. Stock compensation expense decreased $3.8 million,
or 85.6%, to $632,000 for 1998 from $4.4 million for 1997. Our stock
compensation expense in 1997 was attributable to the valuation of common stock
issued upon the initial formation of the Company. Stock compensation as a
percentage of revenues decreased 11.8% to 0.7% for 1998 from 12.5% for 1997. Our
stock compensation expense in 1998 was
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<PAGE> 32
attributable to stock options granted with exercise prices less than the
estimated fair value of our common stock on the date of grant.
Start Up and Integration Expense. Start up and integration expenses relate to
expenses incurred in connection with Waste Connections' formation and
integration costs relating to our initial acquisitions.
Operating Income. Operating income increased $10.8 million from a loss of $2.3
million in 1997 to $8.5 million in 1998. The increase was attributable to the
decline in stock compensation expense combined with improved operating
performance and the inclusion of a full year of the business acquired from BFI
and other acquisitions closed since the beginning of 1998.
Interest Expense. Interest expense increased $1.4 million, or 97.3%, to $2.8
million for 1998 from $1.4 million for 1997. The increase was primarily
attributable to higher debt levels incurred to fund all or a portion of the
purchase price of acquired businesses.
Provision for Income Taxes. Income taxes increased $2.6 million to $2.9 million
for 1998 from $302,000 for 1997. The increase was associated with the
profitability of the operations acquired from BFI. The effective income tax rate
in 1998 was 50.1%, which is above the federal statutory rate of 34.0% as the
result of state and local taxes, non-deductible goodwill associated with certain
acquisitions and the non-deductibility of the stock compensation expense.
Extraordinary Charges. Extraordinary charges relate to the early termination of
our bank credit facility when it was replaced by a new and larger facility. We
had two new credit facilities during 1998.
Net Income. Net income increased by $5.6 million to $1.9 million for 1998, from
a loss of $3.8 million for 1997. The increase was attributable to the decline in
stock compensation expense combined with improved operating performance and the
inclusion of a full year of the operations acquired from BFI and other
acquisitions closed since the beginning of 1998.
1997 VS. 1996
Revenues. Total revenues increased by $10.1 million, or 40.3%, to $35.1 million
in 1997 from $25.0 million in 1996. This increase was primarily attributable to
our acquisition of the predecessors from BFI on December 31,1997, increased
volumes, price increases as a result of increased disposal fees, the acquisition
of the assets of Vashon Island Disposal and additional services to existing
customers.
Cost of Operations. Total cost of operations increased $7.4 million, or 36.0%,
to $27.8 million in 1997 from $20.5 million in 1996. The increase was
principally due to our acquisition of the predecessors from BFI on December
31,1997, increased volume, increased disposal costs and the cost of operations
of Vashon Island Disposal. Cost of operations as a percentage of revenues
declined 2.5% to 79.3% from 81.8% in 1996. The percentage decrease was primarily
due to operating leverage as a result of increased volumes.
SG&A. SG&A expenses increased approximately $800,000, or 37.4%, to $2.9 million
in 1997 from $2.1 million in 1996. The increase was principally due to our
acquisition of the predecessors from BFI on December 31, 1997, and increased
wages and contributions to
32
<PAGE> 33
the Murrey Companies' 401(k) plan. As a percentage of revenues, SG&A decreased
0.2% to 8.4% from 8.6% in 1996 as a result of operating leverage with the
increased revenues.
Depreciation and Amortization. Depreciation and amortization expense increased
approximately $489,000, or 39.6%, to $1.7 million in 1997 from $1.2 million in
1996. The increase resulted from our acquisition of the predecessors from BFI on
December 31, 1997, and the purchase of additional collection equipment and
containers. Depreciation and amortization expense remained constant as a
percentage of revenues at 4.9%.
Interest Expense. Interest expense increased approximately $1.1 million, or
398.2%, to $1.4 million in 1997 from approximately $284,000 in 1996. The
increased interest expense was a result of higher debt levels resulting from our
acquisition of the predecessors from BFI on December 31, 1997 and the purchase
of additional property and equipment.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is capital intensive. The Company's capital requirements
include acquisitions and fixed asset purchases. The Company expects that in the
future it will also make capital expenditures for landfill cell construction,
landfill development and landfill closure activities. The Company plans to meet
its capital needs through various financing sources, including internally
generated funds and debt and equity financing.
As of December 31, 1998, the Company had a working capital deficit of $8.7
million, including cash and cash equivalents of $2.7 million. Approximately $8.5
million of the working capital deficit was a short-term note payable related to
a business acquired in December 1998. In managing its working capital, the
Company generally applies the cash generated from its operations that remains
available after satisfying its working capital and capital expenditure
requirements to reduce its indebtedness under its bank revolving credit facility
and to minimize its cash balances. The Company finances its working capital
requirements from internally generated funds and bank borrowings.
At inception, the Company sold 2,300,000 shares of Common Stock at $0.01 per
share to its founders and 2,499,998 shares of Series A Preferred Stock at $2.80
per share. In May and June 1998, the Company received approximately $24.0
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). In February 1999, the Company received approximately
$65.3 million in net proceeds from the sale of 3,999,307 shares in a secondary
public offering (including exercise by the underwriters of their overallotment
option). As of April 15, 1999, the Company had sold or issued a total of
17,425,483 shares of Common Stock at a weighted average value of $10.69 per
share, and had outstanding options and warrants to purchase 2,315,399 shares of
Common Stock at a weighted average exercise price of $8.51 per share.
The Company has a $225.0 million revolving credit facility with a syndicate of
banks for which BankBoston, N.A. acts as agent, which is secured by all assets
of the Company, including the Company's interest in the equity securities of its
subsidiaries. The credit facility matures in 2004 and bears interest at a rate
per annum equal to, at the Company's discretion, either: (i) the BankBoston Base
Rate plus applicable margin; or (ii) the Eurodollar Rate plus applicable margin.
The credit facility requires the Company to maintain certain financial ratios
and satisfy other predetermined requirements, such as minimum net worth, net
income and limits on capital expenditures. It also requires the lenders'
approval of acquisitions in certain circumstances. See "Risk
Factors -- Potential
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Inability to Finance the Company's Potential Growth." As of April 16, 1999, an
aggregate of approximately $95,700,000 was outstanding under the Company's
credit facility, and the interest rate on outstanding borrowings under the
credit facility was approximately 7.0%.
For the year ended December 31, 1998, net cash provided by operations was
approximately $6.1 million, most of which was provided by operating results for
the period, non-cash charges for stock compensation and one-time extraordinary
non-cash charges for extinguishment of debt. This was offset by an approximately
$3.3 million increase in working capital (net of acquisitions) in 1998.
For the year ended December 31, 1998, net cash used by investing activities was
$62.5 million. Of this, approximately $56.3 million was used to fund the cash
portion of acquisitions, with approximately $6.2 million invested in management
information systems, trucks and landfill construction activities.
For the year ended December 31, 1998, net cash provided by financing activities
was $58.3 million, which included net borrowings under the Company's debt
arrangements and $24.0 million in proceeds from the sale of Common Stock in an
initial public offering.
The Company made approximately $6.2 million in capital expenditures in 1998. The
Company expects to make capital expenditures in 1999 of approximately $6.0
million in connection with its existing business. The Company intends to fund
its planned 1999 capital expenditures principally through existing cash,
internally generated funds, and borrowings under its existing credit facility.
In addition, the Company may make substantial additional capital expenditures in
acquiring solid waste collection and disposal businesses. If the Company
acquires additional landfill disposal facilities, the Company may also be
required to make significant expenditures to bring any such newly acquired
disposal facilities into compliance with applicable regulatory requirements,
obtain permits for any such newly acquired disposal facilities or expand the
available disposal capacity at any such newly acquired disposal facilities. The
Company cannot currently determine the amount of these expenditures, because
they will depend on the nature and extent of any acquired landfill disposal
facilities, the condition of any facilities acquired and the permitted status of
any acquired sites. The Company believes that the credit facility, and the funds
expected to be generated from operations, will provide adequate cash to fund the
Company's working capital and other cash needs for the foreseeable future.
On January 19, 1999, the Company merged with the Murrey Companies. The
transactions were accounted for as poolings-of-interest, whereby the Company
issued 2,888,880 shares of Common Stock for all of the outstanding shares of the
Murrey Companies. In connection with the mergers with the Murrey Companies, the
Company incurred transaction related costs of approximately $6.2 million, which
were charged to operations in the first quarter of 1999.
Effective February 9, 1999, the Company sold approximately four million shares
of Common Stock at $17.50 per share. As a result of the offering, the Company
received approximately $65.3 million in net proceeds and paid down approximately
$50.2 million of its outstanding debt.
Effective March 1, 1999, the Company acquired the stock of two companies that
are the sole partners of CRC and FBLP for total consideration of approximately
$66.9 million in cash.
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<PAGE> 35
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. Accumulated amortization amounted to
$64,000 and $1.4 million as of December 31, 1997 and 1998, respectively. Within
the purchase price of an acquired company, the Company 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.
The Company continually evaluates the value and future benefits of its
intangible assets. The Company 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 the Company's best estimate for expected future cash flows of the
related business over the remaining amortization period would be less than the
carrying amount of the intangible assets. As of December 31, 1998, there have
been no adjustments to the carrying amounts of intangibles resulting from these
evaluations. As of December 31, 1998, the Company's goodwill represented
approximately 63.7% of its total assets and 155.7% of stockholder's equity.
The Company derives a substantial portion of its revenues from exclusive
municipal contracts and franchise agreements. Its single largest contract, with
the City of Vancouver, accounted for approximately 18.1% of the Company's
revenues during the period from inception (September 9, 1997) through December
31, 1997, and 8.7% during the year ended December 31, 1998. There are
approximately nine years remaining under that contract. No other single contract
or customer accounted for more than 7.1% of the Company's revenues during the
period from inception (September 9, 1997) through December 31, 1997, or more
than 5.0% during the year ended December 31, 1998.
INFLATION
To date, inflation has not significant affected the Company's operations.
Consistent with industry practice, many of the Company's contracts allow the
Company to pass through certain costs to the customers, including increases in
landfill tipping fees and, in some cases, fuel costs. Therefore, the Company
believes that it should be able to increase prices to offset many cost increases
that result from inflation. However, competitive pressures may require the
Company to absorb at least part of these cost increases, particularly during
periods of high inflation.
SEASONALITY
Based on historic trends experienced by the businesses the Company has acquired,
the Company expects its operating results to vary seasonally, with revenues
typically lowest in the first quarter, higher in the second and third quarters
and lower in the fourth quarter than in the second and third quarters. See "Risk
Factors -- Seasonality of Business."
YEAR 2000 ISSUES
The Company will need to modify or replace portions of its software so that its
computer systems will function properly with respect to dates in the year 2000
("Year 2000") and afterwards. The Company expects to complete those
modifications and upgrades during
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<PAGE> 36
1999, at a total cost of approximately $100,000. The Company has spent part of
its Year 2000 budget on replacing its billing systems in Maltby and Vancouver.
Because the Company's operations rely primarily on mechanical systems such as
trucks to collect solid waste, the Company does not expect its operations to be
significantly affected by Year 2000 issues. The Company's customers may need to
make Year 2000 modifications to software and hardware that they use to generate
records, bills and payments relating to the Company. The Company does not rely
on vendors on a routine basis except for providers of disposal services. The
Company brings waste to a site and is normally billed based on tonnage received.
The Company believes that if its disposal vendors encounter Year 2000 problems,
they will convert to manual billing based on scale recordings until they resolve
those issues.
In assessing the Company's exposure to Year 2000 issues, management believes its
biggest challenges lie in the following areas: Year 2000 issues at the Company's
banks, large (typically municipal) customers, and acquired businesses between
the time the Company acquires them and the time the Company implements its own
systems. The Company is obtaining Year 2000 compliance certifications from its
vendors, banks and customers. If the Company and its vendors, banks and
customers do not complete the required Year 2000 modifications on time, the Year
2000 issue could materially affect the Company's operations. The Company
believes, however, that in the most reasonably likely worst case, the effects of
Year 2000 issues on its operations would be brief and small relative to the
Company's overall operations. The Company has not made a contingency plan to
minimize operational problems if the Company and its vendors, banks and
customers do not timely complete all required Year 2000 modifications.
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BUSINESS
INTRODUCTION
Waste Connections is a regional, integrated solid waste services company that
provides solid waste collection, transfer, disposal and recycling services in
secondary markets of the Western U.S. As of April 15, 1999, the Company served
more than 330,000 commercial, industrial and residential customers in
California, Idaho, Kansas, Minnesota, Nebraska, Oklahoma, Oregon, South Dakota,
Utah, Washington and Wyoming. The Company currently owns and operates 33
collection operations, 11 transfer stations and three Subtitle D landfills and
operates an additional seven transfer stations, two Subtitle D landfills and
nine recycling facilities.
Waste Connections was founded in September 1997 to execute an acquisition-based
growth strategy in secondary markets of the Western U.S. The Company has
acquired 64 solid waste services related businesses since its formation and has
identified more than 300 independent operators of such businesses in the states
where it currently operates, many of which it believes may be suitable for
acquisition by the Company. In addition, the Company is currently assessing
potential acquisitions of solid waste services operations in Colorado, Montana
and Texas.
The Company has targeted secondary markets in the Western U.S. because it
believes that: (i) a large number of independent solid waste services companies
suitable for acquisition by the Company are located in these markets; (ii) there
is less competition in these markets from large, well-capitalized solid waste
services companies; and (iii) these markets have strong projected economic and
population growth rates. In addition, the Company's senior management team has
extensive experience acquiring and operating solid waste services businesses in
the Western U.S.
INDUSTRY OVERVIEW
According to Waste Age, an industry trade publication, the U.S. solid waste
services industry generated estimated revenues of $36.9 billion in 1997. The
solid waste services industry has been significantly consolidated and integrated
since 1990. The Company believes that, particularly in the Western U.S., this
consolidation and integration have been caused primarily by: (i) stringent
environmental regulation and enforcement, resulting in increased capital
requirements for collection companies and landfill operators; (ii) the evolution
of an industry competitive model that emphasizes integrating collection and
disposal capabilities; (iii) the ability of larger integrated operators to
achieve certain economies of scale; and (iv) the existence of a regulatory
framework that allows the acquisition of exclusive, long-term waste collection
rights through franchise agreements, municipal contracts and governmental
certificates.
Increased Regulatory Impact. Stringent industry regulations, such as the
Subtitle D regulations, have caused operating and capital costs to rise and have
accelerated consolidation and acquisition activities in the solid waste
collection and disposal industry. Many smaller industry participants have found
these costs difficult to bear and have decided to either close their operations
or sell them to larger operators. In addition, Subtitle D requires more
stringent engineering of solid waste landfills, including liners, leachate
collection and monitoring and gas collection and monitoring. These ongoing costs
are combined with increased financial reserve requirements for solid waste
landfill operators
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relating to closure and post-closure monitoring. As a result, the number of
solid waste landfills is declining while the size of solid waste landfills is
increasing.
Integrating Collection and Disposal Operations. Competitive pressures are
forcing operators to become more efficient by establishing an integrated network
of solid waste collection operations and transfer stations, through which they
secure solid waste streams for disposal. Operators have adopted a variety of
disposal strategies, including owning landfills, establishing strategic
relationships to secure access to landfills and otherwise capturing significant
waste stream volumes, to gain leverage in negotiating lower landfill fees and
securing long-term, most-favored-pricing contracts with high capacity landfills.
Economies of Scale. Larger, integrated operators achieve economies of scale by
vertically integrating their operations. These integrated companies have made
more acquisitions and expanded the breadth of services and density in their
market areas. Control of the waste stream in these market areas, combined with
access to significant financial resources to make acquisitions, has allowed
larger solid waste collection and disposal companies to be more cost-effective
and competitive.
Despite the considerable consolidation and integration that has occurred in the
solid waste industry since 1990, the industry remains primarily regional in
nature and highly fragmented. Based on published industry sources, approximately
27% of the total revenues of the U.S. solid waste industry is accounted for by
more than 5,000 private, predominantly small, collection and disposal
businesses, approximately 41% by publicly traded solid waste companies and
approximately 32% by municipal governments that provide collection and disposal
services. The Company expects the current consolidation trends in the solid
waste industry to continue, because many independent landfill and collection
operators lack the capital resources, management skills and technical expertise
necessary to comply with stringent environmental and other governmental
regulations and to compete with larger, more efficient integrated operators. The
Company believes that the fragmented nature of the industry offers significant
consolidation and growth opportunities for companies with disciplined
acquisition programs, decentralized operating strategies and access to financial
resources.
Regulatory Framework. In the Western U.S., waste collection services are
provided largely under three types of contractual arrangements: certificates or
permits, franchise agreements and municipal contracts. Certificates or permits,
such as G certificates awarded to waste collection service providers in
unincorporated areas and electing municipalities of Washington by the Washington
Utilities and Transportation Commission, typically grant the certificate holder
the right, which is generally perpetual and exclusive, to provide specific
residential, commercial and industrial waste services in a specified area. See
"G Certificates" below. Franchise agreements typically provide an exclusive
service period of five to ten years or longer and specify the service territory,
a broad range of services to be provided, and rates for the services. They also
often give the service provider a right of first refusal to extend the term of
the agreement. Municipal contracts typically provide a shorter service period
and a more limited scope of services than franchise agreements and generally
require competitive bidding at the end of the contract term. Unless customers
within the areas covered by certain permits or certificates (including G
certificates), franchise agreements and municipal contracts elect not to receive
any waste collection services, they are required to pay collection fees to the
company providing such services in their area.
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The Company operates five landfills, of which it owns three, and may acquire or
operate others in the future. The Company believes, however, that in those
secondary markets of the Western U.S. where waste collection services are
provided under exclusive certificates, franchises or contracts, or where waste
disposal is municipally funded or available from multiple sources, controlling
the waste stream by providing collection services under exclusive arrangements
is often more important to a waste services company's growth and profitability
than owning or operating landfills. Several other characteristics of secondary
markets in the Western U.S. limit the economic attractiveness of owning or
operating landfills in those markets. For example, certain state and local
regulations in the Western U.S. restrict the amount of waste that may be
accepted from specific geographic areas. In addition, the relatively expansive
geographic area of many western states increases the cost of interstate and long
haul disposal, which heightens the effects of state and local regulations
limiting the type and origin of waste that may be accepted at a landfill and
makes it more difficult for a landfill to achieve the disposal volume necessary
to operate profitably, given its capital and operating costs. The Company
believes that significant opportunities exist for a well-capitalized company
operating in secondary markets of the Western U.S., and that the highly
fragmented nature of this industry should allow the Company to consolidate
existing solid waste services businesses in this region.
STRATEGY
The Company's objective is to build a leading integrated solid waste services
company in secondary markets of the Western U.S. The Company's strategy for
achieving this objective is to: (i) acquire collection, transfer, disposal and
recycling operations in new markets and through "tuck-in" acquisitions in
existing markets; (ii) secure additional franchises, municipal contracts and
governmental certificates; (iii) generate internal growth in existing markets by
increasing market penetration and adding services to its existing operations;
and (iv) enhance profitability by increasing operating efficiencies of existing
and acquired operations. The Company's ability to implement this strategy is
enhanced by the experience of the members of its senior management team and
their knowledge of and reputation in the solid waste services industry in the
Company's targeted markets. The Company intends to implement its strategy as
follows:
EXPANSION THROUGH ACQUISITIONS
The Company intends to expand significantly the scope of its operations by: (i)
acquiring solid waste collection, transfer, disposal and recycling operations in
new markets; and (ii) acquiring solid waste collection, transfer, disposal and
recycling operations in existing and adjacent markets through "tuck-in"
acquisitions.
The Company intends to follow a regional expansion strategy by entering new
markets through acquisitions. An initial acquisition in a new market is used as
an operating base for the Company in that area. The Company then seeks to
strengthen the acquired operation's presence in that market by providing
additional services, adding new customers and making tuck-in acquisitions.
The Company can then broaden its regional presence by adding additional
operations in markets adjacent to the new location. The Company is currently
examining opportunities to expand its presence in the Western U.S. in states
other than those where it currently operates and is assessing potential
acquisitions of solid waste services operations in Colorado, Montana and Texas.
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The Company believes that numerous "tuck-in" acquisition opportunities exist
within its current and targeted market areas. For example, the Company has
identified more than 300 independent entities that provide collection and
disposal services in the states where it currently operates. The Company
believes that throughout the Western U.S., many independent entities are
suitable for acquisition by the Company and would provide the Company
opportunities to increase market share and route density.
FRANCHISE AGREEMENTS, MUNICIPAL CONTRACTS AND GOVERNMENTAL CERTIFICATES
The Company intends to devote significant resources to securing additional
franchise agreements and municipal contracts through competitive bidding and
additional governmental certificates through the acquisition of other companies.
In bidding for franchises and municipal contracts and evaluating the acquisition
of companies holding governmental certificates, the Company's management team
draws on its experience in the waste industry and its knowledge of local service
areas in existing and target markets. The Company's district managers manage
relationships with local governmental officials within their respective service
areas, and sales representatives may be assigned to cover specific
municipalities. These personnel focus on maintaining, renewing and renegotiating
existing franchise agreements and municipal contracts and on securing additional
agreements, contracts and governmental certificates.
INTERNAL GROWTH
To generate continued internal growth, the Company will focus on increasing
market penetration in its current and adjacent markets, soliciting new
commercial, industrial, and residential customers in markets where such
customers may elect whether or not to receive waste collection services,
marketing upgraded or additional services (such as compaction or automated
collection) to existing customers and, where appropriate, raising prices. Where
possible, the Company intends to leverage its franchise-based platforms to
expand its customer base beyond its exclusive market territories. As customers
are added in existing markets, the Company's revenue per routed truck increases,
which generally increases the Company's collection efficiencies and
profitability. In markets in which it has exclusive contracts, franchises and
certificates, the Company expects internal growth to at least track population
and business growth.
The Company expects to use transfer stations as an important part of its
internal growth strategy, by extending the direct-haul reach of the Company and
linking disparate collection operations with Company-owned, operated or
contracted disposal capacity. The Company currently owns and/or operates 18
transfer stations. By operating transfer stations, the Company also engages in
direct communications with municipalities and private operators that deliver
waste to its transfer stations. This better positions the Company to gain
additional business in its markets if any municipality privatizes its solid
waste operations or rebids existing contracts, and it increases the Company's
opportunities to acquire private collection operations.
OPERATING ENHANCEMENTS
The Company has developed company-wide operating standards, which are tailored
for each of its markets based on industry standards and local conditions. Using
these standards, the Company tracks collection and disposal routing efficiency
and equipment utilization. It also implements cost controls and employee
training and safety procedures,
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and establishes a sales and marketing plan for each market. The Company has
installed a wide area network, implemented advanced management information
systems and financial controls, and consolidated accounting, insurance and
employee benefit functions, customer service, productivity reporting and
dispatching systems. The Company believes that by establishing operating
standards, closely monitoring performance and streamlining certain
administrative functions, it can improve the profitability of existing
operations.
To improve an acquired business' operational productivity, administrative
efficiency and profitability, the Company applies the same operating standards,
information systems and financial controls to acquired businesses as the
Company's existing operations employ. Moreover, if the Company is able to
internalize the waste stream of acquired operations, it can further increase
operating efficiencies and improve capital utilization. Where not restricted by
exclusive agreements, contracts, permits or certificates, the Company also
solicits new commercial, industrial and residential customers in areas within
and surrounding the markets served by acquired collection operations, to further
improve operating efficiencies and increase the volume of solid waste collected
by the acquired operations.
ACQUISITION PROGRAM
The Company currently operates in California, Idaho, Kansas, Minnesota,
Nebraska, Oklahoma, Oregon, South Dakota, Utah, Washington and Wyoming and
believes that these and other markets in the Western U.S. with similar
characteristics offer significant opportunities for achieving its objective. The
Company focuses on markets that are generally characterized by: (i) a
geographically dispersed population, which the Company believes deters
competition from larger, established waste management companies; (ii) a
potential revenue base of at least $15 million; (iii) the opportunity for the
Company to acquire a significant market share; (iv) the availability of adequate
disposal capacity, either through acquisition by the Company or through
agreements with third parties; (v) a favorable regulatory environment; or (vi)
strong projected economic or population growth rates. The Company believes that
these market characteristics provide significant growth opportunities for a
well-capitalized market entrant and create economic and operational barriers to
entry by new competitors.
The Company believes that its experienced management, decentralized operating
strategy, financial strength and size make it an attractive buyer to certain
solid waste collection and disposal acquisition candidates. The Company has
developed a set of financial, geographic and management criteria to help
management evaluate acquisition candidates. These criteria evaluate a variety of
factors, including, but not limited to: (i) the candidate's historical and
projected financial performance; (ii) the candidate's internal rate of return,
return on assets and return on revenue; (iii) the experience and reputation of
the candidate's management and customer service providers, their relationships
with local communities and their willingness to continue as employees of the
Company; (iv) the composition and size of the candidate's customer base and
whether the customer base is served under franchise agreements, municipal
contracts, governmental certificates or other exclusive arrangements; (v)
whether the geographic location of the candidate will enhance or expand the
Company's market area or ability to attract other acquisition candidates; (vi)
whether the acquisition will increase the Company's market share or help protect
the Company's existing customer base; (vii) any potential synergies that may be
gained by
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combining the candidate with the Company's existing operations; and (viii) the
liabilities of the candidate.
Before completing an acquisition, the Company performs extensive environmental,
operational, engineering, legal, human resources and financial due diligence.
All acquisitions must be evaluated and approved by the Company's management.
Ronald J. Mittelstaedt is authorized to approve acquisitions with consideration
of up to $1.0 million; the Executive Committee of the Board of Directors must
approve all other acquisitions. The Company seeks to integrate each acquired
business promptly and to minimize disruption to the ongoing operations of both
the Company and the acquired business, and generally attempts to retain the
senior management of acquired businesses. The Company believes its senior
management team has a proven track record in integrating acquisitions.
The following table sets forth the Company's acquisitions completed from its
inception in September 1997 through April 15, 1999:
<TABLE>
<CAPTION>
ACQUIRED BUSINESS MONTH ACQUIRED PRINCIPAL BUSINESS LOCATION MARKET AREA
----------------- -------------- ------------------ -------- -----------
<S> <C> <C> <C> <C>
R&S Cleanup April 1999 Collection Seward, NE Eastern Nebraska
Columbia Resource Co., L.P. March 1999 Collection and Vancouver, WA and Southwestern Washington
and Finley-Buttes Limited Landfill Heppner, OR and Northern Oregon
Partnership
OZ Dispos-All March 1999 Collection Eagle, NE Eastern Nebraska
Jack Fleming Sanitary Service March 1999 Collection Portland, OR Northwestern Oregon
Kansas Industrial Services, March 1999 Collection Arkansas City, KS Southern Kansas
Inc.
Williams Trash Service March 1999 Collection Douglas, KS Southern Kansas
Ritters Sanitary Service, Inc. March 1999 Collection Marshall, MN Southwestern Minnesota
Wahoo Sanitation, Inc. and March 1999 Collection Wahoo, NE Eastern Nebraska
Saunders County Disposal, Inc.
Sandy's Disposal Service and March 1999 Collection Eugene, OR Western Oregon
Extra Mile Disposal
Columbus Sanitation Service March 1999 Collection Columbus, NE Eastern Nebraska
Waste Away, LLC March 1999 Collection Hooper, UT Central Utah
Mrsny Sanitary Service, Inc. March 1999 Collection Wayne, NE Eastern Nebraska
CRX, Inc., Dolpheide Sanitary February 1999 Collection and Fremont, NE Eastern Nebraska
Service, Inc. and Better Landfill
Disposal Service, Inc.
Brecke Sanitation January 1999 Collection Wagner, SD Western South Dakota
Murrey Companies January 1999 Collection Fife, WA Western Washington
Roche & Sons, Inc. January 1999 Collection Layton, UT Central Utah
Butler County Landfill, Inc. January 1999 Landfill David City, NE Eastern Nebraska
and Kobus Construction, Inc.
City Sanitation, Inc. December 1998 Collection Layton, UT Central Utah
Amador Disposal Service, Inc. December 1998 Collection Ione, CA North Central California
and Mother Lode Sani-Hut, Inc.
Heartland Waste Management, December 1998 Collection Arkansas City, KA Southern Kansas
Inc.
Columbia Sanitary Service, Inc. November 1998 Collection Portland, OR Northern Oregon and
and Moreland Sanitary Services, Southwestern Washington
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
</TABLE>
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<TABLE>
<CAPTION>
ACQUIRED BUSINESS MONTH ACQUIRED PRINCIPAL BUSINESS LOCATION MARKET AREA
----------------- -------------- ------------------ -------- -----------
<S> <C> <C> <C> <C>
Harrell's Septic Service September 1998 Septic Services Crescent City, CA Northwestern California
and Southwestern Oregon
Evergreen Waste Systems Inc. September 1998 Collection Washougal, WA Southwestern Washington
and Northwestern Oregon
Wolff's Trashmasher and Haul It September 1998 Collection Stanton, NE Eastern Nebraska
All Sanitary Service
Country Garbage Services, Inc. September 1998 Collection Salt Lake City, UT Central Utah
Youngclaus Enterprises September 1998 Collection Madera, CA North Central California
Affiliated Waste LLC September 1998 Collection Norfolk, NE Eastern Nebraska
J&J Sanitation, Inc. August 1998 Collection O'Neill, NE Eastern Nebraska
Contractors Waste, Inc. August 1998 Collection Salt Lake City, UT Central Utah
Big Red Roll Off Inc. August 1998 Collection O'Neill, NE Eastern Nebraska
ABC Waste, Inc. August 1998 Collection Salt Lake City, UT Central Utah
Miller Containers, Inc. July 1998 Collection Salt Lake City, UT Central Utah
Shrader Refuse and Recycling July 1998 Collection Papillion, NE Eastern Nebraska
Service Company
Red Carpet Landfill, Inc. June 1998 Landfill Enid, OK Western Oklahoma
B&B Sanitation, Inc. June 1998 Collection Enid, OK Western Oklahoma
Darlin Equipment, Inc. June 1998 Equipment leasing Enid, OK Western Oklahoma
Oregon Waste Technology June 1998 Collection Brookings, OR Southwestern Oregon
Curry Transfer and Recycling, June 1998 Collection Brookings, OR Southwestern Oregon
Inc.
Contractors' Waste Removal, L.C June 1998 Collection Orem, UT Central Utah
Arrow Sanitary Service, Inc. June 1998 Collection Portland, OR Northwestern Oregon and
Southwestern Washington
T&T Disposal, Inc. May 1998 Collection Gillette, WY Northeastern Wyoming
Sunshine Sanitation, May 1998 Collection Spearfish, SD Western South Dakota
Incorporated
Sowers' Sanitation, Inc. May 1998 Collection Belle Fourche, SD Western South Dakota
Jesse's Disposal April 1998 Collection Gillette, WY Northeastern Wyoming
A-1 Disposal, Inc. April 1998 Collection Gillette, WY Northeastern Wyoming
Hunter Enterprises, Inc. March 1998 Collection Shelley, ID Eastern Idaho
Madera Disposal Services Inc. February 1998 Collection and Madera, CA North Central California
Landfill
Waste Connections of Idaho, January 1998 Collection Idaho Falls, ID Eastern Idaho
Inc.
Fibres International, Inc. September 1997 Collection Issaquah, WA North Central Washington
and Central Oregon
Browning-Ferris Industries of September 1997 Collection Clark County, WA Southwestern Washington
Washington, Inc.
</TABLE>
SERVICES
COMMERCIAL, INDUSTRIAL AND RESIDENTIAL WASTE SERVICES
The Company serves more than 330,000 commercial, industrial and residential
customers. Of these, the Company serves more than 94,100 under G certificates
that grant the Company rights, which are generally perpetual and exclusive, to
provide services within specified areas, more than 28,900 under exclusive
franchise agreements with remaining terms ranging from seven to 18 years, and
more than 129,100 under exclusive municipal contracts with generally shorter
contract terms.
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The Company's commercial and industrial services that are not performed under G
certificates, franchise agreements or municipal contracts are provided under one
to five year service agreements. Fees under these agreements are determined by
such factors as collection frequency, level of service, route density, the type,
volume and weight of the waste collected, type of equipment and containers
furnished, the distance to the disposal or processing facility, the cost of
disposal or processing and prices charged in its markets for similar service.
Collection of larger volumes associated with commercial and industrial waste
streams generally helps improve the Company's operating efficiencies, and
consolidation of these volumes allows the Company to negotiate more favorable
disposal prices. The Company's commercial and industrial customers use portable
containers for storage, enabling the Company to service many customers with
fewer collection vehicles. Commercial and industrial collection vehicles
normally require one operator. The Company provides one to eight cubic yard
containers to commercial customers, 10 to 50 cubic yard containers to industrial
customers, and 30 to 95 gallon carts to residential customers. For an additional
fee, the Company installs stationary compactors that compact waste prior to
collection on the premises of a substantial number of large volume customers.
The Company's residential waste services that are not performed under G
certificates, franchise agreements or municipal contracts are provided under
contracts with homeowners' associations, apartment owners or mobile home park
operators, or on a subscription basis with individual households. Residential
contract fees are based primarily on route density, the frequency and level of
service, the distance to the disposal or processing facility, the cost of
disposal or processing and prices charged in that market for similar services.
Collection fees are paid either by the municipalities from tax revenues or
directly by the residents receiving the services.
TRANSFER STATION SERVICES
The Company has an active program to acquire, develop, own and operate transfer
stations in markets proximate to its operations. Currently, the Company operates
three transfer stations in California, four transfer stations in Nebraska, six
transfer stations in Washington and five transfer stations in Oregon, which
receive, compact, and transfer solid waste to be transported by larger vehicles
to landfills. The Company believes that the transfer stations benefit the
Company by: (i) concentrating the waste stream from a wider area, which
increases the volume of disposal at Company-operated landfills and gives the
Company greater leverage in negotiating for more favorable disposal rates at
other landfills; (ii) improving utilization of collections personnel and
equipment; and (iii) building relationships with municipalities and private
operators that deliver waste, which can lead to additional growth opportunities.
LANDFILLS
The Company operates five Subtitle D landfills: the Fairmead Landfill, the Red
Carpet Landfill, the Butler County Landfill, the Finley-Buttes Regional
Landfill, and the Coalition Landfill. Of these the Company owns the Red Carpet
Landfill, the Butler County Landfill and the Finley-Buttes Regional Landfill.
The Company operates the Fairmead Landfill under an operating agreement with
Madera County. As of March 31, 1999, the Fairmead Landfill consisted of 160
total acres, of which 77 acres were permitted for disposal. As of that date, the
Fairmead Landfill had approximately 2.86 million tons of unused permitted
capacity
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remaining, with approximately 2.04 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 March 31, 1999, the Red Carpet Landfill consisted of 82 total acres, all
of which 40 acres were permitted for disposal. As of that date, the Red Carpet
Landfill had approximately 525,000 tons of unused permitted capacity remaining,
with approximately 1.75 million additional tons of capacity in various stages of
permitting, and was estimated to have a remaining life of 15 years. The Red
Carpet Landfill is currently permitted to accept up to 350 tons per day of
municipal solid waste.
As of March 31, 1999, the Butler County Landfill consisted of 282 total acres,
of which 84 were permitted for disposal. As of that date, the Butler County
Landfill had approximately 2.32 million tons of unused permitted capacity
remaining, with approximately 1.60 million additional tons of capacity in
various stages of permitting, and was estimated to have a remaining life of 25
years.
As of March 31, 1999, the Finley-Buttes Regional Landfill consisted of 1,800
total acres, of which 476 acres were permitted for disposal. As of that date,
the Finley-Buttes Regional Landfill had approximately 65.99 million tons of
unused permitted capacity remaining, with approximately 56.88 million additional
tons of capacity in various stages of permitting, and was estimated to have a
remaining life of 190 years.
The Company operates the Coalition Landfill under an operating agreement with
the Northeast Nebraska Solid Waste Coalition. As of March 31, 1999, the
Coalition Landfill consisted of 160 total acres, had approximately 3.68 million
tons of unused permitted capacity remaining, and was estimated to have a
remaining life of 46 years.
The Company monitors the available permitted in-place disposal capacity of its
landfills on an ongoing basis and evaluates whether to seek to expand this
capacity. In making this evaluation, the Company considers various factors,
including the volume of waste projected to be disposed of at the landfill, the
size of the unpermitted acreage included in the landfill, the likelihood that
the Company will be successful in obtaining the necessary approvals and permits
required for the expansion and the costs that would be involved in developing
the additional capacity. The Company also regularly considers whether it is
advisable, in light of changing market conditions and/or regulatory
requirements, to seek to expand or change the permitted waste streams or to seek
other permit modifications.
The Company seeks to identify solid waste landfill acquisition candidates to
achieve vertical integration in markets where the economic and regulatory
environment makes such acquisitions attractive. The Company believes that in
some markets, acquiring landfills would provide opportunities to vertically
integrate its collection, transfer and disposal operations while improving
operating margins. The Company evaluates landfill candidates by determining,
among other things, the amount of waste that could be diverted to the landfill
in question, whether access to the landfill is economically feasible from the
Company's existing market areas either directly or through transfer stations,
the expected life of the landfill, the potential for expanding the landfill, and
current disposal costs compared to the cost of acquiring the landfill. Where the
acquisition of a landfill is not attractive, the Company pursues long term
disposal contracts with facilities located in proximity to its markets.
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RECYCLING AND OTHER SERVICES
The Company offers municipal, commercial, industrial and residential customers
recycling services for a variety of recyclable materials, including cardboard,
office paper, plastic containers, glass bottles and ferrous and aluminum metals.
The Company operates nine recycling processing facilities and sells other
collected recyclable materials to third parties for processing before resale.
The profits from the Company's resale of recycled materials are often shared
between the Company and the other parties to its recycling contracts. For
example, certain of the Company's municipal recycling contracts in Washington
and Idaho, which were negotiated before the Company acquired those businesses,
specify certain benchmark resale prices for recycled commodities. To the extent
the prices the Company actually receives for the processed recycled commodities
collected under the contract exceed the prices specified in the contract, the
Company shares the excess with the municipality, after recovering any previous
shortfalls resulting from actual market prices falling below the prices
specified in the contract. In an effort to reduce its exposure to commodity
price risk with respect to recycled materials, the Company has adopted a pricing
strategy of charging collection and processing fees for recycling volume
collected from third parties. The Company believes that recycling will continue
to be an important component of local and state solid waste management plans,
due to the public's increasing environmental awareness and expanding regulations
that mandate or encourage recycling.
The Company also provides other waste management services, most of which are
project-based, including transporting and disposing of non-hazardous
contaminated soils and similar materials, transporting special waste products,
including asbestos, and arranging for the transportation of construction and
demolition waste and disposal of soil and special waste products and providing
portable toilet and septic pumping services.
OPERATIONS
The Company is managed on a decentralized basis. This places decision-making
authority close to the customer, enabling the Company to identify customers'
needs quickly and to address those needs in a cost-effective manner. The Company
believes that decentralization provides a low-overhead, highly efficient
operational structure that allows the Company to expand into geographically
contiguous markets and operate in relatively small communities that larger
competitors may not find attractive. The Company believes that this structure
gives the Company a strategic competitive advantage, given the relatively rural
nature of much of the Western U.S., and makes the Company an attractive buyer to
many potential acquisition candidates.
The Company currently delivers its services from 33 operating locations serving
12 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 help
identify acquisition candidates. Once the Company begins an acquisition,
business development managers, under the supervision of district and executive
managers, obtain the permits and other governmental approvals required for the
Company to operate the acquired business, including those related to zoning,
environmental and land use.
The Company's financial management, accounting, management information systems,
environmental compliance, risk management and certain personnel functions are
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centralized and shared among locations to improve productivity, lower operating
costs and stimulate internal growth. The Company has installed a Company-wide
management information system that assists district personnel in making
decisions based on centralized, real-time financial, productivity, maintenance
and customer information. While district management operates with a high degree
of autonomy, the Company's senior officers monitor district operations and
require adherence to the Company's accounting, purchasing, marketing and
internal control policies, particularly with respect to financial matters. The
Company's executive officers regularly review the performance of district
managers and operations.
G CERTIFICATES
The Company performs a substantial portion of its collection business in
Washington under G certificates awarded by the Washington Utilities and
Transportation Commission (the "WUTC"). G certificates apply only to
unincorporated areas of Washington and municipalities that have elected to have
their solid waste collection overseen by the WUTC. G certificates generally
grant the holder the perpetual right to provide specified solid waste collection
and transportation services in a specified territory. The WUTC has repeatedly
determined that, in enacting the statute authorizing G certificates, the
Washington Legislature intended to favor grants of exclusive, rather than
overlapping, service rights for conventional solid waste services. Accordingly,
most G certificates currently grant exclusive solid waste collection and
transportation rights for conventional solid waste services in their specified
territories.
The WUTC and the Washington Legislature have generally construed G certificates
as conferring vested property rights that may be defeated, diminished or
cancelled only upon the occurrence of specified events of default, the
demonstrated lack of fitness of the certificate holder, or municipalities'
annexation of territory covered by a certificate. Thus, a certificate holder is
entitled to due process in challenging any action that affects its rights. In
addition, legislation passed in 1997 requires a municipality that annexes
territory covered by a G certificate either to grant the certificate holder an
exclusive franchise, generally with a minimum term of seven years, to continue
to provide services in the affected area, or to negotiate with the certificate
holder some other compensation for the collection rights in the affected area.
The statute expressly permits the certificate holder to sue the annexing
municipality for measurable damages that exceed the value of a seven-year
franchise agreement to provide services in the affected area. Under one of the
contracts with a municipality in Washington acquired by a predecessor of the
Company, the predecessor purported to waive its rights to compensation or
damages under the statute in return for the right to service any current or
prospectively annexed areas formerly covered by its G certificate.
In addition to awarding G certificates, the WUTC is required by statute to
establish just, reasonable and compensatory rates to customers of regulated
solid waste collection companies. The WUTC is charged with balancing the needs
of service providers to earn fair and sufficient returns on their investments in
plant and equipment against the needs of commercial and residential customers to
receive adequate and reasonably priced services. Over the past decade, the WUTC
has used a ratemaking methodology known as the "Lurito-Gallagher" method. This
method calculates rates based on the income statements and balance sheets of
each service provider, with the goal of establishing rates that reflect the
costs of providing service and that motivate service providers to invest in
equipment
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that improves operating efficiency in a cost-effective manner. The
Lurito-Gallagher rate-setting methodology was adjusted in the early 1990's to
better reflect the costs of providing recycling services, by accounting for
providers' increasing use of automated equipment and adjusting for the
cyclicality of the secondary recyclables markets. This has often resulted in
more frequent rate adjustments in response to material cost shifts.
SALES AND MARKETING
In most of the Company's existing markets, waste collection, transfer and
disposal services are provided to municipalities and governmental authorities
under exclusive franchise agreements, municipal contracts and G certificates;
service providers do not contract directly with individual customers. In
addition, because the Company has grown to date primarily through acquisitions,
the Company has generally assumed existing franchise agreements, municipal
contracts and G certificates from the acquired companies, rather than obtaining
new contracts. For these reasons, the Company's sales and marketing efforts to
date have been narrowly focused. The Company expects to add sales and marketing
personnel as necessary to: (i) solicit new customers in markets where it is not
the exclusive provider of solid waste services; (ii) expand its presence into
areas adjacent to or contiguous with its existing markets; and (iii) market
additional services to existing customers.
COMPETITION
The solid waste services industry is highly competitive and fragmented and
requires substantial labor and capital resources. The industry presently
includes four large national waste companies: Allied Waste Industries, Inc.,
(which has announced a proposed purchase of Browning-Ferris 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 the Company competes or
will likely compete are served by one or more large, national solid waste
companies, as well as by numerous regional and local solid waste companies of
varying sizes and resources, some of which have accumulated substantial goodwill
in their markets. The Company also competes with operators of alternative
disposal facilities, including incinerators, and with counties, municipalities,
and solid waste districts that maintain their own waste collection and disposal
operations. Public sector operations may have financial advantages over the
Company, because of their access to user fees and similar charges, tax revenues
and tax-exempt financing.
The Company competes for collection, transfer and disposal volume based
primarily on the price and quality of its services. From time to time,
competitors may reduce the price of their services in an effort to expand their
market shares or service areas or to win competitively bid municipal contracts.
These practices may cause the Company to reduce the price of its services or, if
it elects not to do so, to lose business. The Company provides a substantial
portion of its residential, commercial and industrial collection services under
exclusive franchise and municipal contracts and certificates, some of which are
subject to periodic competitive bidding. The Company provides the balance of its
services under subscription agreements with individual households and one to
five year service contracts with commercial and industrial customers.
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Intense competition exists not only for collection, transfer and disposal
volume, but also for acquisition candidates. The Company generally competes for
acquisition candidates with publicly owned regional and large national waste
management companies.
REGULATION
INTRODUCTION
The Company'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
the Company are administered by the EPA and other federal, state and local
environmental, zoning, health and safety agencies. The WUTC regulates the
portion of the Company's collection business in Washington performed under G
certificates, which generally grant the Company perpetual and exclusive
collection rights in certain areas. The Company is currently in substantial
compliance with applicable federal, state and local environmental laws, permits,
orders and regulations. The Company does not currently anticipate any material
environmental costs necessary to bring its operations into compliance (although
there can be no assurance in this regard). The Company anticipates that
regulation, legislation and regulatory enforcement actions related to the solid
waste services industry will continue to increase. The Company attempts to
anticipate future regulatory requirements and to plan in advance as necessary to
comply with them.
The principal federal, state and local statutes and regulations that apply to
the Company's operations are described below. All of the federal statutes
described below contain provisions that authorize, under certain circumstances,
lawsuits by private citizens to enforce the provisions of the statutes. In
addition to a penalty award by the United States, some of those statutes
authorize an award of attorneys' fees to parties that successfully bring 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
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and response standards, as well as requirements for manifesting, record keeping
and reporting, corrective action, facility closure, post-closure and financial
responsibility. Most states have promulgated regulations modeled on some or all
of the Subtitle C provisions issued by the EPA. Some state regulations impose
different, additional and more stringent obligations, and may regulate certain
materials as hazardous wastes that are not so regulated under the federal
Subtitle C Regulations. From the date of inception through April 19, 1999, the
Company did not, to its knowledge, transport hazardous wastes under
circumstances that would subject the Company to hazardous waste regulations
under RCRA. Some of the Company's ancillary operations (e.g., vehicle
maintenance operations) may generate hazardous wastes. The Company manages these
wastes 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 the Company operates or in which
it may operate in the future have adopted regulations or programs as stringent
as, or more stringent than, the Subtitle D Regulations.
RCRA also regulates underground storage of petroleum and other regulated
materials. RCRA requires registration, compliance with technical standards for
tanks, release detection and reporting, and corrective action, among other
things. Certain of the Company'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 the Company's transfer stations or run-off
or collected leachate from the Company's owned or operated landfills is
discharged into streams, rivers or other surface waters, the Clean Water Act
would require the Company to apply for and obtain a discharge permit, conduct
sampling and monitoring and, under certain circumstances, reduce the quantity of
pollutants in such discharge. Also, virtually all landfills are required to
comply with the EPA's storm water regulations issued in November 1990, which are
designed to prevent contaminated landfill storm water runoff from flowing into
surface
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waters. The Company believes that its facilities comply in all material respects
with the Clean Water Act requirements. Various states in which the Company
operates or in which it may operate in the future have been delegated authority
to implement the Clean Water Act permitting requirements, and some of these
states have adopted regulations that are more stringent than the federal
requirements. For example, states often require permits for discharges to ground
water as well as surface water.
THE COMPREHENSIVE ENVIRONMENTAL RESPONSE, COMPENSATION, AND
LIABILITY ACT OF 1980 ("CERCLA")
CERCLA established a regulatory and remedial program intended to provide for the
investigation and cleanup of facilities where or from which a release of any
hazardous substance into the environment has occurred or is threatened. CERCLA's
primary mechanism for remedying such problems is to impose strict joint and
several liability for cleanup of facilities on current owners and operators of
the site, former owners and operators of the site at the time of the disposal of
the hazardous substances, any person who arranges for the transportation,
disposal or treatment of the hazardous substances, and the transporters who
select the disposal and treatment facilities. CERCLA also imposes liability for
the cost of evaluating and remedying any damage to natural resources. The costs
of CERCLA investigation and cleanup can be very substantial. Liability under
CERCLA does not depend on the existence or disposal of "hazardous waste" as
defined by RCRA; it can also be based on the existence of even very small
amounts of the more than 700 "hazardous substances" listed by the EPA, many of
which can be found in household waste. In addition, the definition of "hazardous
substances" in CERCLA incorporates substances designated as hazardous or toxic
under the federal Clean Water Act, Clear Air Act and Toxic Substances Control
Act. If the Company were found to be a responsible party for a CERCLA cleanup,
the enforcing agency could hold the Company, or any other generator, transporter
or the owner or operator of the contaminated facility, responsible for all
investigative and remedial costs, even if others were also liable. CERCLA also
authorizes the imposition of a lien in favor of the United States on all real
property subject to, or affected by, a remedial action for all costs for which a
party is liable. CERCLA gives a responsible party the right to bring a
contribution action against other responsible parties for their allocable shares
of investigative and remedial costs. The Company's ability to obtain
reimbursement from others for their allocable shares of such costs would be
limited by its 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 volume 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
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requirements but may 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 the Company's operations,
including standards concerning notices of hazards, safety in excavation and
demolition work, the handling of asbestos and asbestos-containing materials, and
worker training and emergency response programs.
FLOW CONTROL/INTERSTATE WASTE RESTRICTIONS
Certain permits and approvals, as well as certain state and local regulations,
may limit a landfill 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 the Company operates landfills could
limit or prohibit the importation of out-of-state waste or direct that wastes be
handled at specified facilities. Such state actions could adversely affect the
Company's landfills. These restrictions could also result in higher disposal
costs for the Company's collection operations. If the Company were unable to
pass such higher costs through to its customers, its business, financial
condition and operating results could be adversely affected.
Certain state and local jurisdictions may also seek to enforce flow control
restrictions through local legislation or contractually. In certain cases, the
Company may elect not to challenge such restrictions. These restrictions could
reduce the volume of waste going to landfills in certain areas, which may
adversely affect the Company's ability to operate its landfills at their full
capacity and/or reduce the prices that the Company can charge for landfill
disposal services. These restrictions may also result in higher disposal costs
for the Company's collection operations. If the Company were unable to pass such
higher costs through to its customers, its business, financial condition and
operating results could be adversely affected.
STATE AND LOCAL REGULATION
Each state in which the Company now operates or may operate in the future has
laws and regulations governing the generation, storage, treatment, handling,
transportation and disposal of solid waste, occupational safety and health,
water and air pollution and, in most cases, the siting, design, operation,
maintenance, closure and post-closure maintenance of landfills and transfer
stations. State and local permits and approval for these operations
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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 the Company's 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
prevent the Company from operating its facilities at their full capacity.
Some state and local authorities enforce certain federal laws in addition to
state and local laws and regulations. For example, in some states, RCRA, the OSH
Act, parts of the Clean Air Act and parts of the Clean Water Act are enforced by
local or state authorities instead of by the EPA, and in some states those laws
are enforced jointly by state or local and federal authorities.
PUBLIC UTILITY REGULATION
In many states, public authorities regulate the rates that landfill operators
may charge. The rates that the Company may charge at the Fairmead Landfill for
the disposal of municipal solid waste are regulated by the Madera County Board
of Supervisors. The adoption of rate regulation or the reduction of current
rates in states in which the Company owns or operates landfills could adversely
affect the Company's business, financial condition and operating results.
Solid waste collection services in all unincorporated areas of Washington and in
electing municipalities in Washington are provided under G certificates awarded
by the Washington Utilities and Transportation Commission. The WUTC also sets
rates for regulated solid waste collection services in Washington.
RISK MANAGEMENT, INSURANCE AND PERFORMANCE BONDS
The Company maintains an environmental and other risk management programs
appropriate for its business. The Company's environmental risk management
program includes evaluating existing facilities and potential acquisitions for
environmental law compliance. The Company does not presently expect
environmental compliance costs to
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increase above current levels, but it cannot predict whether future acquisitions
will cause such costs to increase. The Company also maintains a worker safety
program that encourages safe practices in the workplace. Operating practices at
all Company operations emphasize minimizing the possibility of environmental
contamination and litigation. The Company's facilities comply in all material
respects with applicable federal and state regulations.
The Company carries a broad range of insurance, which its management considers
adequate to protect the Company's assets and operations. The coverage includes
general liability, comprehensive property damage, workers' compensation and
other coverage customary in the industry. These policies generally exclude
coverage for damages associated with environmental conditions. Because of the
limited availability and high cost of environmental impairment liability
insurance, and in light of the Company's limited landfill operations, the
Company has not obtained such coverage. If the Company were to incur liability
for environmental cleanups, corrective action or damage, its financial condition
could be materially and adversely affected. The Company will continue to
investigate the possibility of obtaining environmental impairment liability
insurance, particularly if it acquires or operates additional landfills. The
Company believes that most other landfill operators do not carry such insurance.
Municipal solid waste collection contracts may require performance bonds or
other means of financial assurance to secure contractual performance. Certain
environmental regulations also require demonstrated financial assurance to meet
closure and post-closure requirements for landfills. The Company has not
experienced difficulty in obtaining performance bonds or letters of credit for
its current operations. At April 15, 1999, the Company had provided customers
and various regulatory authorities with surety bonds and letters of credit in
the aggregate amount of approximately $4.7 million to secure its obligations.
The Company's credit facility provides for the issuance of letters of credit in
an amount up to $20 million, but any letters of credit issued reduce the
availability of borrowings for acquisitions and other general corporate
purposes. If the Company were unable to obtain surety bonds or letters of credit
in sufficient amounts or at acceptable rates, it could be precluded from
entering into additional municipal solid waste collection contracts or obtaining
or retaining landfill operating permits.
PROPERTY AND EQUIPMENT
As of April 15, 1999, the Company owned and operated 33 collection operations,
11 transfer stations and three Subtitle D landfills and operated an additional
seven transfer stations, two Subtitle D landfills and nine recycling facilities.
The Company leases various offices and facilities, including its corporate
offices in Roseville, California. The real estate owned by the Company is not
subject to material encumbrances. The Company owns various equipment, including
waste collection and transportation vehicles, related support vehicles, carts,
containers, and heavy equipment used in landfill operations. The Company
believes that its existing facilities and equipment are generally adequate for
its current operations. However, the Company expects to make additional
investments in property and equipment for expansion and replacement of assets
and in connection with future acquisitions.
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EMPLOYEES
At April 15, 1999, the Company employed approximately 965 full-time employees,
including approximately 65 persons classified as professionals or managers,
approximately 775 employees involved in collection, transfer, disposal and
recycling operations, and approximately 125 sales, clerical, data processing or
other administrative employees.
Approximately 67 drivers and mechanics at the Company's Vancouver, Washington
operation are represented by the Teamsters Union, with which Browning-Ferris
Industries of Washington, Inc., the Company's predecessor in Vancouver, entered
a four-year collective bargaining agreement in January 1997. Approximately 11
drivers at Arrow are currently represented by the Teamsters Union, with which
Arrow entered a three-year collective bargaining agreement in March 1998.
Approximately 46 drivers at Murrey's Disposal Company and American Disposal
Company are represented by the Teamsters Union, with which those companies
entered into a three-year collective bargaining agreement in June 1996. The
Company is not aware of any other organizational efforts among its employees and
believes that its relations with its employees are good.
LEGAL PROCEEDINGS
The Company is a party to various legal proceedings in the ordinary course of
business and as a result of the extensive governmental regulation of the solid
waste industry. Management does not believe that these proceedings, either
individually or in the aggregate, are likely to have a material adverse effect
on the Company's business, financial condition, operating results or cash flows.
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<PAGE> 56
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information concerning the Company's
executive officers and directors as of April 15, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Ronald J. President, Chief Executive Officer and
Mittelstaedt(1)(2)......... 35 Chairman
Steven F. Bouck.............. 42 Executive Vice President and Chief
Financial Officer
Eugene V. Dupreau............ 51 Vice President -- Madera; Director
Charles B. Youngclaus........ 58 Vice President -- Madera; Advisory Director
Darrell W. Chambliss......... 34 Vice President -- Operations; Secretary
Michael R. Foos.............. 33 Vice President and Corporate Controller
Eric J. Moser................ 32 Treasurer and Assistant Corporate
Controller
David M. Hall................ 41 Vice President -- Business Development
Irmgard R. Wilcox............ 56 Vice President -- Finance -- Northern
Washington; Director
Michael W. Harlan(1)(2)(3)... 37 Director
William J.
Razzouk(1)(2)(3)........... 51 Director
</TABLE>
- -------------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
Ronald J. Mittelstaedt has been President, Chief Executive Officer and a
director of the Company since it was formed, and was elected Chairman in January
1998. He also served as a consultant to the Company in August and September
1997. Mr. Mittelstaedt has more than ten years of experience in the solid waste
industry. He served as a consultant to United Waste Systems, Inc., with the
title of Executive Vice President, from January 1997 to August 1997, where he
was responsible for corporate development for all states west of Colorado. As
Regional Vice President of USA Waste Services, Inc. (including Sanifill, Inc.,
which was acquired by USA Waste Services, Inc.) from November 1993 to January
1997, he was responsible for all operations in 16 states and Canada. Mr.
Mittelstaedt held various positions at Browning-Ferris Industries, Inc. from
August 1987 to November 1993, most recently as Division Vice President in
northern California, overseeing the San Jose market. Previously he was the
District Manager responsible for BFI's operations in Sacramento and the
surrounding areas. He holds a B.S. in Finance from the University of California
at Santa Barbara.
Steven F. Bouck has been Executive Vice President and Chief Financial Officer of
the Company since February 1998. Mr. Bouck held various positions with First
Analysis Corporation from 1986 to 1998, including most recently as Managing
Director coordinating corporate finance. In that capacity, he provided merger
and acquisition advisory services to companies in the environmental industry.
Mr. Bouck was also responsible for assisting in investing venture capital funds
focussed on the environmental industry that were managed by First Analysis. In
connection with those investments, he served on the boards of directors of
several companies. While at First Analysis, Mr. Bouck also provided analytical
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<PAGE> 57
research coverage of a number of publicly traded environmental services
companies. Mr. Bouck holds B.S. and M.S. degrees in mechanical engineering from
Rensselaer Polytechnic Institute and an M.B.A. in Finance from the Wharton
School. He has been a Chartered Financial Analyst since 1990.
Eugene V. Dupreau has been Vice President -- Madera and a director of the
Company since February 23, 1998. Mr. Dupreau served as President and a director
of Madera Disposal Systems, Inc. beginning in 1981 and 1985, respectively, and
held both positions until the Company acquired Madera in 1998. Mr. Dupreau holds
a B.S. in Business Administration from Fresno State University and has completed
advanced coursework in waste management. He serves as a director of several
civic and charitable organizations in Madera County.
Charles B. Youngclaus has been Vice President -- Madera and an advisory director
of the Company since February 23, 1998. Mr. Youngclaus founded Madera Disposal
Systems, Inc. in 1981 and was its Chief Operating Officer and Vice President
before its acquisition by the Company in 1998. Mr. Youngclaus owned and operated
Madera's predecessor company, Madera County Disposal, from 1965 to 1981. Mr.
Youngclaus holds a B.S. from Fresno State University and has completed advanced
coursework in waste management, including certification in clay liner
construction by the University of Texas in 1992. Mr. Youngclaus is a Board
Member of the California Refuse Removal Council and is incoming Treasurer of the
Northern California chapter.
Darrell W. Chambliss has been Vice President -- Operations and Secretary of the
Company since October 1, 1997. Mr. Chambliss held various management positions
at USA Waste Services, Inc. (including Sanifill, Inc. and United Waste, Inc.,
both of which were acquired by USA Waste Services, Inc.) from April 1995 to
September 1997, including most recently Division Manager in Corning, California,
where he was responsible for the operations of 19 operating companies as well as
supervising and integrating acquisitions. From July 1989 to April 1995, he held
various management positions with Browning-Ferris Industries, Inc., including
serving as Assistant District Manager in San Jose, California, where he was
responsible for a significant hauling operation, and serving as District Manager
in Tucson, Arizona for more than three years. Mr. Chambliss holds a B.S. in
Business Administration from the University of Arkansas.
Michael R. Foos has been Vice President and Corporate Controller of the Company
since October 1, 1997. Mr. Foos served as Division Controller of USA Waste
Services, Inc. (including Sanifill, Inc., which was acquired by USA Waste
Services, Inc.) from October 1996 to September 1997, where he was responsible
for financial compilation and reporting and acquisition due diligence for a
seven-state region. Mr. Foos served as Assistant Regional Controller at USA
Waste Services, Inc. from August 1995 to September 1996, where he was
responsible for internal financial reporting for operations in six states and
Canada. Mr. Foos also served as District Controller for Waste Management, Inc.
from February 1990 to July 1995, and was a member of the audit staff of Deloitte
& Touche from 1987 to 1990. Mr. Foos holds a B.S. in Accounting from Ferris
State University.
David M. Hall has been Vice President -- Business Development since August 1,
1998. Mr. Hall has over twelve years experience in the solid waste industry with
extensive operating and marketing experience in the Western U.S. From October,
1995 to July, 1998, Mr. Hall was the Divisional Vice President of USA Waste
Services, Inc., Rocky Mountain Division (including for Sanifill, Inc. which was
acquired by USA Waste
57
<PAGE> 58
Services, Inc.). In that position, he oversaw all operations and business
development in six Rocky Mountain states. Prior to Sanifill, Mr. Hall held
various management positions with BFI from October, 1986 to October, 1995,
including Vice President of Sales for the Western United States. Prior to the
solid waste industry, Mr. Hall was employed from 1979 to 1986 in a variety of
sales and marketing management positions in the high technology sector. Mr. Hall
received a BS degree in Management and Marketing in 1979 from SW Missouri State
University.
Eric J. Moser has been the Company's Treasurer and Assistant Corporate
Controller since October 1, 1997. From August 1995 to September 1997, Mr. Moser
held various finance positions at USA Waste Services, Inc. (including Sanifill,
Inc., which was acquired by USA Waste Services, Inc.), most recently as
Controller of the Ohio Division, where he was responsible for internal financial
compilation and reporting and acquisition due diligence. Previously Mr. Moser
was Controller of the Michigan Division of USA Waste Services, Inc., where he
was responsible for internal financial reporting. Mr. Moser served as Controller
for Waste Management, Inc. from June 1993 to August 1995, where he was
responsible for internal financial reporting for a hauling company, landfill and
transfer station. Mr. Moser holds a B.S. in Accounting from Illinois State
University.
Irmgard R. Wilcox has been Vice President -- Finance -- Northern Washington of
the Company since January 19, 1999, and a director of the Company since February
1999. Ms. Wilcox served as Chief Financial Officer, Secretary and Treasurer of
the Murrey Companies from 1982 until they merged with the Company in 1999. Ms.
Wilcox joined the Murrey Companies in 1975. She holds a B.A. in Business
Administration from Pacific Lutheran University with a concentration in
accounting.
Michael W. Harlan has been a director of the Company since January 30, 1998. He
is Senior Vice President, Chief Financial Officer and a director of U.S.
Concrete, Inc., a company focused on acquiring businesses in the ready-mix
concrete industry. From November 1997 to January 30, 1998, Mr. Harlan served as
a consultant to the Company on various financial matters. From March 1997 to
August 1998, Mr. Harlan was Vice President and Chief Financial Officer of Apple
Orthodontix, Inc., a publicly traded company that provides practice management
services to orthodontic practices in the U.S. and Canada. From April 1991 to
December 1996, Mr. Harlan held various positions in the finance and acquisition
departments of USA Waste Services, Inc. (including Sanifill, Inc., which was
acquired by USA Waste Services, Inc.), including serving as Treasurer and
Assistant Secretary beginning in September 1993. From May 1982 to April 1991,
Mr. Harlan held various positions in the tax and corporate financial consulting
services division of Arthur Andersen LLP, where he was a Manager since July
1986. Mr. Harlan is a Certified Public Accountant and holds a B.A. from the
University of Mississippi.
William J. Razzouk has been a director of the Company since January 30, 1998.
Since September 1998, Mr. Razzouk has been Chairman and Chief Executive Officer
of PlanetRx, an e-commerce start-up focused on healthcare and sales of
prescription and over-the-counter medicines, health and beauty products and
medical supplies. From April 1998 until September 1998, Mr. Razzouk owned a
management consulting business and an investment company that focused on
identifying strategic acquisitions. From September 1997 until April 1998, he was
also the President, Chief Operating Officer and a director of Storage USA, Inc.,
a publicly traded real estate investment trust that owns and operates more than
350 mini storage warehouses. He served as the President and Chief Operating
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<PAGE> 59
Officer of America Online from February 1996 to June 1996. From 1983 to 1996,
Mr. Razzouk held various management positions at Federal Express Corporation,
most recently as Executive Vice President, World Wide Customer Operations, with
full worldwide profit and loss responsibility. Mr. Razzouk previously held
management positions at ROLM Corporation, Philips Electronics and Xerox
Corporation. He is a member of the Board of Directors of Fritz Companies, Inc.
and previously was a director of Sanifill, Inc., Cordis Corp. and La Quinta
Motor Inns. He holds a Bachelor of Journalism degree from the University of
Georgia.
CLASSIFICATION OF BOARD OF DIRECTORS
The Board of Directors is divided into three classes. The term of office of the
first class (currently comprised of Eugene V. Dupreau) will expire at the annual
meeting of stockholders following the fiscal year ending December 31, 1998. The
term of office of the second class (currently comprised of Michael W. Harlan and
William J. Razzouk) will expire at the annual meeting of stockholders following
the fiscal year ending December 31, 1999. The term of office of the third class
(currently comprised of Ronald J. Mittelstaedt and Irmgard R. Wilcox) will
expire at the annual meeting of stockholders following the fiscal year ending
December 31, 2000. At each annual meeting, stockholders will elect successors to
the directors of the class whose term expires at such meeting, to serve for
three-year terms and until their successors are elected and qualified. See
"Description of Capital Stock -- Certain Charter and By-Law
Provisions -- Classified Board of Directors."
COMMITTEES OF THE BOARD
The Board of Directors has established an Executive Committee and has authorized
an Audit Committee and a Compensation Committee. A majority of the members of
the Executive Committee are, and both members of each of the Audit and
Compensation Committees are, independent directors who are not employees of the
Company or one of its subsidiaries.
COMPENSATION OF DIRECTORS
Directors who are officers or employees of the Company do not currently receive
any compensation for attending meetings of the Board of Directors. Each
independent director receives a fee of $1,500 for attending each Board meeting
and each committee meeting (unless held on the same day as the full Board
meeting), in addition to reimbursement of reasonable expenses.
Each independent director who has not been an employee of the Company at any
time during the 12 months preceding his initial election and appointment to the
Board is granted an option to purchase 15,000 shares of the Company's Common
Stock at the time of his or her initial election or appointment. The Company has
granted to each of Messrs. Harlan and Razzouk options to purchase 15,000 shares
of Common Stock at $3.00 per share, exercisable on October 1, 1998.
The Company grants each independent director, on February 1 of each year during
which such person serves on the Board, an option to purchase 7,500 shares of the
Company's Common Stock. All such options have an exercise price equal to the
fair market value of the Common Stock on the grant date, vest in full on the
grant date, and expire upon the earlier to occur of ten years after the grant
date or one year after the director ceases to be
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<PAGE> 60
a member of the Board. Effective February 1, 1999, the Company granted to each
of Messrs. Harlan and Razzouk immediately exercisable options to purchase 7,500
shares of Common Stock at $17.9375 per share.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION INFORMATION
The Company was incorporated in September 1997. The following table contains
information about the annual and long-term compensation earned in 1997 and 1998
by the 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. The Chief Executive
Officer has been compensated in accordance with the terms of his Employment
Agreement described below.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION SHARES
ANNUAL COMPENSATION -------------------- UNDERLYING
-------------------------- RESTRICTED OPTIONS/WARRANTS ALL OTHER
TERM 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 -- -- 200,000 $10,000
Ronald J.
Mittelstaedt....... 1998 176,577 100,000 $10,254 -- -- --
Steven F. Bouck...... 1998 92,887 115,008 -- -- 250,000 --
Darrell W.
Chambliss.......... 1998 89,972 89,322 -- -- -- --
Michael R. Foos...... 1998 89,809 71,788 -- -- -- --
Eric J. Moser........ 1998 74,115 45,563 -- -- -- --
</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 the Company's
formation.
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 the Company's Common Stock. No options or warrants were
granted to Messrs. Mittelstaedt, Chambliss, Foos or Moser in 1998.
1998 OPTION GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SHARES % OF TOTAL STOCK PRICE
UNDERLYING OPTIONS AND APPRECIATION FOR
OPTIONS WARRANT OPTION/WARRANT
AND GRANTED TO TERM(3)
NAME OF WARRANT EMPLOYEES IN EXERCISE PRICE EXPIRATION -----------------------
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 an additional 33% on
October 1, 1999 and 34% on October 1, 2000.
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<PAGE> 61
(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 the named executive
officer could realize on exercise of options and warrant immediately before
they expire, assuming that the Company's Common Stock appreciates at 5% or
10% annually. These amounts do not take into account taxes and expenses that
may be payable on such exercise. The amount actually realized will depend on
the price of the Common Stock when the options or warrants are exercised,
which may be before the term expires. The Commission requires the table to
reflect 5% and 10% annualized rates of stock price appreciation; the Company
does not project those rates. The Common Stock may not appreciate at those
rates.
Option and Warrant Values. The following table shows the value of the named
executive officers' exercises of options 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 UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AND IN-THE-MONEY OPTIONS AND
WARRANT AT WARRANT AT
SHARES DECEMBER 31, 1998 DECEMBER 31, 1998(1)
ACQUIRED VALUE ---------------------------- ----------------------------
ON 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 Common Stock's closing price of $18.375 on the Nasdaq National
Market on December 31, 1998.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Steven F. Bouck, Eugene
V. Dupreau, Charles B. Youngclaus, Darrell W. Chambliss, Michael R. Foos, Eric
J. Moser and David M. Hall. Each agreement has a three-year term.
The Company entered into an employment agreement with Ronald J. Mittelstaedt,
the President and the Chief Executive Officer, on October 1, 1997. The initial
annual base salary is $170,000. Mr. Mittelstaedt's base salary was adjusted to
$200,000 on October 1, 1998. Mr. Mittelstaedt is also entitled to a performance
bonus of up to 100% of his annual base salary.
The agreement has an initial five-year term, and then automatically renews for
additional successive one-year terms unless terminated earlier upon written
notice of either Mr. Mittelstaedt or the Company or extended further by the
Board. The Company or Mr. Mittelstaedt may terminate the agreement with or
without cause at any time. If the Company terminates the agreement without cause
(as defined in the agreement) or if Mr. Mittelstaedt terminates the agreement
for good reason (as defined in the agreement), the Company is required to make
certain severance payments, and all of Mr. Mittelstaedt's unvested options,
warrants and rights relating to capital stock of the Company will immediately
vest. A change of control of the Company (as defined in the agreement) is
generally treated as a termination of Mr. Mittelstaedt without cause.
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<PAGE> 62
Under the employment agreement, the Company sold Mr. Mittelstaedt 617,500 shares
of the Company's Common Stock for $0.01 per share and 357,143 shares of the
Company's Series A Preferred Stock for $1,000,000. Mr. Mittelstaedt may
recommend nominees for election to the Company's Board of Directors. If the
Board has five or fewer members, Mr. Mittelstaedt may recommend two nominees,
and if it consists of more than five members, he may recommend three nominees.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The full Board of Directors served as the compensation committee of the Board
during 1997. When the employment agreement with Mr. Mittelstaedt was approved by
the Board of Directors, Mr. Mittelstaedt was one of three members of the Board
of Directors. The Compensation Committee was appointed in 1998, and Mr.
Mittelstaedt served on that committee for the remainder of the year. He is no
longer a member of the Compensation Committee. No executive officer of the
Company served as a director or member of the compensation committee of another
entity, one of whose executive officers served as a director or member of the
Compensation Committee of the Company.
1997 STOCK OPTION PLAN
The 1997 Stock Option Plan (the "Stock Option Plan") was adopted by the Board of
Directors effective as of October 1, 1997, and was approved by the stockholders
on March 12, 1998, and amended on January 19, 1999. The Stock Option Plan is
intended to provide employees, consultants and directors with additional
incentives by increasing their proprietary interests in the Company. Under the
Stock Option Plan, the Company may grant options with respect to a maximum of
12% of the shares of Waste Connections Common Stock outstanding at any given
time. As of April 15, 1999, the Company had outstanding options to purchase
1,420,447 shares of Common Stock at a weighted average exercise price of $10.99
per share.
The Compensation Committee of the Board of Directors currently administers the
Stock Option Plan. The administrator of the Stock Option Plan determines the
employees, consultants and directors to whom options are granted (the
"Optionees"), the type, size and term of the options, the grant date, the
expiration date, the vesting schedule and other terms and conditions of the
options.
The Stock Option Plan provides for the grant of incentive stock options ("ISOs")
as defined in section 422 of the Internal Revenue Code, as amended, and
nonqualified stock options. Only employees of the Company may receive ISOs. The
aggregate fair market value, as of the grant date, of the Common Stock subject
to ISOs that become exercisable by any employee during any calendar year may not
exceed $100,000. Options generally become exercisable in installments pursuant
to a vesting schedule set forth in the option agreement. No option may be
granted after September 30, 2007. No option will remain exercisable later than
10 years after the grant date (or five years in the case of ISOs granted to
Optionees owning more than 10% of the total combined voting power of all classes
of the Company's outstanding capital stock (a "Ten Percent Stockholder")). The
exercise price of ISOs granted under the Stock Option Plan must be at least the
fair market value of a share of Common Stock on the grant date (or 110% of such
fair market value, in the case of ISOs granted to Ten Percent Stockholders).
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<PAGE> 63
If an Optionee with outstanding options retires or becomes disabled and does not
die within the three months after retirement or disability, the Optionee may
exercise his or her options, but generally only within the period ending on the
earlier of: (i) six months after retirement or disability; or (ii) the
expiration of the option set forth in the option agreement. If the Optionee does
not exercise his or her options within that time period, the options terminate,
and the shares of Common Stock subject to the options become available for
issuance under the Stock Option Plan. If the Optionee ceases to be an employee,
consultant or director of the Company other than because of retirement, death or
disability, his or her options generally terminate on the date such relationship
terminates, and the shares of Common Stock subject to the options become
available for issuance under the Stock Option Plan. Each option agreement may
give the Company the right to repurchase shares acquired by an Optionee under
the Stock Option Plan upon termination of the Optionee.
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<PAGE> 64
CERTAIN TRANSACTIONS
INITIAL FUNDING
In September and October 1997, the Company sold 2,300,000 shares of Common Stock
at $0.01 per share and 2,499,998 shares of Series A Preferred Stock at $2.80 per
share to 19 accredited investors, including certain officers and directors of
the Company, in a private placement. The sales were made in accordance with
Regulation D under the Securities Act of 1933, as amended (the "Securities
Act"). The investors included the following officers and directors of the
Company, their immediate family members, and entities controlled by them:
Mittelstaedt Family Trust dated 6/18/97 (trustee is Ronald J. Mittelstaedt,
President, Chief Executive Officer and Chairman): 357,143 shares of Series A
Preferred for $1,000,000 and 617,500 shares of Common Stock for $6,175;
J. Bradford Bishop (former director; resigned January 30, 1998): 678,750 shares
of Common Stock for $6,787.50;
James N. Cutler, Jr. (former director; resigned January 30, 1998): 678,750
shares of Common Stock for $6,787.50;
Bishop-Cutler L.L.C. (controlled by former directors J. Bradford Bishop and
James N. Cutler, Jr.): 339,285 shares of Series A Preferred Stock for $950,000;
Frank W. Cutler (brother of former director James N. Cutler, Jr.): 142,857
shares of Series A Preferred Stock for $400,000 and 275,000 shares of Common
Stock for $2,750;
Darrell W. Chambliss (Vice President -- Operations): 20,000 shares of Common
Stock for $200;
Michael R. Foos (Vice President and Corporate Controller): 20,000 shares of
Common Stock for $200;
Eric J. Moser (Treasurer and Assistant Corporate Controller): 10,000 shares of
Common Stock for $100.
OPTIONS AND WARRANTS TO MANAGEMENT GROUP
On October 1, 1997, Darrell W. Chambliss, Michael R. Foos and Eric J. Moser were
granted options to purchase 150,000, 150,000 and 85,000 shares, respectively, of
Common Stock, pursuant to their respective employment agreements with the
Company.
On December 15, 1997, each of then directors James N. Cutler and J. Bradford
Bishop and Board consultant Frank W. Cutler was granted a warrant to purchase
247,000 shares of Common Stock at an exercise price of $2.80 per share. Messrs.
Cutler and Bishop resigned as directors on January 30, 1998, and Frank W.
Cutler's consulting relationship with the Board terminated on that date. On
December 15, 1997, Ronald J. Mittelstaedt was granted a warrant to purchase
100,000 shares of Common Stock at an exercise price of $2.80 per share and an
option to purchase 100,000 shares of Common Stock at an exercise price of $2.80
per share. All of the above warrants and options are currently exercisable,
except for the option to purchase 100,000 shares granted to Mr. Mittelstaedt,
one-third of which becomes exercisable on each of October 1, 1998, October 1,
1999, and October 1, 2000.
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<PAGE> 65
On December 15, 1997, Michael W. Harlan was granted a warrant to purchase 5,000
shares of Common Stock at an exercise price of $2.80 per share, exercisable on
October 1, 1998. On January 30, 1998, Mr. Harlan and William J. Razzouk were
each granted an option to purchase 15,000 shares of Common Stock at an exercise
price of $3.00 per share, exercisable on October 1, 1998.
On February 1, 1998, Steven F. Bouck was granted options to purchase 200,000
shares of Common Stock, pursuant to his employment agreement with the Company.
These options include an option to purchase 100,000 shares at an exercise price
of $2.80 per share, of which one-third is exercisable on each of October 1,
1998, October 1, 1999, and October 1, 2000. Of Mr. Bouck's remaining options, an
option to purchase 50,000 shares has an exercise price of $9.50 per share, and
an option to purchase 50,000 shares has an exercise price of $12.50 per share;
one-third of each of these options vests on each of October 1, 1998, October 1,
1999, and October 1, 2000. On February 1, 1998, Mr. Bouck was granted an
immediately exercisable warrant to purchase 50,000 shares of Common Stock at an
exercise price of $2.80 per share, which he exercised in March 1998.
On February 23, 1998, Eugene V. Dupreau and Charles B. Youngclaus were granted
warrants in connection with the Company's acquisition of Madera. See "Purchase
of Madera Disposal Systems, Inc." below.
On July 7, 1998, David M. Hall was granted options to purchase 50,000 shares of
Common Stock at an exercise price of $18.125 per share, one third of which
become exercisable on each of October 1, 1998, October 1, 1999, and October 1,
2000.
On January 19, 1999, Eugene V. Dupreau, Charles B. Youngclaus and Irmgard R.
Wilcox were granted options to purchase 10,000, 7,000 and 5,000 shares of Common
Stock, respectively, at an exercise price of $17.9375 per share, one-third of
which become exercisable on each of January 19, 2000, January 19, 2001 and
January 19, 2002.
On January 19, 1999, Ronald J. Mittelstaedt, Steven F. Bouck, Darrell W.
Chambliss, Michael R. Foos, Eric J. Moser and David M. Hall were granted options
to purchase 100,000, 50,000, 40,000, 40,000, 40,000 and 15,000 shares of Common
Stock, respectively, at an exercise price of $17.9375 per share, one-third of
which become exercisable on each of January 19, 2000, January 19, 2001, and
January 19, 2002.
PURCHASE OF WASTE CONNECTIONS OF IDAHO, INC.
On January 30, 1998, the Company purchased all of the outstanding stock of Waste
Connections of Idaho, Inc. ("Waste Connections Idaho") from Ronald J.
Mittelstaedt, J. Bradford Bishop and James N. Cutler, Jr., the sole shareholders
of Waste Connections Idaho. The purchase price was $3,000, which was the
aggregate price that Messrs. Mittelstaedt, Bishop and Cutler had paid initially
for the shares. Messrs. Mittelstaedt, Bishop and Cutler formed Waste Connections
Idaho in September 1997 for the purpose of acquiring certain assets from
Browning-Ferris Industries of Idaho, Inc.
PURCHASE OF MADERA DISPOSAL SYSTEMS, INC.
Eugene V. Dupreau was President and a 16.7% shareholder of Madera Disposal
Systems, Inc. before it was acquired by the Company on February 23, 1998.
Charles B. Youngclaus was Chief Operating Officer and a 16.7% shareholder of
Madera before it was acquired by the Company. For their shares of Madera's
common stock, each of Messrs. Dupreau and Youngclaus received $630,662 in cash,
333,333 shares of the Company's Common Stock
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<PAGE> 66
and warrants to purchase 66,667 shares of the Company's Common Stock at an
exercise price of $4.00 per share. Each of Messrs. Dupreau and Youngclaus has
been engaged by the Company as Vice President -- Madera. Mr. Dupreau was
appointed a director of the Company, effective February 23, 1998.
Pursuant to the agreement under which the Company acquired Madera, the Company
will issue additional restricted shares of the Company's Common Stock to former
Madera shareholders, including Messrs. Dupreau and Youngclaus, with respect to
the successful extension of a franchise agreement that was being negotiated by
Madera at the time of the Company's acquisition of Madera.
PURCHASE OF YOUNGCLAUS ENTERPRISES.
On September 9, 1998, the Company purchased the business assets of Youngclaus
Enterprises, a proprietorship, from Charles B. Youngclaus. The aggregate
purchase price was $139,000, which was paid through the issuance of Common
Stock.
TRANSACTIONS WITH FIBRES INTERNATIONAL.
The Company has entered into certain transactions with Continental Paper, LLC,
an Oregon limited liability company doing business as Fibres International
("Fibres"). J. Bradford Bishop and James N. Cutler, Jr. own 60% of the
membership interests in Fibres, were directors of the Company when some of these
transactions occurred and may be deemed promoters of the Company. In markets
where Fibres has processing facilities (which include three of the Company's
current markets), the Company delivers to Fibres' processing facilities all of
the Company's collected recyclable materials for which Fibres pays the market
rate (adjusted to reflect the Company's costs of transporting the materials to
Fibres or another processor) otherwise obtainable by the Company for such
materials. The Company received approximately $222,701 in gross revenues from
Fibres from the Company's inception through December 31, 1997. After deducting
the fees the Company paid to Fibres for the right to collect the recyclables,
the Company retained approximately $10,860. The Company made net payments of
$108,000 to Fibres in 1998.
MERGERS WITH THE MURREY COMPANIES.
Donald J. Hawkins was the President, Chief Executive Officer and a 5%
shareholder of the Murrey Companies before the Company merged with them in
January 1999. Irmgard R. Wilcox was the Chief Financial Officer, Treasurer,
Secretary and a 5% shareholder of the Murrey Companies until the Company merged
with them. For their shares of the Murrey Companies' common stock each of Mr.
Hawkins and Ms. Wilcox received 144,442 shares of the Company's Common Stock.
The Company engaged Mr. Hawkins as Vice President -- Operations -- Northern
Washington division and Ms. Wilcox as Vice President -- Controller -- Northern
Washington division, and each of Mr. Hawkins and Ms. Wilcox received a
$2,000,000 signing bonus pursuant to their employment agreements with the
Company. The Company appointed Ms. Wilcox to its Board of Directors in February
1999.
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PRINCIPAL STOCKHOLDERS
The following table shows the amount of the Company's Common Stock beneficially
owned, as of April 15, 1999, by: (i) each person or entity that the Company
knows owns more than 5% of the Company's Common Stock; (ii) the "named executive
officers" identified in "Executive Compensation" and each director of the
Company; and (iii) all current directors and executive officers of the Company
as a group.
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENTAGE
--------------------------- --------- ----------
<S> <C> <C>
Murrey Trust UTA August 5, 1993, as amended(2)(3)....... 1,949,997 11.2%
Eugene P. Polk(2)(4).................................... 1,311,574 7.5
Ronald J. Mittelstaedt(2)(5)............................ 1,058,376 6.0
Eugene V. Dupreau(2)(6)................................. 407,148 2.3
Irmgard R. Wilcox(2).................................... 144,942 0.8
Steven F. Bouck(2)(7)................................... 116,668 0.7
Darrell W. Chambliss(2)(8).............................. 77,501 0.4
Michael R. Foos(2)(8)................................... 80,430 0.5
Eric J. Moser(2)(9)..................................... 58,452 0.3
Michael W. Harlan(2)(10)................................ 27,500 0.2
William J. Razzouk(2)(11)............................... 22,500 0.1
All executive officers and directors as a group (11
persons).............................................. 2,405,844 13.5
</TABLE>
- ---------------
(1) Beneficial ownership is determined in accordance with the rules of the
Commission. In general, a person who has voting power and/or investment
power with respect to securities is treated as the beneficial owner of
those securities. Shares of Common Stock subject to options and/or warrants
currently exercisable or exercisable within 60 days of the date of this
Prospectus count as outstanding for computing the percentage beneficially
owned by the person holding such options. Except as otherwise indicated by
footnote, the Company believes that the persons named in this table have
sole voting and investment power with respect to the shares of Common Stock
shown.
(2) The address of the Murrey Trust is c/o US Bank, 5530 Pacific Highway, Suite
A, Fife, Washington 98424. The address of Messrs. Mittelstaedt, Bouck,
Chambliss, Foos and Moser is 2260 Douglas Boulevard, Suite 280, Roseville,
California 95661. The address of 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. The address of Irmgard R. Wilcox is 4622 70
Avenue East, Fife, Washington 98731.
(3) The trustees of the Murrey Trust are Bonnie L. Murrey, Irmgard R. Wilcox
and Donald Hawkins. Under the rules of the Commission, the trustees may
also be deemed beneficial owners of the shares owned by the Murrey Trust.
The shares listed exclude 144,942 and 144,442 shares of Common Stock owned
individually by Irmgard R. Wilcox and Donald Hawkins, respectively.
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<PAGE> 68
(4) 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; and
562,104 shares held by Kieckhefer Partnership 84-1, for which Eugene Polk
serves as Managing Partner.
(5) 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.
(6) Includes 66,667 shares purchasable under immediately exercisable warrants
and 5,000 shares purchasable under immediately exercisable options.
(7) Includes 23,749 shares purchasable under currently exercisable options.
(8) Includes 50,000 shares purchasable under currently exercisable options.
(9) Includes 36,667 shares purchasable under currently exercisable options.
(10) Includes 5,000 shares purchasable under immediately exercisable warrants
and 22,500 shares purchasable under immediately exercisable options
(11) Includes 22,500 shares purchasable under immediately exercisable options.
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<PAGE> 69
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, par value $0.01 per share, and 10,000,000 shares of Preferred
Stock, par value $0.01 per share (the "Preferred Stock"). As of April 19, 1999,
there were 17,425,483 shares of Common Stock outstanding and no shares of
Preferred Stock outstanding.
COMMON STOCK
The holders of shares of Common Stock are entitled to one vote per share held on
all matters submitted to a vote at a meeting of stockholders. Cumulative voting
for the election of directors is not permitted. Subject to any preferences to
which holders of Preferred Stock are entitled, the holders of outstanding shares
of Common Stock are entitled to receive ratably any dividends that the Board of
Directors declares. If the Company liquidates, dissolves or winds up, the
holders of shares of Common Stock are entitled to receive pro rata all assets of
the Company that are available for distribution to stockholders. The holders of
shares of Common Stock do not have any preemptive, subscription, redemption,
conversion or sinking fund rights. The outstanding shares of Common Stock, and
the shares of Common Stock to be issued pursuant to this Prospectus and any
Prospectus Supplement, are fully paid and nonassessable.
PREFERRED STOCK
The Company is authorized by its Amended and Restated Certificate of
Incorporation to issue a maximum of 10,000,000 shares of Preferred Stock, in one
or more series. The Board determines the rights, privileges and limitations of
Preferred Stock, including dividend rights, voting rights, conversion
privileges, redemption rights, liquidation rights and/or sinking fund rights.
Preferred Stock may be issued in the future in connection with acquisitions,
financings or such other matters as the Board of Directors believes appropriate.
There are no shares of Preferred Stock outstanding, and the Company has no
current plans to issue Preferred Stock.
One effect of having Preferred Stock authorized is that the Company's Board of
Directors alone may be able to authorize the issuance of Preferred Stock in ways
that render more difficult or discourage an attempt to obtain control of the
Company by a tender offer, proxy contest, merger or otherwise, and thereby
protect the continuity of the Company's management. The issuance of shares of
Preferred Stock may adversely affect the voting and other rights of holders of
Common Stock. For example, Preferred Stock may rank prior to the Common Stock as
to dividend rights, liquidation preferences or both, may have full or limited
voting rights and may be convertible into Common Stock. Accordingly, the
issuance of Preferred Stock may discourage bids for the Common Stock or
otherwise adversely affect the market price of the Common Stock.
CERTAIN STATUTORY, CHARTER AND BY-LAW PROVISIONS
Classified Board of Directors. The Company's Amended and Restated Certificate of
Incorporation (the "Restated Certificate") provides that the Board will be
divided into three classes serving staggered terms, and that the number of
directors in each class will be as nearly equal as is possible based on the
number of directors constituting the entire
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<PAGE> 70
Board. At each annual meeting of stockholders, successors to directors of the
class whose term expires at such meeting will be elected to serve for three-year
terms.
The classification of directors makes it more difficult for stockholders to
change the composition of the Board. At least two annual meetings of
stockholders, instead of one, will generally be required to change the majority
of the Board. This delay may help ensure that the Company's directors, if
confronted by a third party attempting to force a proxy contest, a tender or
exchange offer or other extraordinary corporate transaction, would have
sufficient time to review the proposal and available alternatives and to act in
what they believe to be the best interests of the stockholders. However, such
classification could also discourage a third party from initiating a proxy
contest, making a tender offer or otherwise attempting to obtain control of the
Company, even though such an attempt might benefit the Company and its
stockholders. The classification of the Board could thus make it more likely
that incumbent directors will retain their positions.
Number of Directors; Removal; Filling Vacancies. The Restated Certificate
provides that the number of directors will be fixed from time to time by a
majority of the directors then in office. In no event may there be less than
three or more than nine directors, unless approved by at least two-thirds of the
directors then in office. In addition, the Restated Certificate provides that
newly created directorships resulting from an increase in the authorized number
of directors, vacancies on the Board resulting from death, resignation,
retirement, disqualification or removal of directors or any other cause may be
filled only by the Board (and not by the stockholders unless there are no
directors in office), if a quorum is then in office and present, or by a
majority of the directors then in office, if less than a quorum is then in
office, or by the sole remaining director. Accordingly, the Board could prevent
any stockholder from enlarging the Board and filling the new directorships with
such stockholder's own nominees.
The Restated Certificate allows directors to be removed only for cause and only
on the affirmative vote of holders of at least 66 2/3% of the voting power of
all the then outstanding shares of stock entitled to vote generally in the
election of directors ("Voting Stock"), voting together as a single class.
The provisions of the Restated Certificate governing the number of directors,
their removal and the filling of vacancies may discourage a third party from
initiating a proxy contest, making a tender offer or otherwise attempting to
gain control of the Company, or attempting to change the composition or policies
of the Board, even though such attempts might benefit the Company or its
stockholders. These provisions of the Restated Certificate could thus increase
the likelihood that incumbent directors retain their positions.
Limitation on Special Meetings; No Stockholder Action by Written Consent. The
Restated Certificate and the Amended and Restated By-laws (the "Restated
By-laws") provide that: (i) only a majority of the Board of Directors or the
President or Chairman of the Board may call a special meeting of stockholders;
(ii) only matters stated in the notice of meeting or properly brought before the
meeting by or at the direction of the Board of Directors may be transacted at
the meeting; and (iii) stockholder action may be taken only at a duly called and
convened annual or special meeting of stockholders and may not be taken by
written consent. These provisions, taken together, prevent stockholders from
forcing consideration of stockholder proposals over the opposition of the Board,
except at an annual meeting.
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Advance Notice Provisions for Stockholder Nominations and Stockholder
Proposals. The Restated By-laws establish an advance notice procedure for
stockholders to make nominations of candidates for election as director, or to
bring other business before an annual meeting of stockholders of the Company
(the "Stockholder Notice Procedure"). In general, only persons who are nominated
by or at the direction of the Board, any committee appointed by the Board, or by
a stockholder who has given timely written notice to the Secretary of the
Company, may be elected as directors. At an annual meeting, only business that
has been brought before the meeting by, or at the direction of, the Board, any
committee appointed by the Board, or by a stockholder who has given timely
written notice to the Secretary of the Company, may be conducted. To be timely,
notice of stockholder nominations or proposals to be made at an annual or
special meeting must be received by the Company not less than 60 days nor more
than 90 days before the scheduled date of the meeting (or, if less than 70 days'
notice or prior public disclosure of the date of the meeting is given, then the
15th day following the earlier of the day such notice was mailed or the day such
public disclosure was made).
By requiring advance notice of nominations by stockholders, the Stockholder
Notice Procedure gives the Board an opportunity to consider the qualifications
of the proposed nominees and inform stockholders about such qualifications. By
requiring advance notice of other proposed business, the Stockholder Notice
Procedure provides a more orderly procedure for conducting annual meetings of
stockholders. It also gives the Board an opportunity to inform stockholders in
advance of any business proposed to be conducted at such meetings, together with
the Board's recommendations regarding action to be taken with respect to such
business, so that stockholders can better decide whether to attend such a
meeting or to grant a proxy regarding the disposition of any such business.
Although the Restated By-laws do not give the Board any power to approve or
disapprove stockholder nominations for the election of directors or proposals
for action, the Stockholder Notice Procedure may preclude a contest for the
election of directors or the consideration of stockholder proposals. It may also
discourage or deter a third party from soliciting proxies to elect its own slate
of directors or to approve its own proposal, even though consideration of such
nominees or proposals might benefit the Company and its stockholders.
Certain Provisions Relating to Potential Change of Control. The Restated
Certificate authorizes the Board and any committee of the Board to take such
action as it determines to be reasonably necessary or desirable to encourage any
person or entity to enter into negotiations with the Board and management about
transactions that may result in a change of control of the Company. The Board
and its committees may also contest or oppose any such transaction that the
Board determines to be unfair, abusive or otherwise undesirable to the Company,
its business, assets, properties or stockholders. The Board or any Board
committee may adopt plans or to issue securities of the Company, and to
determine the terms and conditions on which such securities may be exchangeable
or convertible into cash or other securities. In addition, the Board or Board
committee may treat any holder or class of holders of such designated securities
differently than all other security holders in respect of the terms, conditions,
provisions and rights of such securities.
This authority is intended to give the Board flexibility to act in the best
interests of stockholders in the event of a potential change of control. Such
provisions may, however,
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deter potential acquirors from proposing unsolicited transactions not approved
by the Board and might enable the Board to hinder or frustrate such a
transaction if proposed.
Limitation of Liability of Directors. The Restated Certificate provides that a
director will not be personally liable to the Company or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except for
liability: (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders; (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii) under
Section 174 of the Delaware General Corporation Law (the "Delaware Law"), which
concerns unlawful payments of dividends, stock purchases or redemptions; or (iv)
for any transaction from which the director derived an improper personal
benefit. If the Delaware Law is subsequently amended to permit further
limitation of the personal liability of directors, the liability of a director
of the Company will be eliminated or limited to the fullest extent permitted by
the Delaware Law as so amended.
Amendment of the Certificate of Incorporation and By-laws. The Restated
Certificate contains provisions requiring the affirmative vote of the holders of
at least 66 2/3% of the voting power of the Voting Stock to amend certain
provisions of the Restated Certificate (including the provisions discussed above
relating to the size and classification of the Board, replacement and/or removal
of Board members, action by written consent, special stockholder meetings, the
authorization for the Board to take steps to encourage or oppose, as the case
may be, transactions which may result in a change of control of the Company, and
limitation of the liability of directors) or to amend any provision of the
Restated By-laws by action of stockholders. These provisions make it more
difficult for stockholders to make changes in the Restated Certificate and the
Restated By-laws, including changes designed to facilitate the exercise of
control over the Company.
Business Combination Provisions of Delaware Law. The Company is a Delaware
corporation and is subject to section 203 of the Delaware Law. Section 203
generally prevents a person who, together with affiliates and associates, owns,
or within the past three years did own, 15% or more of the outstanding voting
stock of a corporation (an "Interested Stockholder") from engaging in certain
business combinations with the corporations for three years after the date such
person became an Interested Stockholder, subject to certain exceptions. Business
combinations covered by section 203 include a wide variety of transactions with
or caused by an Interested Stockholder, including mergers, asset sales and other
transactions in which the Interested Stockholder receives or could receive a
benefit on other than a pro rata basis with other stockholders.
TRANSFER AGENT AND REGISTRAR
BankBoston, N.A., c/o Boston EquiServe, L.P., serves as transfer agent and
registrar for the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
As of April 19, 1999, the Company had 17,425,483 shares of Common Stock
outstanding. Of those shares, the 2,300,000 sold in the Company's initial public
offering, the 3,999,307 shares sold in the Company's secondary public offering,
and an additional 4,355,265 shares are freely saleable in the public market,
unless acquired by affiliates of the Company. An additional 5,908,483 of the
currently outstanding shares are currently eligible for resale in the public
market, an additional 361,732 of the currently outstanding shares will become
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eligible for resale in the public market later in 1999, an additional 302,342 of
the currently outstanding shares will become eligible for resale in the public
market in 2000, and an additional 198,354 of the currently outstanding shares
will become eligible for resale in the public market in subsequent years, in
each case subject to the restrictions of Rule 144 promulgated under the
Securities Act. Shares of Common Stock held by affiliates of the Company are
subject to certain volume and other limitations discussed below under Rule 144.
In general, under Rule 144, a person (or persons whose shares are aggregated),
including persons who may be deemed affiliates of the Company, who has
beneficially owned his or her shares for at least one year may sell in any
three-month period a number of shares equal to the greater of 1% of the
outstanding shares of the Common Stock (174,254 shares as of April 19, 1999) or
the average weekly trading volume during the four calendar weeks preceding each
such sale. Sales under Rule 144 also are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. Under Rule 144(k), a person (or persons whose
shares are aggregated) who is not or has not been deemed an "affiliate" of the
Company for at least three months and who has beneficially owned his or her
shares for at least two years may sell such shares under Rule 144 without regard
to the limitations discussed above.
The Common Stock has been publicly traded only since May 22, 1998, and it is
possible that no active public market for the Common stock will develop or be
sustained. Sales of substantial amounts of the Common Stock, or the perception
that such sales could occur, could cause the market price of the Common Stock to
decline and impair the Company's ability to raise capital or fund acquisitions
by issuing Common Stock.
In July 1998, the Company filed a registration statement on Form S-4 under the
Securities Act to register up to 3,000,000 shares issuable from time to time in
connection with the Company's acquisitions of solid waste services businesses.
In October 1998, the Company filed an additional registration statement on Form
S-4 under the Securities Act to increase by 20% the number of shares covered by
the previous registration statement. Also in October 1998, the Company filed a
third registration statement on Form S-4 to register up to 3,000,000 shares
issuable from time to time in connection with acquisitions of solid waste
services businesses. As of April 15, 1999, the Company had issued 3,768,207
shares under the original registration statement on Form S-4, and an additional
2,875,958 shares were issuable under the three Form S-4 registration statements.
In September 1998, the Company filed a registration statement under the
Securities Act to register 309,700 shares issuable on exercise of stock options
or other awards granted or to be granted under its Stock Option Plan. In
February 1999, the Company filed a registration statement under the Securities
Act to register an additional 820,132 shares issuable on exercise of such
options or awards. Subject to certain restrictions under Rule 144, those shares
will be freely saleable in the public market immediately following exercise of
such options.
OUTSTANDING SECURITIES COVERED BY THIS PROSPECTUS
Persons who receive shares of Common Stock covered by the Registration Statement
in acquisitions of businesses by the Company, or their transferees ("Selling
Stockholders"), may use this Prospectus and Post-Effective Amendments and
Prospectus Supplements to sell such shares.
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The Company will not receive any of the proceeds from any such sales. Any
commissions paid or concessions allowed to any broker-dealer and, if any
broker-dealer purchases such shares as principal, any profits received on the
resale of such shares, may be deemed to be underwriting discounts and
commissions under the Securities Act. The Company will pay printing, certain
legal, filing and other similar expenses of this offering. Selling Stockholders
will bear all other expenses of this offering, including any brokerage fees,
underwriting discounts or commissions.
If a Selling Stockholder notifies the Company of an arrangement with a
broker-dealer to sell shares through a block trade, special offering, exchange
distribution or secondary distribution, the Company will file a Prospectus
Supplement pursuant to Rule 424 under the Securities Act. The Prospectus
Supplement will set forth (i) the name of such Selling Stockholder and the
participating broker-dealer, (ii) the number of shares involved, (iii) the price
at which such shares were sold, (iv) the commissions paid or discounts or
concessions allowed to such broker-dealer, where applicable, (v) that such
broker-dealer did not conduct any investigation to verify the information set
out in this Prospectus, and (vi) other facts material to the transaction.
Selling Stockholders may sell the shares being offered through this Prospectus
in transactions on the Nasdaq National Market or on a securities exchange on
which the Company's Common Stock may then be listed, in negotiated transactions
or otherwise, at market prices or at negotiated prices. Selling Stockholders may
sell the shares in transactions involving broker-dealers, who may act as agents
and/or acquire shares as principals. Broker-dealers who participate in such
transactions as agents may receive commissions from Selling Stockholders (and,
if they act as agents for the purchasers of such shares, from such purchasers).
Participating broker-dealers may agree with Selling Stockholders to sell a
specified number of shares at a stipulated price per share and, to the extent
they are unable to do so acting as agents for the Selling Stockholders, to
purchase as principals any unsold shares at the price required to fulfill their
commitments to the Selling Stockholders.
The Selling Stockholders may also sell shares by or through other broker-dealers
in special offerings, exchange distributions or secondary distributions pursuant
to the rules of the Nasdaq National Market or on a securities exchange on which
the Company's Common Stock may then be listed. They may pay commissions in
excess of the customary commission prescribed by the rules of such securities
exchange to participating broker-dealers. In certain secondary distributions, a
discount or concession from the offering price may be allowed to participating
broker-dealers in excess of such customary commission. Broker-dealers who
acquire shares as principals may subsequently resell such shares in transactions
(which may involve crosses and block transactions and which may involve sales to
and through other broker-dealers) on the Nasdaq National Market or on a
securities exchange on which the Company's Common Stock may then be listed, in
negotiated transactions or otherwise, at market prices or at negotiated prices.
In connection with such resales, the broker-dealers may pay to or receive
commissions from the purchasers of such shares.
Each Selling Stockholder may indemnify any broker-dealer that participates in
transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Securities Act.
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LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby will
be passed upon for the Company by Shartsis, Friese & Ginsburg LLP, San
Francisco, California. The statements pertaining to the Company's G certificates
awarded by the WUTC under "Risk Factors -- Highly Competitive Industry,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- General," "Business -- Industry Overview," and "Business -- G
Certificates" will be passed upon for the Company by Williams, Kastner & Gibbs
PLLC, Seattle, Washington.
EXPERTS
The following financial statements appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing elsewhere in this Prospectus and
Registration Statement:
(a) financial statements of Waste Connections, Inc. and Predecessors
as of December 31, 1997 and 1998, and for each of the three years in the
period ended December 31, 1998;
(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, 1997 and 1998, and for each of the three years in the period
ended December 31, 1998;
(c) Supplemental consolidated financial statements of Waste
Connections, Inc. and Predecessors as of December 31, 1997 and 1998, and
for each of the three years in the period ended December 31, 1998.
Such financial statements have been included in this Prospectus and Registration
Statement in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
The combined financial statements of Columbia Resource Co., L.P. and
Finley-Buttes Limited Partnership as of December 31, 1997 and 1998, and for each
of the three years in the period ended December 31, 1998 in this Prospectus and
Registration Statement have been audited by Perkins & Company, P.C., independent
auditors, as set forth in their report thereon appearing elsewhere in this
Prospectus and Registration Statement, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
WASTE CONNECTIONS, INC. UNAUDITED PRO FORMA FINANCIAL
STATEMENTS
Introduction to Unaudited Pro Forma Financial
Statements............................................. F-3
Unaudited Pro Forma Statement of Operations for the year
ended December 31, 1998................................ F-4
Notes to Unaudited Pro Forma Statement of Operations...... F-5
Unaudited Pro Forma Balance Sheet as of December 31,
1998................................................... F-7
Notes to Unaudited Pro Forma Consolidated Balance Sheet... F-8
WASTE CONNECTIONS, INC. AND PREDECESSORS
Report of Ernst & Young LLP, Independent Auditors......... F-9
Consolidated Balance Sheets of Waste Connections, Inc. as
of December 31, 1997 and 1998.......................... F-10
Statement of Operations of Predecessors for the nine
months ended September 30, 1997........................ F-11
Consolidated Statements of Operations of Waste
Connections, Inc. for the period from inception
(September 9, 1997) through December 31, 1997 and the
year ended December 31, 1998........................... F-11
Combined Statement of Operations of The Disposal Group for
the period from January 1, 1996 through July 31,
1996................................................... F-12
Combined Statement of Operations of Predecessors for the
period ended December 31, 1996......................... F-12
Consolidated Statements of Redeemable Stock and
Stockholders' Equity (Deficit) of Waste Connections,
Inc. for the period from inception (September 9, 1997)
through December 31, 1997 and the year ended December
31, 1998............................................... F-13
Statement of Cash Flows of Predecessors for the nine
months ended September 30, 1997........................ F-14
Consolidated Statements of Cash Flows of Waste
Connections, Inc. for the period from inception
(September 9, 1997) through December 31, 1997 and the
year ended December 31, 1998........................... F-14
Combined Statement of Cash Flows of The Disposal Group for
the period from January 1, 1996 through July 31,
1996................................................... F-15
Combined Statement of Cash Flows of Predecessors for the
period ended December 31, 1996......................... F-15
Notes to Financial Statements............................. F-16
THE MURREY COMPANIES
Report of Ernst & Young LLP, Independent Auditors......... F-37
Combined Balance Sheets as of December 31, 1997 and
1998................................................... F-38
Combined Statements of Income and Retained Earnings for
each of the three years in the period ended December
31, 1998............................................... F-39
Combined Statements of Cash Flows for each of the three
years in the period ended December 31, 1998............ F-40
Notes to Combined Financial Statements.................... F-42
COLUMBIA RESOURCE CO., L.P. AND FINLEY-BUTTES LIMITED
PARTNERSHIP
Independent Auditors' Report.............................. F-51
Combined Balance Sheets as of December 31, 1997 and
1998................................................... F-52
Combined Statements of Income for each of the three years
in the period ended December 31, 1998.................. F-53
Combined Statements of Partners Capital and Comprehensive
Income for each of the three years in the period ended
December 31, 1998...................................... F-54
Combined Statements of Cash Flows for each of the three
years in the period ended December 31, 1998............ F-55
Notes to Financial Statements............................. F-56
SUPPLEMENTAL WASTE CONNECTIONS, INC. AND PREDECESSORS
Report of Ernst & Young LLP, Independent Auditors......... F-64
Supplemental Consolidated Balance Sheets of Waste
Connections, Inc. as of December 31, 1997 and 1998..... F-65
</TABLE>
F-1
<PAGE> 77
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Combined Statement of Operations of Predecessors for the
nine months ended September 30, 1997................... F-66
Supplemental Consolidated Statements of Operations of
Waste Connections, Inc. for the years ended December
31, 1997 and 1998...................................... F-66
Combined Statement of Operations of The Disposal Group for
the period from January 1, 1996 through July 31,
1996................................................... F-67
Combined Statement of Operations of Predecessors for the
period ended December 31, 1996......................... F-67
Supplemental Consolidated Statement of Operations of Waste
Connections, Inc. for the year ended December 31,
1996................................................... F-67
Supplemental Consolidated Statement of Redeemable Stock
and Stockholders' Equity of Waste Connections, Inc. for
each of the three years in the period ended December
31, 1998............................................... F-68
Combined Statement of Cash Flows of Predecessors for the
nine months ended September 30, 1997................... F-69
Supplemental Consolidated Statements of Cash Flows of
Waste Connections, Inc. for the years ended December
31, 1997 and 1998...................................... F-69
Combined Statement of Cash Flows of The Disposal Group for
the period from January 1, 1996 through July 31,
1996................................................... F-71
Combined Statement of Cash Flows of Predecessors for the
period ended December 31, 1996......................... F-71
Supplemental Consolidated Statement of Cash Flows of Waste
Connections, Inc. for the year ended December 31,
1996................................................... F-71
Notes to Financial Statements............................. F-72
</TABLE>
F-2
<PAGE> 78
WASTE CONNECTIONS, INC.
INTRODUCTION TO UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
The Unaudited Pro Forma Statement of Operations for the year ended December
31, 1998 gives effect to the business combination involving WCI and Columbia
Resource Co., LP and Finley-Buttes Limited Partnership ("CRCFBLP") as if such
business combination occurred on January 1, 1998 and was accounted for using the
purchase method of accounting. In addition to reflecting the business
combination involving WCI and CRCFBLP, the following Unaudited WCI and the
Murrey Companies Pro Forma Combined Statement of Operations for the year ended
December 31, 1998 reflects the mergers with the Murrey Companies as
poolings-of-interests.
The following Unaudited Pro Forma Balance Sheet as of December 31, 1998
assumes WCI's acquisition of CRCFBLP occurred on December 31, 1998. In addition
to reflecting the business combinations involving WCI and CRCFBLP, the following
Unaudited Pro Forma Combined Balance Sheet as of December 31, 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 CRCFBLP and Murrey Companies 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, the Murrey Companies and CRCFBLP 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-3
<PAGE> 79
WASTE CONNECTIONS, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
WASTE THE MURREY
CONNECTIONS, INC. CRCFBLP PRO FORMA COMPANIES PRO FORMA
CONSOLIDATED COMBINED ADJUSTMENTS PRO FORMA COMBINED COMBINED
----------------- ------------ ----------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues.................. $ 54,042 $22,511 $(7,017)(a) $ 69,536 $32,528 $ 102,064
Operating expenses:
Cost of operations...... 36,554 10,675 (7,017)(a) 40,166 26,410 66,576
(46)(b)
Selling, general and
administrative........ 5,317 2,956 -- 8,273 2,791 11,064
Depreciation and
amortization.......... 4,112 2,729 (683)(c) 6,158 2,194 8,352
Stock compensation...... 632 -- -- 632 -- 632
---------- ------- ------- ---------- ------- -----------
Income from operations.... 7,427 6,151 729 14,307 1,133 15,440
Interest expense.......... (2,257) (1,258) (5,280)(d) (8,795) (535) (9,330)
Other income (expense),
net..................... -- 29 -- 29 79 108
---------- ------- ------- ---------- ------- -----------
Income before income
taxes................... 5,170 4,922 (4,551) 5,541 677 6,218
Income tax provision...... (2,395) -- (1,968)(e) (2,543) (535) (3,078)
1,820(f)
---------- ------- ------- ---------- ------- -----------
Income before
extraordinary item...... 2,775 4,922 (4,699) 2,998 142 3,140
Extraordinary
item -- early
extinguishment of debt,
net of tax benefit of
$264.................... (1,027) -- -- (1,027) -- (1,027)
---------- ------- ------- ---------- ------- -----------
Net income................ $ 1,748 $ 4,922 $(4,699) $ 1,971 $ 142 $ 2,113
========== ======= ======= ========== ======= ===========
Redeemable convertible
preferred stock
accretion............... (917) -- -- (917) -- (917)
---------- ------- ------- ---------- ------- -----------
Net income applicable to
common stockholders..... $ 831 $ 4,922 $(4,699) $ 1,054 $ 142 $ 1,196
========== ======= ======= ========== ======= ===========
Basic earnings per share:
Income before
extraordinary item.... $ 0.29 $ 0.32 $ 0.24
Extraordinary item...... (0.16) (0.16) (0.11)
---------- ---------- -----------
Net income per share.... $ 0.13 $ 0.16 $ 0.13
========== ========== ===========
Diluted earnings per
share:
Income before
extraordinary item.... $ 0.22 $ 0.25 $ 0.20
Extraordinary item...... (0.12) (0.12) (0.09)
---------- ---------- -----------
Net income per share.... $ 0.10 $ 0.13 $ 0.11
========== ========== ===========
Shares used in calculating
basic earnings per
share................... 6,460,293 6,460,293 9,349,173
========== ========== ===========
Shares used in calculating
diluted earnings per
share................... 8,371,415 8,371,415 11,260,295
========== ========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 80
WASTE CONNECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
ASSUMPTIONS. The unaudited pro forma statement of operations for the year
ended December 31, 1998 is presented as if the acquisition of CRCFBLP occurred
on January 1, 1998. In addition, the unaudited pro forma combined statement of
operations for the year ended December 31, 1998 combines the pro forma
statements of operations for that period with the historical statement of
operations for the Murrey Companies for the year ended December 31, 1998.
BUSINESS COMBINATIONS. The acquisition of CRCFBLP is being accounted for
under the purchase method of accounting for business combinations. Certain items
affecting the purchase price and its allocation are preliminary. The preliminary
purchase price consists of the following:
<TABLE>
<CAPTION>
CRCFBLP
-------
<S> <C>
Cash paid to shareholders................................. $66,911
Liabilities assumed....................................... 18,935
Acquisition costs......................................... 316
-------
$86,162
=======
</TABLE>
The Company has preliminarily allocated the purchase price as follows:
<TABLE>
<CAPTION>
CRCFBLP
-------
<S> <C>
Tangible assets purchased, including landfill............. $85,962
Covenant not to compete................................... 200
-------
$86,162
=======
</TABLE>
WCI's mergers with the Murrey Companies are accounted for under the
pooling-of-interests method of accounting for business combinations. The pro
forma financial statements assume the issuance of 2,888,880 shares, which
represents the actual number of shares exchanged.
PRO FORMA ADJUSTMENTS. The unaudited pro forma statement of operations does
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 $6,200 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 statement of operations:
(a) Eliminate intercompany revenue and expense between WCI and CRCFBLP.
(b) To record closure and post closure amortization in accordance with the
Company's policies.
(c) To record site depletion expense in accordance with the Company's policies.
(d) To record interest expense on the debt obligations incurred by the Company
in connection with the acquisition of CRCFBLP.
(e) To record income tax provision for CRCFBLP which were limited partnerships
for income tax purposes for all periods prior to the acquisition by the
Company.
(f) To recorded estimate tax benefit for the year ended December 31, 1998
associated with the pro forma adjustments.
F-5
<PAGE> 81
WASTE CONNECTIONS, INC.
NOTES TO UNAUDITED PRO FORMA
STATEMENT OF OPERATIONS
(DOLLARS IN THOUSANDS)
PRO FORMA COMBINED PER SHARE DATA. The shares used in computing the
unaudited pro forma combined net income per share for the year ended December
31, 1998 are based upon the pro forma number of common shares as summarized in
the table below. See Note 11 of the Company's notes to financial statements
included elsewhere herein for information concerning the computation of basic
and diluted net income per share.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
Basic Share Count:
Company weighted average shares outstanding............... 6,460,293
Shares issued in exchange for the Murrey Companies'
stock.................................................. 2,888,880
-----------
Shares used in calculating pro forma combined basic net
income (loss) per share................................ 9,349,173
===========
Diluted Share Count:
-----------
Shares used in calculating the Company's diluted income
(loss) per share....................................... 8,371,415
Shares issued in exchange for the Murrey Companies'
stock.................................................. 2,888,880
-----------
Shares used in calculating pro forma combined diluted net
income (loss) per share................................ 11,260,295
===========
</TABLE>
ACQUISITION COSTS. The Company incurred costs of $316 related to the
CRCFBLP acquisition which have been factored into the purchase price allocation.
Costs incurred by CRCFBLP 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.
F-6
<PAGE> 82
WASTE CONNECTIONS, INC.
UNAUDITED PRO FORMA BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
WASTE THE MURREY
CONNECTIONS, INC. CRCFBLP PRO FORMA COMPANIES PRO FORMA PRO FORMA
CONSOLIDATED COMBINED ADJUSTMENTS PRO FORMA COMBINED ADJUSTMENTS COMBINED
----------------- -------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Current assets:
Cash and equivalents.... $ 2,675 $ 2,048 $ --(2)(4)(5) $ 4,723 $ 173 $ -- $ 4,896
Investments in
Marketable
Securities............ -- 5,640 -- 5,640 -- -- 5,640
Accounts receivable,
net................... 10,769 2,330 (1,276)(8) 11,823 3,007 -- 14,830
Prepaid expenses and
other current
assets................ 2,246 1,105 -- 3,351 27 -- 3,378
-------- ------- -------- -------- ------- ------- --------
Total current
assets.......... 15,690 11,123 (1,276) 25,537 3,207 -- 28,744
Property and equipment,
net..................... 33,043 19,820 54,222(3) 107,085 13,943 -- 121,028
Intangible assets, net.... 98,785 -- 200(3) 98,985 1,801 -- 100,786
Other assets.............. 1,794 2,389 -- 4,183 184 -- 4,367
-------- ------- -------- -------- ------- ------- --------
$149,312 $33,332 $ 53,146 $235,790 $19,135 $ -- $254,925
======== ======= ======== ======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings... $ -- $ -- $ -- $ -- $ 1,500 $ -- $ 1,500
Accounts payable........ 6,598 1,155 (1,276)(8) 6,477 1,509 -- 7,986
Advances from a related
party................. -- -- -- -- 543 -- 543
Deferred revenue........ 2,052 -- -- 2,052 1,095 -- 3,147
Accrued liabilities..... 4,154 536 -- 4,690 1,330 -- 6,020
Current portion of
long-term debt........ 9,516 1,779 (839)(4) 10,456 731 -- 11,187
Other current
liabilities........... 2,087 668 -- 2,755 106 -- 2,861
Accrued merger related
expenses.............. -- -- -- -- -- 6,200(1) 6,200
-------- ------- -------- -------- ------- ------- --------
Total current
liabilities..... 24,407 4,138 (2,115) 26,430 6,814 6,200 39,444
Long-term debt............ 60,106 16,298 68,066(4)(5) 144,470 3,879 -- 148,349
Deferred income taxes..... 1,645 -- -- 1,645 623 -- 2,268
Other long-term
liabilities............. 2,091 -- 91(7) 2,182 353 -- 2,535
Stockholders' equity:
Common stock............ 94 -- -- 94 45 (16)(1) 123
Additional paid-in
capital............... 66,163 -- -- 66,163 455 16(1) 66,634
Deferred stock
compensation.......... (428) (428) -- -- (428)
Retained earnings
(deficit)............. (4,766) (4,766) 6,966 (6,200)(1) (4,000)
Accumulated other
comprehensive
income................ -- 740 (740)(6) -- -- -- --
Other Partners'
Capital............... -- 12,156 (12,156)(6) -- -- -- --
-------- ------- -------- -------- ------- ------- --------
Total
stockholders'
equity.......... 61,063 12,896 (12,896) 61,063 7,466 (6,200) 62,329
-------- ------- -------- -------- ------- ------- --------
$149,312 $33,332 $ 53,146 $235,790 $19,135 $ -- $254,925
======== ======= ======== ======== ======= ======= ========
</TABLE>
See accompanying notes.
F-7
<PAGE> 83
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 December 31, 1998
combines the historical balance sheet of Waste Connections, Inc. with the
historical balance sheets of CRCFBLP to be accounted for as a purchase, and the
historical balance sheet of the Murrey Companies to be accounted for as
poolings-of-interests as of December 31, 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
2,888,880 shares of the Company's common stock. The management of the
Company estimates that the non-recurring costs will approximate $6,200
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 owners of CRCFBLP ($66,911) and payment of
acquisition costs ($316).
(3) To increase site costs of CRCFBLP for the excess of purchase price over
net assets acquired of $54,422 and to record the fair value of the
covenant not to compete ($200).
(4) Pay off debt obligations of CRCFBLP ($8,512).
(5) Record additional long term debt associated with the acquisition of
CRCFBLP of $75,739.
(6) To eliminate equity accounts of CRCFBLP.
(7) To accrue closure and post closure liability in accordance with the
Company's policies
(8) To eliminate intercompany receivable between WCI and CRCFBLP.
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-8
<PAGE> 84
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, 1997 and 1998, and for each of the
three years in the period ended December 31, 1998 which appear on pages F-10
through F-15 herein as listed in the accompanying Index to Financial Statements.
Our audits also included the financial statement schedule listed in Item 21.b.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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, 1997 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
ERNST & YOUNG LLP
Sacramento, California
February 17, 1999,
except for the third and fourth
paragraphs of Note 14, as to
which the dates are
March 31, 1999
F-9
<PAGE> 85
WASTE CONNECTIONS, INC. AND PREDECESSORS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
WASTE CONNECTIONS, INC.
CONSOLIDATED
DECEMBER 31,
-----------------------
1997 1998
--------- ----------
<S> <C> <C>
Current assets:
Cash and equivalents...................................... $ 820 $ 2,675
Accounts receivable, less allowance for doubtful accounts
of $19 and $362 at December 31, 1997 and December 31,
1998, respectively..................................... 3,940 10,769
Prepaid expenses and other current assets................. 358 2,246
------- --------
Total current assets.............................. 5,118 15,690
Property and equipment, net................................. 4,185 33,043
Intangible assets, net...................................... 9,550 98,785
Other assets................................................ 27 1,794
------- --------
$18,880 $149,312
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (Deficit)
Current liabilities:
Accounts payable.......................................... $ 2,609 $ 6,598
Deferred revenue.......................................... 597 2,052
Accrued liabilities....................................... 825 4,154
Current portion of long-term debt......................... -- 9,516
Other current liabilities................................. 251 2,087
------- --------
Total current liabilities......................... 4,282 24,407
Long-term debt.............................................. 6,762 60,106
Deferred income taxes....................................... 162 1,645
Other long-term liabilities................................. 702 2,091
Commitments and contingencies (Note 7)
Redeemable convertible preferred stock: $.01 par value;
2,500,000 shares authorized at December 31, 1997 (none
authorized at December 31, 1998); 2,499,998 shares issued
and outstanding at December 31, 1997; no shares issued and
outstanding at December 31, 1998 (aggregate liquidation
preference of $10,500 at December 31, 1997)............... 7,523 --
Stockholders' equity (deficit):
Preferred stock: $.01 par value; 7,500,000 and 10,000,000
shares authorized at December 31, 1997 and 1998,
respectively; none issued and outstanding.............. -- --
Common stock: $.01 par value; 50,000,000 shares
authorized; 2,300,000 and 9,435,233 shares issued and
outstanding at December 31, 1997 and 1998,
respectively........................................... 23 94
Additional paid-in capital................................ 5,105 66,163
Stockholder notes receivable.............................. (82) --
Deferred stock compensation............................... -- (428)
Accumulated deficit....................................... (5,597) (4,766)
------- --------
Total stockholders' equity (deficit).............. (551) 61,063
------- --------
$18,880 $149,312
======= ========
</TABLE>
See accompanying notes.
F-10
<PAGE> 86
WASTE CONNECTIONS, INC. AND PREDECESSORS
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
WASTE CONNECTIONS, INC. CONSOLIDATED
PREDECESSORS ---------------------------------------
COMBINED PERIOD
NINE MONTHS FROM INCEPTION
ENDED (SEPTEMBER 9, 1997)
SEPTEMBER 30, THROUGH YEAR ENDED
1997 (NOTE 1) DECEMBER 31, 1997 DECEMBER 31, 1998
------------- ------------------- -----------------
<S> <C> <C> <C>
Revenues......................................... $18,114 $ 6,237 $ 54,042
Operating expenses:
Cost of operations............................. 14,753 4,703 36,554
Selling, general and administrative............ 3,009 619 5,317
Depreciation and amortization.................. 1,083 354 4,112
Start-up and integration....................... -- 493 --
Stock compensation............................. -- 4,395 632
------- ---------- ----------
Income (loss) from operations.................... (731) (4,327) 7,427
Interest expense................................. (456) (1,035) (2,257)
Other income (expense), net...................... 14 (36) --
------- ---------- ----------
Income (loss) before income taxes................ (1,173) (5,398) 5,170
Income tax (provision) benefit................... -- 332 (2,395)
------- ---------- ----------
Income (loss) before extraordinary item.......... (1,173) (5,066) 2,775
Extraordinary item -- early extinguishment of
debt, net of tax benefit of $264............... -- -- (1,027)
------- ---------- ----------
Net income (loss)................................ $(1,173) $ (5,066) $ 1,748
======= ========== ==========
Redeemable convertible preferred stock
accretion...................................... (531) (917)
---------- ----------
Net income (loss) applicable to common
stockholders................................... $ (5,597) $ 831
========== ==========
Basic income (loss) per share:
Income (loss) before extraordinary item........ $ (2.99) $ 0.29
Extraordinary item............................. -- (0.16)
---------- ----------
Net income (loss) per share.................... $ (2.99) $ 0.13
========== ==========
Diluted income (loss) per common share:
Income (loss) before extraordinary item........ $ (2.99) $ 0.22
Extraordinary item............................. -- (0.12)
---------- ----------
Net income (loss) per common share............. $ (2.99) $ 0.10
========== ==========
Shares used in calculating basic income (loss)
per share...................................... 1,872,567 6,460,293
========== ==========
Shares used in calculating diluted income (loss)
per share...................................... 1,872,567 8,371,415
========== ==========
</TABLE>
F-11
<PAGE> 87
WASTE CONNECTIONS, INC. AND PREDECESSORS
STATEMENTS OF OPERATIONS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSORS
------------------------------------------
THE DISPOSAL
GROUP
COMBINED
PERIOD FROM PREDECESSORS
JANUARY 1, 1996 COMBINED PERIOD
THROUGH ENDED 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-12
<PAGE> 88
WASTE CONNECTIONS, INC. AND PREDECESSORS
CONSOLIDATED STATEMENTS OF REDEEMABLE STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM INCEPTION (SEPTEMBER 9, 1997)
THROUGH DECEMBER 31, 1997 AND THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
WASTE CONNECTIONS, INC. CONSOLIDATED
-----------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
REDEEMABLE -------------------------------
CONVERTIBLE REDEEMABLE
PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL
-------------------- -------------------- ------------------ PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ------- ---------- ------- --------- ------ ----------
<S> <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...................... -- -- -- -- -- -- --
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
Issuance of redeemable common
stock........................... -- -- 1,000,000 7,500 -- -- --
Issuance of common stock
warrants........................ -- -- -- -- -- -- 2,388
Common stock sold in connection
with initial public offering.... -- -- -- -- 2,300,000 23 23,963
Issuance of common stock.......... -- -- -- -- 1,054,634 10 17,783
Accretion of redeemable
convertible preferred stock..... -- 917 -- -- -- -- --
Preferred stock dividend.......... -- (161) -- -- -- -- --
Conversion of redeemable preferred
stock........................... (2,499,998) (8,279) -- -- 2,499,998 25 8,254
Conversion of redeemable common
stock........................... -- -- (1,000,000) (7,500) 1,000,000 10 7,490
Deferred stock compensation
associated with stock options... -- -- -- -- -- -- 821
Amortization of deferred stock
compensation.................... -- -- -- -- -- -- --
Exercise of stock options......... -- -- -- -- 57,912 1 223
Exercise of warrants.............. -- -- -- -- 222,689 2 136
Payment of stockholder notes
receivable...................... -- -- -- -- -- -- --
Net income........................ -- -- -- -- -- -- --
---------- ------- ---------- ------- --------- --- -------
Balances at December 31, 1998..... -- $ -- -- $ -- 9,435,233 $94 $66,163
========== ======= ========== ======= ========= === =======
<CAPTION>
WASTE CONNECTIONS, INC. CONSOLIDATED
--------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------
STOCKHOLDER DEFERRED
NOTES STOCK ACCUMULATED
RECEIVABLE COMPENSATION DEFICIT TOTAL
----------- ------------ ----------- -------
<S> <C> <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) -- -- (82)
Accretion of redeemable
convertible preferred stock..... -- -- (531) (531)
Net loss.......................... -- -- (5,066) (5,066)
---- ----- ------- -------
Balances at December 31, 1997..... (82) -- (5,597) (551)
Issuance of redeemable common
stock........................... -- -- -- --
Issuance of common stock
warrants........................ -- -- -- 2,388
Common stock sold in connection
with initial public offering.... -- -- -- 23,986
Issuance of common stock.......... -- -- -- 17,793
Accretion of redeemable
convertible preferred stock..... -- -- (917) (917)
Preferred stock dividend.......... -- -- -- --
Conversion of redeemable preferred
stock........................... -- -- -- 8,279
Conversion of redeemable common
stock........................... -- -- -- 7,500
Deferred stock compensation
associated with stock options... -- (821) -- --
Amortization of deferred stock
compensation.................... -- 393 -- 393
Exercise of stock options......... -- -- -- 224
Exercise of warrants.............. -- -- -- 138
Payment of stockholder notes
receivable...................... 82 -- -- 82
Net income........................ -- -- 1,748 1,748
---- ----- ------- -------
Balances at December 31, 1998..... $ -- $(428) $(4,766) $61,063
==== ===== ======= =======
</TABLE>
See accompanying notes.
F-13
<PAGE> 89
WASTE CONNECTIONS, INC. AND PREDECESSORS
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSORS WASTE CONNECTIONS, INC. CONSOLIDATED
COMBINED ---------------------------------------
NINE MONTHS PERIOD FROM
ENDED INCEPTION
SEPTEMBER 30, (SEPTEMBER 9, 1997)
1997 THROUGH YEAR ENDED
(NOTE 1) DECEMBER 31, 1997 DECEMBER 31, 1998
------------- ------------------- -----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)......................................... $(1,173) $ (5,066) $ 1,748
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 4,112
Deferred income taxes................................... -- (369) 1,391
Amortization of debt issuance costs, debt guarantee fees
and accretion of discount on long-term debt........... -- 860 192
Stock compensation...................................... -- 4,395 632
Extraordinary item -- extinguishment of debt............ -- -- 1,291
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable, net.............................. (604) (1,021) (2,159)
Prepaid expenses and other current assets............. (74) (51) (1,587)
Accounts payable...................................... (221) 2,607 (566)
Deferred revenue...................................... (137) 169 878
Accrued liabilities................................... (450) 801 49
Other liabilities..................................... -- (65) 85
------- -------- --------
Net cash provided by (used in) operating activities....... (1,580) 2,614 6,066
Cash Flows From Investing Activities:
Proceeds from sale of property and equipment.............. 188 -- 132
Payments for acquisitions, net of cash acquired........... -- (11,493) (56,341)
Prepaid acquisition costs................................. -- (20) --
Capital expenditures for property and equipment........... (735) (264) (6,248)
Decrease (increase) in other assets....................... 22 (19) (94)
Proceeds from stockholder notes receivable................ -- -- 82
Issuance of stockholder notes receivable.................. -- (82) --
------- -------- --------
Net cash used in investing activities..................... (525) (11,878) (62,469)
Cash Flows From Financing Activities:
Net intercompany balance.................................. 2,142 -- --
Proceeds from short-term borrowings....................... -- 600 --
Proceeds from long-term debt.............................. -- 5,500 77,402
Principal payments on notes payable....................... (38) (2,724) (3,374)
Principal payments on long-term debt...................... -- (157) (39,103)
Proceeds from sale of redeemable convertible preferred
stock................................................... -- 6,992 --
Proceeds from sale of common stock........................ -- 23 23,986
Proceeds from option and warrant exercises................ -- -- 362
Payment of preferred stock dividend....................... -- -- (161)
Debt issuance costs....................................... -- (150) (854)
------- -------- --------
Net cash provided by financing activities................. 2,104 10,084 58,258
------- -------- --------
Net increase (decrease) in cash and equivalents............. (1) 820 1,855
Cash and equivalents at beginning of period................. 102 -- 820
------- -------- --------
Cash and equivalents at end of period....................... $ 101 $ 820 $ 2,675
======= ======== ========
Supplementary Disclosures of Cash Flow Information and
Non-Cash Transactions:
Cash paid for income taxes................................ $ -- $ -- $ 509
======= ======== ========
Cash paid for interest.................................... $ -- $ 183 $ 1,590
======= ======== ========
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 $120,507
Cash paid for acquisitions (including acquisition
costs)................................................ (11,493) (56,341)
-------- --------
Liabilities assumed, stock and notes payable issued to
sellers............................................... $ 5,547 $ 64,166
======== ========
</TABLE>
See accompanying notes.
F-14
<PAGE> 90
WASTE CONNECTIONS, INC. AND PREDECESSORS
STATEMENTS OF CASH FLOWS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSORS
-------------------------------------------
THE DISPOSAL GROUP
COMBINED PERIOD
FROM PREDECESSORS COMBINED
JANUARY 1, 1996 PERIOD ENDED
THROUGH DECEMBER 31, 1996
JULY 31, 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 and equivalents............. 2,233 (82)
Cash and equivalents at beginning of period................. 961 184
------ -------
Cash and equivalents at end of period....................... $3,194 $ 102
====== =======
</TABLE>
See accompanying notes.
F-15
<PAGE> 91
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 in California, Idaho, Kansas, Nebraska, Oklahoma, Oregon, South
Dakota, Utah, Washington and Wyoming.
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.
F-16
<PAGE> 92
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Due to the manner in which BFI intercompany transactions were recorded as
described above, it is not feasible to present a detailed analysis of
transactions reflected in the net intercompany balance with BFI. The change in
the predecessors' combined intercompany balance with BFI (net of income (loss)
and initial investment in the acquired companies) was $642 and $2,142 during the
period ended December 31, 1996 and the nine months ended September 30, 1997,
respectively.
The accompanying statements of operations and cash flows for the Company
and its predecessors for the years ended December 31, 1996, 1997 and 1998 are
comprised of the following entities for the periods indicated:
<TABLE>
<S> <C>
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
YEAR ENDED DECEMBER 31, 1998:
Waste Connections, Inc. Year ended December 31, 1998
</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.
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.
F-17
<PAGE> 93
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Cash equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. As of December 31,
1998, cash equivalents consist of demand money market accounts.
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 - 15 years
Furniture and fixtures...................................... 3 - 6 years
</TABLE>
In connection with the Company's 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 the estimated remaining
useful lives, which range from one to fifteen years.
Capitalized landfill costs include expenditures for land and related
airspace, permitting costs and preparation costs. Landfill permitting and
preparation costs represent only direct costs related to those activities,
including legal, engineering and construction. Interest is capitalized on
landfill permitting and construction projects and other projects under
development while the assets are undergoing activities to ready them for their
intended use. The interest capitalization rate is based on the Company's
weighted average cost of indebtedness. No interest was capitalized in 1998.
Landfill permitting, acquisition and preparation costs, 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, and is amortized on a straight-line
basis over the period of expected benefit of 40 years. Accumulated amortization
amounted to $64 and $1,443 as of December 31, 1997 and 1998, respectively.
The Company continually evaluates the value and future benefits of its
intangible assets, including goodwill. The Company assesses recoverability from
future operations using cash flows and income from
F-18
<PAGE> 94
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
operations of the related acquired business as measures. 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 related intangible assets. There have been
no adjustments to the carrying amounts of intangible assets resulting from these
evaluations as of December 31, 1998.
Fair Values of Financial Instruments
The Company's financial instruments consist primarily of cash, trade
receivables, restricted funds held in trust, trade payables and debt
instruments. The carrying values of cash, trade receivables, restricted funds
held in trust, and trade payables are considered to be representative of their
respective fair values. The carrying values of the Company's debt instruments
approximate their fair values as of December 31, 1997 and 1998, based on current
incremental borrowing rates for similar types of borrowing arrangements.
Interest Rate Protection Agreements
Interest rate protection agreements are used to reduce interest rate risks
and interest costs of the Company's debt portfolio. The Company enters into
these agreements to change the fixed/variable interest rate mix of the portfolio
to reduce the Company's aggregate exposure to increases in interest rates. The
Company does not hold or issue derivative financial instruments for trading
purposes. Hedge accounting treatment is applied to interest rate derivative
contracts that are designated as hedges of specified debt positions. Amounts
payable or receivable under interest rate swap agreements are recognized as
adjustments to interest expense in the periods in which they accrue. Net
premiums paid for derivative financial instruments are deferred and recognized
ratably over the life of the instruments. Under hedge accounting treatment,
current period income is not affected by the increase or decrease in the fair
market value of derivative instruments as interest rates change and these
instruments are not reflected in the financial statements at fair market value.
Early termination of a hedging instrument does not result in recognition of
immediate gain or loss except in those cases when the debt instruments to which
a contract is specifically linked is terminated.
Income Taxes
The Company and The Disposal Group use the liability method to account for
income taxes. Under this method, deferred tax assets and liabilities are
determined based on differences between the financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
During the periods in which the predecessors were owned by BFI, their
operations were included in the consolidated income tax returns of BFI, and no
allocations of income taxes were reflected in the historical statements of
operations. For purposes of the combined predecessor financial statements,
current and deferred income taxes have been provided on a separate income tax
return basis.
Revenue Recognition
Revenues are recognized as services are provided. Certain customers are
billed in advance and, accordingly, recognition of the related revenues is
deferred until the services are provided.
Start-Up and Integration Expenses
During the period from inception (September 9, 1997) through December 31,
1997, the Company incurred certain start-up expenses relating to the formation
of the Company, primarily for legal and other
F-19
<PAGE> 95
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
professional services, and the costs associated with recruiting the Company's
initial management team. In addition, the Company incurred certain integration
expenses relating to its initial acquisitions. These start-up and integration
expenses have been charged to operations as incurred.
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.
Closure and Post-Closure Costs
The Company does not accrue for closure and post-closure costs related to
the Fairmead Landfill it operates in Madera County, California. Madera County as
required by state law, has established a special fund to pay such liabilities.
In 1998, the Company acquired the stock of Red Carpet Landfill ("Red Carpet") in
Oklahoma and Butler County Landfill ("Butler") in Nebraska. Both Red Carpet and
Butler are engaged in landfilling of municipal solid waste and other acceptable
waste streams. 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
F-20
<PAGE> 96
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
consumed. The states in which the Company operates its landfills require a
specified portion of these accrued closure and post-closure obligations to be
funded at any point in time. As of December 31, 1998, the Company estimates that
total closure and post closure costs relating to its landfills will be
approximately $5,474, of which approximately $1,233 has been accrued as of
December 31, 1998 and included in other long-term liabilities in the
accompanying balance sheet.
Segment Information
The Company adopted FASB Statement No. 131, Disclosure About Segments of an
Enterprise and Related Information in 1998. Statement 131 established standards
for the way that public business enterprises report information about operating
segments. It also established standards for related disclosures about products
and services, geographic areas and major customers. Implementation of the
provisions of Statement 131 did not have a significant impact on the Company's
disclosures.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. The statement, which is
to be applied prospectively, is effective for the Company's year ended December
31, 2000. The Company is currently evaluating the impact of SFAS No. 133 on its
future results of operations and financial position.
In April 1998, Statement of Position ("SOP") No. 98-5 -- "Reporting on the
Costs of Start-Up Activities" was issued by the American Institute of Certified
Public Accountants. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. Initial application of the
statement, which is effective for the Company's year ended December 31, 1999, is
to be reported as a cumulative effect of a change in accounting principle. The
Company believes that the future adoption of SOP No. 98-5 will not have a
material effect on its results of operations or financial position.
Reclassifications
Certain amounts reported in the Company's prior year's financial statements
have been reclassified to conform with the 1998 presentation.
2. ACQUISITIONS
1998 Acquisitions
During 1998, the Company acquired 42 businesses, including 2 operational
landfills, which were accounted for as purchases. Aggregate consideration for
these acquisitions consisted of $56,341 in cash (net of cash acquired), $12,488
in notes payable to sellers, 2,054,634 shares of common stock valued at $25,293,
and warrants to purchase 267,925 shares of common stock valued at $1,293. The
results of operations of the acquired businesses have been included in the
Company's consolidated financial statements from their respective acquisition
dates.
F-21
<PAGE> 97
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Certain items affecting the purchase price allocations are preliminary. A
summary of the preliminary purchase price allocations as of December 31, 1998
for the acquisitions consummated in 1998 is as follows:
<TABLE>
<S> <C>
Acquired assets:
Accounts receivable....................................... $ 4,670
Prepaid expenses and other current assets................. 301
Property and equipment.................................... 25,853
Goodwill.................................................. 86,358
Long-term franchise agreements and other.................. 2,390
Non-competition agreement................................. 540
Other assets.............................................. 395
Assumed liabilities:
Deferred revenue.......................................... (577)
Accounts payable and accrued liabilities.................. (9,210)
Other accrued liabilities................................. (1,575)
Long-term liabilities assumed............................. (13,638)
Deferred income taxes..................................... (92)
--------
$ 95,415
========
</TABLE>
In connection with certain of the acquisitions in 1998, the Company is
required to pay contingent consideration to certain former shareholders of the
respective companies, subject to the occurrence of specified events. As of
December 31, 1998, contingent payments relating to these acquisitions total
approximately $4,400, including 51,746 shares placed into escrow, are payable
primarily in cash and stock, and are earned based upon the achievement of
certain milestones. No amounts related to these contingent payments have been
included in the Company's financial statements as the events which would give
rise to such payments have not yet occurred nor are probable.
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 "BFI Acquisitions"). The total purchase price for the
BFI 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, $9,869 was recorded as goodwill and $150 was assigned to
a non-competition agreement. The BFI 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 BFI Acquisitions. The
Company's consolidated statement of operations includes the revenues and
expenses of the acquired businesses after the effective date of the transaction.
F-22
<PAGE> 98
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A summary of the purchase price allocation for the BFI 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.................................................. 9,869
Non-competition agreement................................. 150
Assumed liabilities:
Deferred revenue.......................................... (428)
Accounts payable and accrued liabilities.................. (26)
Accrued losses on acquired contracts...................... (1,309)
Deferred income taxes..................................... (532)
-------
$15,036
=======
</TABLE>
Predecessor Acquisitions
As described in Note 1, BFI acquired for cash and debt The Disposal Group
Combined on July 31, 1996 in a transaction accounted for as a purchase.
Accordingly, the respective purchase price was allocated to the fair values of
the assets acquired and liabilities assumed. The following presents purchase
price information for this acquisition:
<TABLE>
<S> <C>
Tangible assets acquired.................................... $2,076
Goodwill.................................................... 2,671
Assumed liabilities......................................... (33)
------
$4,714
======
</TABLE>
The following unaudited pro forma results of operations assume that the
Company's significant acquisitions included above had occurred at the beginning
of each period presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998
--------- ---------
(UNAUDITED)
<S> <C> <C>
Total revenue.......................................... $61,347 $70,360
Net income (loss)...................................... (5,187) 2,678
Basic income (loss) per share.......................... (2.12) 0.26
Diluted income (loss) per share........................ (2.12) 0.20
</TABLE>
The unaudited pro forma results do not purport to be indicative of the
results of operations which actually would have resulted had the acquisitions
occurred on January 1, 1997, nor are they necessarily indicative of future
operating results.
F-23
<PAGE> 99
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31, 1997 and
1998:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------ --------
<S> <C> <C>
Goodwill................................................. $9,472 $ 96,545
Long-term franchise agreements and contracts............. -- 2,390
Non-competition agreement................................ 150 690
Other.................................................... -- 777
------ --------
9,622 100,402
Less accumulated amortization............................ (72) (1,617)
------ --------
$9,550 $ 98,785
====== ========
</TABLE>
The Company acquired certain long-term franchise agreements, contracts and
non-competition agreements in connection with certain of its acquisitions. 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 estimated fair value of the
non-competition agreements was determined by management based on the discounted
adjusted operating income stream that would have otherwise been subject to
competition. The amounts assigned to the franchise agreements, contracts, and
non-competition agreements is being amortized on a straight-line basis over the
lesser of 40 years or the remaining term of the related agreements (ranging from
17 to 40 years).
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 1997
and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
------ -------
<S> <C> <C>
Land, buildings and improvements.......................... $ -- $13,287
Rolling stock............................................. 2,353 11,325
Containers................................................ 1,995 7,410
Machinery and equipment................................... 60 3,866
Furniture and fixtures.................................... 67 86
------ -------
4,475 35,974
Less accumulated depreciation............................. (290) (2,931)
------ -------
$4,185 $33,043
====== =======
</TABLE>
Landfill costs of approximately $9,044 are included in land, buildings and
improvements at December 31, 1998. No landfills were owned as of December 31,
1997.
Combined depreciation expense for the predecessor operations was $1,101 and
$789 for the year ended December 31, 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 and for the year ended
December 31, 1998 was $290 and $2,556, respectively.
F-24
<PAGE> 100
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
5. OTHER ASSETS
Other assets consist of the following as of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1998
---- ------
<S> <C> <C>
Restricted funds held in trust.............................. $-- $1,521
Other....................................................... 27 273
--- ------
$27 $1,794
=== ======
</TABLE>
Restricted funds held in trust are included as part of other assets and
consist of amounts on deposit with various banks that support the Company's
financial assurance obligations for its landfill facilities' closure and
postclosure costs and amounts outstanding under the Madera Bond (Note 6).
6. LONG-TERM DEBT
On January 30, 1998, the Company obtained a revolving credit facility from
BankBoston N.A. (the "January Credit Facility"). The maximum amount available
under the January 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 January Credit Facility allowed for
the Company to issue up to $5,000 in stand-by letters-of-credit. The January
Credit Facility required quarterly payments of interest and required the Company
to pay an annual commitment fee equal to 0.5% of the unused portion of the
January Credit Facility. In connection with the January 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 (Note 9).
On May 28, 1998, the Company entered into a new revolving credit facility
with a syndicate of banks for which BankBoston N.A. acted as agent (the "May
Credit Facility"). The maximum amount available under the May Credit Facility
was $60,000 (including stand-by letters of credit) and the borrowings bore
interest at various fixed and/or variable rates at the Company's option. The May
Credit Facility replaced the January Credit Facility. The May Credit Facility
allowed for the Company to issue up to $5,000 in stand-by letters-of-credit. The
May Credit Facility required quarterly payments of interest and borrowings 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 facility.
On November 20, 1998, the Company entered into a new revolving credit
facility with a syndicate of banks for which BankBoston N.A. acted as agent (the
"November Credit Facility"). As of December 31, 1998, the maximum amount
available under the November Credit Facility is $115,000 (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 December 31,
1998). The maximum amount available was increased to $125,000 in January 1999.
The November Credit Facility replaced the May Credit Facility. The November
Credit Facility allows for the Company to issue up to $15,000 in stand-by
letters-of-credit, of which $1,829 were issued as of December 31, 1998. The
November Credit Facility requires quarterly payments of interest and it matures
in November 2003. Borrowings are secured by substantially all of the Company's
assets and the Company is required to pay an annual commitment fee equal to
0.375% of the unused portion of the 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
F-25
<PAGE> 101
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Facility also contains covenants that require specified financial ratios and
balances be maintained. As of December 31, 1998, the Company was in compliance
with these covenants.
On June 16, 1998, the Company completed a $1,800 tax-exempt bond financing
for its Madera subsidiary (the "Madera Bond"). These funds will be used for
specified capital expenditures and improvements, including installation of a
landfill gas recovery system. The bonds mature on May 1, 2016 and bear interest
at variable rates based on market conditions for California tax exempt bonds
(approximately 3.8% at December 31, 1998). The bonds are backed by a letter of
credit issued by BankBoston N.A. under the November Credit Facility for $1,800.
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 in the accompanying consolidated balance sheet.
Long-term debt consists of the following as of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
------ -------
<S> <C> <C>
November Credit Facility.................................... $ -- $57,281
Madera Bond................................................. -- 1,800
Term loan payable to a 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 sellers in connection with acquisition,
non-interest bearing, due January 1999.................... -- 8,546
Revolving line of credit from a bank bearing interest at the
bank's prime rate plus 1.5% (aggregating 10% at December
31, 1997); interest was payable monthly and the line was
to expire on September 29, 1998; secured by substantially
all of the Company's assets............................... 600 --
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%; 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 --
Other....................................................... -- 1,995
------ -------
6,762 69,622
Less: current portion....................................... -- (9,516)
------ -------
$6,762 $60,106
====== =======
</TABLE>
The term loan payable to the Bank and the notes payable to BFI were
personally guaranteed by certain officers and stockholders of the Company (Note
9).
F-26
<PAGE> 102
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
As of December 31, 1998, aggregate contractual future principal payments by
calendar year on long-term debt are due as follows:
<TABLE>
<S> <C>
1999............................................... $ 9,516
2000............................................... 561
2001............................................... 251
2002............................................... 84
2003............................................... 57,367
Thereafter......................................... 1,843
-------
$69,622
=======
</TABLE>
Management used borrowings from the January Credit Facility 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.
The Company has entered into an interest rate protection agreement (the
"Interest Agreement"), with its primary banking institution to reduce its
exposure to fluctuations in variable interest rates. The Interest Agreement,
which is effective November 2, 1998 through November 2, 2000, effectively
changes the Company's interest rate paid on a notional amount of $27,700 of its
floating rate long-term debt to a weighted average fixed rate (approximately
6.43% at December 31, 1998). The fair value of the Interest Agreement as of
December 31, 1998 was approximately $188, which reflects the estimated amounts
that the Company would receive to terminate the Interest Agreement based on
quoted market prices of comparable contracts as of December 31, 1998. In the
event of nonperformance by the counterparty, the Company would be exposed to
interest rate risk if the variable interest rate received were to exceed the
fixed rate paid by the Company under the terms of the Interest Agreement.
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 $412 and $441 for the
year ended December 31, 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 and for the
year ended December 31, 1998 amounted to $52 and $500, respectively.
As of December 31, 1998, future minimum lease payments under these leases,
by calendar year, are as follows:
<TABLE>
<S> <C>
1999................................................ $ 521
2000................................................ 539
2001................................................ 490
2002................................................ 418
2003................................................ 413
Thereafter.......................................... 1,774
------
$4,155
======
</TABLE>
F-27
<PAGE> 103
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, 1998, the Company had provided customers and various regulatory
authorities with bonds and letters of credit of approximately $3,692 to secure
its obligations. The Company's November Credit Facility provides for the
issuance of letters of credit in an amount up to $15,000, 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, 1998, the Company is not aware of any such
environmental liabilities.
Legal Proceedings
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, the Company is 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,
1998 there is no current proceeding or litigation involving the Company that the
Company believes will have a material adverse impact on its 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 $2,600 from the lawsuit, which is included
in other income in the accompanying statement of operations.
Employees
Approximately 67 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
F-28
<PAGE> 104
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 accrued 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. Each share of Preferred Stock was
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 Preferred Stock and any accumulated and unpaid dividends were convertible at
the holder's option into shares of the Company's common stock at the calculated
rate of $2.80 per share divided by the "Conversion Price" subject to certain
anti-dilution adjustments. Each share was automatically converted into common
stock immediately upon the closing of the Company's initial public offering of
common stock at a Conversion Price of $2.80 per share.
9. STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
Of the 40,564,767 shares of common stock authorized but unissued as of
December 31, 1998, the following shares were reserved for issuance:
<TABLE>
<S> <C>
Stock option plan........................................... 1,139,214
Stock purchase warrants..................................... 1,291,135
Shares held in escrow....................................... 51,746
---------
2,482,095
=========
</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 bore interest at 8%, were
secured by the Preferred Stock purchased and common stock owned by the
employees, and were paid in full during 1998.
F-29
<PAGE> 105
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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"), 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 1998, 35,000 and 333,121 options to
purchase common stock were exercisable under the Option Plan, respectively. In
addition, as of December 31, 1997 and 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 year ended December 31, 1998 is presented below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES (OPTIONS) EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Outstanding at inception....................... -- $ --
Granted........................................ 528,500 4.92
------- -----
Outstanding as of December 31, 1997............ 528,500 4.92
Granted........................................ 511,050 9.58
Forfeited...................................... 2,874 5.00
Exercised...................................... 57,912 4.69
-------
Outstanding as of December 31, 1998............ 978,764 7.38
=======
</TABLE>
The following table summarizes information about stock options outstanding as of
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE --------------------
WEIGHTED REMAINING WEIGHTED
AVERAGE CONTRACTUAL AVERAGE
EXERCISE LIFE EXERCISE
EXERCISE RANGE SHARES PRICE (IN YEARS) SHARES PRICE
-------------- ------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
$2.80 to 5.00................... 544,099 $ 2.92 8.9 190,869 $ 2.97
$6.00 to 9.50................... 62,415 8.42 8.9 14,582 8.01
$10.50 to 12.50................. 240,000 11.06 9.2 80,003 11.05
$15.19 to 19.00................. 95,750 17.25 9.5 47,667 16.23
$21.00 to 22.13................. 36,500 21.90 9.6 -- --
------- -------
978,764 7.38 8.9 333,121 7.04
======= =======
</TABLE>
F-30
<PAGE> 106
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The weighted average grant date fair values for options granted during 1997
and 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1997 1998
----- -----
<S> <C> <C>
Exercise prices equal to market price of stock.............. $ -- $5.28
Exercise prices less than market price of stock............. -- 6.52
Exercise prices greater than market price of stock.......... 0.30 3.09
</TABLE>
Pro Forma information regarding net income (loss) 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 and the year ended December 31, 1998: risk-free interest rate of 6% and
5%, respectively; dividend yield of zero; volatility factor of the expected
market price of the Company's common stock of .40 and .55, respectively; and a
weighted-average expected life of the option of 4 years.
The Black-Scholes option valuation model was developed for use 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 following
table summarizes 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 and for the year ended December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1997 1998
------- ------
<S> <C> <C>
Pro forma net income (loss)............................... $(5,070) $ 425
Pro forma net loss applicable to common stockholders...... (5,601) (492)
Pro forma basic net loss per share........................ (2.99) (0.08)
</TABLE>
During the year ended December 31, 1998, the Company recorded deferred
stock compensation of $821 relating to stock options granted 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 $393 was recorded during the year ended December
31, 1998 relating to these options, and the remaining $428 will be amortized
into expense in future periods.
Stock Purchase Warrants
At December 31, 1998, the Company had outstanding warrants to purchase
1,291,135 shares of the Company's common stock at exercise prices between $0.01
and $22.13 per share. The warrants are exercisable upon vesting and notification
and expire between 2000 and 2008.
F-31
<PAGE> 107
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 of credit and
term loan payable. The exercise price of the warrant is $.01 per share and
contains provisions for a cashless exercise at the bank's option. 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 1998, the bank received 172,578 shares of
common stock through the exercise of 172,689 warrants.
In connection with their guarantee of certain of the Company's debt
obligations, the Company issued in December, 1997, 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 January 1998, the Company issued a warrant to purchase 140,000 shares of
its common stock to BankBoston N.A. in connection with the January Credit
Facility. The exercise price of the warrant is $2.80 per share. The warrant was
valued at $855 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%,
estimated fair value of the common stock of $7.50 per share and an expected life
of 10 years. The value assigned to the warrant was reflected as a discount on
long-term debt and accreted to interest expense using the interest method over
the expected term of the January Credit Facility. The January Credit Facility
was extinguished in May, 1998 and the unamortized discount on the debt was
expensed as an extraordinary loss on early extinguishment of debt.
In February 1998, the Company issued warrants to purchase 200,000 shares of
its common stock with an exercise price of $4.00 per share in connection with an
acquisition. The warrants were valued at $954 using the Black-Scholes pricing
model and recorded as an element of purchase price for the acquisition.
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 $240 relating to these
warrants. All such warrants were exercised in 1998.
During 1998, the Company issued warrants to certain third party market
development consultants to purchase 67,935 shares of the Company's common stock
with exercise prices ranging from $12.00 to $22.13 per share. The warrants were
valued at $339 using the Black-Scholes pricing model and recorded as an element
of purchase price of the related acquisitions.
F-32
<PAGE> 108
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. INCOME TAXES
The provision (benefit) for income taxes for the periods ended December 31,
1996, the nine months ended September 30, 1997, the period from inception
(September 9, 1997) through December 31, 1997 and the year ended December 31,
1998 consists of the following:
<TABLE>
<CAPTION>
PREDECESSORS
------------------
THE DISPOSAL GROUP WASTE CONNECTIONS, INC.
COMBINED -----------------------------------------
PERIOD FROM PERIOD FROM INCEPTION
JANUARY 1, 1996 (SEPTEMBER 9, 1997)
THROUGH THROUGH YEAR ENDED
JULY 31, 1996 DECEMBER 31, 1997 DECEMBER 31, 1998
------------------ --------------------- -----------------
<S> <C> <C> <C>
Current:
Federal.................. $207 $ 38 $ 862
State.................... -- -- 142
Deferred:
Federal.................. 298 (370) 1,252
State.................... -- -- 139
---- ----- ------
$505 $(332) $2,395
==== ===== ======
</TABLE>
Significant components of the Company's deferred income tax assets and
liability were as follows as of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
WASTE CONNECTIONS,
INC.
DECEMBER 31,
------------------
1997 1998
------ --------
<S> <C> <C>
Deferred income tax assets:
Accounts receivable reserves......................... $ 8 $ 152
Amortization......................................... 290 --
Accrued expenses..................................... -- 8
Vacation accrual..................................... 15 6
State taxes.......................................... -- 22
Other................................................ -- 49
Net operating losses................................. 54 --
----- -------
Total deferred income tax assets................ 367 237
Deferred income tax liabilities:
Amortization......................................... -- (757)
Depreciation......................................... (529) (745)
Other liabilities.................................... -- (146)
Prepaid expenses..................................... -- (234)
----- -------
Total deferred income tax liabilities........... (529) (1,882)
----- -------
Net deferred income tax liability....................... $(162) $(1,645)
===== =======
</TABLE>
F-33
<PAGE> 109
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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
GROUP
COMBINED PREDECESSORS PREDECESSORS
PERIOD FROM COMBINED COMBINED
JANUARY 1, 1996 PERIOD ENDED NINE MONTHS ENDED
THROUGH DECEMBER 31, SEPTEMBER 30,
JULY 31, 1996 1996 1997
--------------- ------------ -----------------
<S> <C> <C> <C>
Income tax provision (benefit) at the statutory
rate........................................... 34.0% (34.0)% (34.0)%
Effect of valuation allowance.................... (16.0)% 34.0% 34.0%
----- ----- -----
18.0% -- --
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
WASTE CONNECTIONS, INC.
-------------------------------------------
PERIOD FROM INCEPTION
(SEPTEMBER 9, 1997)
THROUGH YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998
--------------------- -----------------
<S> <C> <C>
Income tax provision/(benefit) at the statutory rate..... (34.0)% 34.0%
State taxes, net of federal benefit...................... -- 4.0%
Goodwill amortization.................................... -- 3.0%
Stock compensation expense............................... 28.0% 4.0%
Other.................................................... -- 1.0%
----- ----
(6.0)% 46.0%
===== ====
</TABLE>
F-34
<PAGE> 110
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 income (loss) per
share for the period from inception (September 9, 1997) through December 31,
1997 and the year ended December 31, 1998:
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(SEPTEMBER 9, 1997)
THROUGH YEAR ENDED DECEMBER 31, 1998
DECEMBER 31, 1997 -----------------------------
BASIC AND DILUTED BASIC NET DILUTED NET
NET LOSS INCOME (LOSS) INCOME (LOSS)
PER SHARE PER SHARE PER SHARE
-------------------- ------------- -------------
<S> <C> <C> <C>
Numerator:
Income (loss) before extraordinary item........ $ (5,066) $ 2,775 $ 2,775
Redeemable convertible preferred stock
accretion................................... (531) (917) (917)
---------- ---------- ----------
Income (loss) applicable to common stockholders
before extraordinary item................... $ (5,597) $ 1,858 $ 1,858
========== ========== ==========
Extraordinary item............................. -- (1,027) (1,027)
---------- ---------- ----------
Net income (loss) applicable to common
stockholders................................ $ (5,597) $ 831 $ 831
========== ========== ==========
Denominator:
Weighted average common shares outstanding..... 1,872,567 6,460,293 6,460,293
Dilutive effect of stock options and warrants
outstanding................................. -- -- 1,628,930
Incremental common shares issuable upon
redemption of redeemable common stock....... -- -- 282,192
---------- ---------- ----------
1,872,567 6,460,293 8,371,415
========== ========== ==========
</TABLE>
As of December 31, 1998, outstanding options and warrants to purchase
87,832 shares of common stock (with exercise prices from $18.62 to $22.13) could
potentially dilute basic net income per share in the future and have not been
included in the computation of diluted net income per share because to do so
would have been antidilutive for the period presented.
12. 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 and the year ended December 31, 1998, the Company
received, after deducting amounts paid to Continental, approximately $10 and
paid approximately $108, respectively, to/from Continental in these
transactions.
13. EMPLOYEE BENEFIT PLAN
The Company has a voluntary savings and investment plan (the "401(k)
Plan"). The 401(k) Plan is available to all eligible, non-union employees of the
Company. Under the 401(k) Plan, the Company's contributions are 40% of the first
5% of the employee's contributions. During the period from inception
F-35
<PAGE> 111
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(September 9, 1997) through December 31, 1997 and the year ended December 31,
1998, the Company's 401(k) Plan expense was approximately $2 and $58,
respectively.
14. SUBSEQUENT EVENTS
Murrey Companies Merger
On January 19, 1999, the Company merged with Murreys Disposal Company,
Inc., DM Disposal Co., Inc., American Disposal Company, Inc., and Tacoma
Recycling, Inc. (Collectively, the "Murrey Companies"). The transactions were
accounted for as poolings-of-interests, whereby the Company issued 2,888,880
shares of its common stock for all of the outstanding shares of the Murrey
Companies. In Connection with the merger with the Murrey Companies, the Company
incurred transaction related costs of approximately $6,200, which will be
charged to operations in the first quarter of 1999.
Secondary Public Offering
Effective February 9, 1999, the Company sold approximately 4,000,000 shares
of its common stock at $17.50 per share. As a result of the offering, the
Company received approximately $65,300 in net proceeds and used the proceeds to
pay down approximately $50,200 of its then outstanding debt.
Acquisition of Columbia Resource Co. L.P. and Finley-Buttes Limited
Partnership (CRCFBLP)
On March 31, 1999, the Company acquired the stock of two companies that are
the sole partners of CRCFBLP. Total consideration paid for CRCFBLP was
approximately $66,900 in cash.
New Credit Facility
On March 30, 1999, the Company obtained commitments from a syndicate of
banks led by BankBoston, N.A., which increased the Company's borrowing capacity
from $125,000 to $225,000 and modified certain covenants. The revised credit
facility matures in 2004.
F-36
<PAGE> 112
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, 1997 and 1998, 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, 1998. 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, 1997 and 1998, and the combined results of their operations and
their cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Sacramento, California
February 4, 1999
F-37
<PAGE> 113
THE MURREY COMPANIES
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
------- -------
<S> <C> <C>
Current assets:
Cash and equivalents...................................... $ 126 $ 173
Accounts receivable, less allowance for doubtful accounts
of $74 in 1997 and $149 in 1998........................ 2,779 3,007
Prepaid expenses and other current assets................. 79 27
------- -------
Total current assets........................................ 2,984 3,207
Property, plant and equipment, net.......................... 14,819 13,943
Intangible assets, net...................................... 1,862 1,801
Other assets................................................ 31 184
------- -------
$19,696 $19,135
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... $ 1,628 $ 1,500
Accounts payable.......................................... 1,617 1,509
Advances from a related party............................. 543 543
Deferred revenue.......................................... 919 1,095
Other current liabilities................................. -- 106
Accrued liabilities....................................... 832 993
Income taxes payable...................................... 228 337
Current portion of long-term debt......................... 873 731
------- -------
Total current liabilities................................... 6,640 6,814
Long-term debt.............................................. 4,907 3,879
Deferred income taxes....................................... 658 623
Other long-term liabilities................................. -- 353
Commitments and contingencies (Note 7)
Shareholders' equity:
Common stock at par value; 60,500 shares authorized; 1,470
shares issued and outstanding.......................... 45 45
Additional paid-in capital................................ 455 455
Retained earnings......................................... 6,991 6,966
------- -------
Total shareholders' equity.................................. 7,491 7,466
------- -------
$19,696 $19,135
======= =======
</TABLE>
See accompanying notes.
F-38
<PAGE> 114
THE MURREY COMPANIES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Revenues.................................................. $25,024 $28,874 $32,528
Operating expenses:
Cost of operations...................................... 20,465 23,133 26,410
Selling, general and administrative..................... 2,142 2,323 2,791
Depreciation and amortization........................... 1,236 1,371 2,194
------- ------- -------
Income from operations.................................... 1,181 2,047 1,133
Interest expense.......................................... (284) (380) (535)
Other income (expense), net............................... 309 283 79
------- ------- -------
Income before income taxes................................ 1,206 1,950 677
Income tax provision...................................... (543) (634) (535)
------- ------- -------
Net income................................................ 663 1,316 142
Retained earnings, beginning of period.................... 5,095 5,758 6,991
Dividends................................................. -- (83) (167)
------- ------- -------
Retained earnings, end of period.......................... $ 5,758 $ 6,991 $ 6,966
======= ======= =======
Pro forma income taxes (unaudited -- Note 11)............. $ (432) $ (697) $ (238)
------- ------- -------
Pro forma net income (unaudited -- Note 11)............... $ 774 $ 1,253 $ 439
======= ======= =======
</TABLE>
See accompanying notes.
F-39
<PAGE> 115
THE MURREY COMPANIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- ------ -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 663 $1,316 $ 142
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization.......................... 1,236 1,371 2,194
Deferred income taxes.................................. (19) (44) (35)
Gain on sale of land................................... -- -- (8)
Changes in operating assets and liabilities:
Accounts receivable, net............................. 63 (446) (228)
Prepaid expenses and other assets.................... (36) 40 52
Accounts payable..................................... 932 509 (108)
Deferred revenue..................................... 42 154 176
Accrued liabilities.................................. 129 127 161
Other liabilities.................................... -- -- 459
Income taxes payable................................. (232) (93) 109
------- ------ -------
Net cash provided by operating activities................... 2,778 2,934 2,914
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions................................. -- (2,900) --
Capital expenditures for property and equipment........... (4,790) (2,108) (1,874)
Proceeds from sale of land................................ -- -- 625
Net change in other assets................................ 31 (28) (153)
------- ------ -------
Net cash used in investing activities....................... (4,759) (5,036) (1,402)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 1,418 3,414 --
Principal payments on long-term debt...................... (615) (928) (1,170)
Net change in short-term borrowings....................... 659 19 (128)
Net change in advances from a related party............... (259) (275) --
Payment of dividends...................................... -- (83) (167)
------- ------ -------
Net cash provided by (used in) financing activities......... 1,203 2,147 (1,465)
------- ------ -------
Net increase (decrease) in cash and equivalents............. (778) 45 47
Cash and equivalents:
Beginning of year......................................... 859 81 126
------- ------ -------
End of year............................................... $ 81 $ 126 $ 173
======= ====== =======
</TABLE>
F-40
<PAGE> 116
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- ------ -------
<S> <C> <C> <C>
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND
NON-CASH TRANSACTIONS:
Cash paid for interest.................................... $ 284 $ 358 $ 540
======= ====== =======
Cash paid for income taxes................................ $ 792 $ 744 $ 461
======= ====== =======
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 $ --
Notes payable to sellers............................... -- (200) --
------- ------ -------
Cash paid for acquisitions............................. $ -- $2,900 $ --
======= ====== =======
</TABLE>
See accompanying notes.
F-41
<PAGE> 117
THE MURREY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
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 consider all highly liquid investments with a maturity of
three months or less 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 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
F-42
<PAGE> 118
THE MURREY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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
intangible assets, including goodwill. The Murrey Companies assess
recoverability from future operations using cash flows and income from
operations of the related acquired business as measures. 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 related intangible assets. There
have been no adjustments to the carrying amounts of intangible assets resulting
from these evaluations as of December 31, 1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values of cash and cash equivalents approximate their fair values
as of December 31, 1997 and 1998. The carrying values of short-term borrowings
(Note 5) and long-term debt (Note 6) approximate their fair values as of
December 31, 1997 and 1998, 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.
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
F-43
<PAGE> 119
THE MURREY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, 1997 and 1998 consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Land and buildings.......................................... $ 6,668 $ 6,174
Machinery and equipment..................................... 3,780 3,772
Rolling stock............................................... 7,570 8,388
Containers.................................................. 4,380 5,234
Furniture and fixtures...................................... 255 249
------- -------
22,653 23,817
Less accumulated depreciation............................... (7,834) (9,874)
------- -------
$14,819 $13,943
======= =======
</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.
A summary of the purchase price allocation 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>
F-44
<PAGE> 120
THE MURREY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 consist of the following as of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
------ ------
<S> <C> <C>
Goodwill.................................................... $1,791 $1,791
Non-competition agreement................................... 80 80
------ ------
1,871 1,871
Less accumulated amortization............................... (9) (70)
------ ------
$1,862 $1,801
====== ======
</TABLE>
5. SHORT-TERM BORROWINGS
Short-term borrowings consist of various revolving and non-revolving
lines-of-credit with a bank, bearing interest at 8.50% as of December 31, 1998
and which mature at various dates through February 28, 1999. The lines of credit
are secured by all accounts receivable and inventory accounts, which totaled
$3,176 as of December 31, 1998. The lines-of-credit were fully utilized as of
December 31, 1998.
F-45
<PAGE> 121
THE MURREY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. LONG-TERM DEBT
Long-term debt consists of the following as of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
------ ------
<S> <C> <C>
Note payable to a bank bearing interest at a variable rate
(approximately 8.4% as of December 31, 1998); 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 $1,866
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 $400 as of December 31, 1998
and certain cash accounts................................. 632 514
Notes payable to a bank bearing interest at various fixed
rates (ranging from 9.1% to 9.2% as of December 31, 1998);
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 $2,463 as
of December 31, 1998...................................... 1,544 1,350
Equipment financing notes payable bearing interest at
various rates (ranging from 8.6% to 8.8% as of December
31, 1998); monthly payments of principal and interest
aggregating $21; maturing at various dates through
September 2001; secured by equipment with an aggregate net
book value of approximately $660 as of December 31,
1998...................................................... 822 423
Notes payable to sellers bearing interest at 9.0% as of
December 31, 1998; monthly principal and interest payments
of $3; maturing October, 2007; secured by land and
buildings with a net book value of approximately $901 as
of December 31, 1998...................................... 471 291
Unsecured notes payable to seller bearing interest at 8.0%
as of December 31, 1998; monthly principal and interest
payments of $4; maturing in June 2002..................... 189 90
Other....................................................... 122 76
------ ------
5,780 4,610
Less: current portion....................................... 873 731
------ ------
Long-term debt.............................................. $4,907 $3,879
====== ======
</TABLE>
As of December 31, 1998, aggregate contractual future principal payments by
calendar year on long-term debt are due as follows:
<TABLE>
<S> <C>
1999........................................................ $ 731
2000........................................................ 936
2001........................................................ 1,182
2002........................................................ 336
2003........................................................ 226
Thereafter.................................................. 1,199
------
$4,610
======
</TABLE>
F-46
<PAGE> 122
THE MURREY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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, 1996, 1997 and 1998 amounted to $170, $183, and $230, respectively.
As of December 31, 1998, future minimum lease payments under these operating
leases, by calendar year, are as follows:
<TABLE>
<S> <C>
1999........................................................ $194
2000........................................................ 174
2001........................................................ 109
2002........................................................ 86
2003........................................................ 72
Thereafter.................................................. 285
----
$920
====
</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. As of December 31, 1998, the Murrey 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 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, 1998, there is no current proceeding or
litigation involving the Murrey Companies that the Murrey Companies believe will
have a material adverse impact on their business, financial condition, results
of operations or cash flows.
F-47
<PAGE> 123
THE MURREY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 was closed on December 31,
1998; and subsequent to that date, all of the waste collected by the Murrey
Companies in Pierce County was long hauled to an alternate disposal site pending
completion of a new solid waste landfill in Pierce County. 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 46 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, 1996, 1997, and 1998.
ADVANCES
As of December 31, 1997 and 1998, the Murrey Companies had non-interest bearing
advances payable to one of their shareholders totaling $543.
DISPOSAL FEES
During the years ended December 31, 1996, 1997 and 1998, the Murrey Companies
paid $7,730, $8,592, and $8,816, 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, 1996, 1997 and 1998, the Murrey Companies' 401(k) Plan expense was
approximately $267, $316, and $336, respectively.
F-48
<PAGE> 124
THE MURREY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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,
------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Federal:
Current................................................... $562 $678 $570
Deferred.................................................. (19) (44) (35)
---- ---- ----
$543 $634 $535
==== ==== ====
</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, 1997 and 1998 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,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Federal expense expected at statutory rates on combined
income before income taxes............................. $410 $663 $230
Tax effect of companies reporting under Subchapter S..... 124 (42) 302
Other.................................................... 9 13 3
---- ---- ----
$543 $634 $535
==== ==== ====
</TABLE>
11. PRO FORM 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
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 $2,135, $1,941 and $1,924 for 1996, 1997 and 1998, respectively. Had
the Murrey Companies filed federal income tax returns as regular corporations
for 1996, 1997 and 1998, income tax expense under the provisions of Financial
Accounting Standards No. 109 would have been $432, $697 and $238, respectively.
F-49
<PAGE> 125
THE MURREY COMPANIES
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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,
--------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Federal:
Current................................................ $726 $660 $654
Deferred............................................... (294) 37 (416)
---- ---- ----
Pro forma income taxes................................... $432 $697 $238
==== ==== ====
</TABLE>
The pro forma provisions for income taxes for the years ended December 31, 1996,
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
certain non-deductible expenses.
The Murrey Companies pro forma deferred income tax asset of approximately $71
and $301 as of December 31, 1997 and 1998, respectively, relates principally to
differences in the recognition of bad debt expenses, vacation accruals, accruals
for contract losses and certain other temporary differences. The Murrey
Companies also had pro forma deferred tax liabilities as of December 31, 1997
and 1998 of approximately $1,332 and $1,147 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 January 19, 1999, the Murrey Companies merged with wholly-owned subsidiaries
of Waste Connections, Inc. ("WCI") whereby all shares of common stock of the
Murrey Companies were exchanged for 2,888,880 shares of WCI common stock. The
transactions were accounted for as poolings-of-interests.
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-50
<PAGE> 126
INDEPENDENT AUDITORS' REPORT
The Partners
Columbia Resource Co., L.P. and
Finley-Buttes Limited Partnership
Vancouver, Washington
We have audited the accompanying combined balance sheets of Columbia
Resource Co., L.P. and Finley-Buttes Limited Partnership as of December 31, 1997
and 1998, and the related combined statements of income, partners' capital and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Partnerships' 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 Columbia Resource
Co., L.P. and Finley-Buttes Limited Partnership at December 31, 1997 and 1998,
and the combined results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
PERKINS & COMPANY, P.C.
Portland, Oregon
March 9, 1999, except
for the second paragraph
of Note 12, as to which the
date is March 31, 1999
F-51
<PAGE> 127
COLUMBIA RESOURCE CO., L.P.
AND FINLEY-BUTTES LIMITED PARTNERSHIP
COMBINED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 1,579 $ 2,048
Investments in marketable securities...................... -- 5,640
Accounts receivable:
Trade, less allowance for doubtful accounts of $64 in
1998.................................................. 2,343 2,330
Related parties........................................ 39 137
Prepaid expenses.......................................... 225 300
Other assets.............................................. -- 668
------- -------
Total current assets.............................. 4,186 11,123
Property and equipment, net................................. 21,177 19,820
Investment in marketable securities......................... 3,900 --
Other assets................................................ 2,688 2,389
------- -------
$31,951 $33,332
======= =======
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable:
Trade.................................................. $ 678 $ 821
Related parties........................................ 315 334
Accrued expenses.......................................... 403 536
Other liability........................................... -- 668
Current portion of long-term debt......................... 2,039 1,779
------- -------
Total current liabilities......................... 3,435 4,138
Long-term debt.............................................. 18,908 16,298
Other liability............................................. 533 --
Commitments and contingencies (Notes 4, 6 and 9)
Partners' capital:
Accumulated other comprehensive income.................... -- 740
Other partners' capital................................... 9,075 12,156
------- -------
9,075 12,896
------- -------
$31,951 $33,332
======= =======
</TABLE>
See accompanying notes.
F-52
<PAGE> 128
COLUMBIA RESOURCE CO., L.P.
AND FINLEY-BUTTES LIMITED PARTNERSHIP
COMBINED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Revenues.................................................... $21,492 $22,940 $22,511
Operating expenses:
Cost of operations........................................ 10,986 11,975 10,675
Selling, general and administrative....................... 2,876 3,145 2,956
Depreciation and amortization............................. 2,745 2,846 2,729
------- ------- -------
Income from operations...................................... 4,885 4,974 6,151
Other income (expense):
Interest expense, net..................................... (1,675) (1,519) (1,258)
Other income, net......................................... 16 19 29
Gain on disposal of subsidiary............................ -- 2,544 --
------- ------- -------
(1,659) 1,044 (1,229)
------- ------- -------
Net income.................................................. $ 3,226 $ 6,018 $ 4,922
======= ======= =======
Pro forma income taxes (unaudited -- Note 11)............... $(1,255) $(1,935) $(1,785)
------- ------- -------
Pro forma net income (unaudited -- Note 11)................. $ 1,971 $ 4,083 $ 3,137
======= ======= =======
</TABLE>
See accompanying notes.
F-53
<PAGE> 129
COLUMBIA RESOURCE CO., L.P.
AND FINLEY-BUTTES LIMITED PARTNERSHIP
COMBINED STATEMENTS OF PARTNERS' CAPITAL AND COMPREHENSIVE INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER OTHER TOTAL
COMPREHENSIVE COMPREHENSIVE PARTNERS' PARTNERS'
INCOME INCOME CAPITAL CAPITAL
------------- ------------- --------- ---------
<S> <C> <C> <C> <C>
Balances at December 31, 1995............... $ -- $ 3,045 $ 3,045
Net income.................................. $3,226 -- 3,226 3,226
======
Capital contributions....................... -- 475 475
Distributions............................... -- (2,080) (2,080)
---- ------- -------
Balances at December 31, 1996............... -- 4,666 4,666
Net income.................................. $6,018 -- 6,018 6,018
======
Distributions............................... -- (1,609) (1,609)
---- ------- -------
Balances at December 31, 1997............... -- 9,075 9,075
Comprehensive income:
Net income................................ $4,922 -- 4,922 4,922
Other comprehensive income:
Unrealized gains on marketable
securities............................. 740 740 -- 740
------
$5,662
======
Distributions............................... -- (1,841) (1,841)
---- ------- -------
Balances at December 31, 1998............... $740 $12,156 $12,896
==== ======= =======
</TABLE>
See accompanying notes.
F-54
<PAGE> 130
COLUMBIA RESOURCE CO., L.P.
AND FINLEY-BUTTES LIMITED PARTNERSHIP
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 3,226 $ 6,018 $ 4,922
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on disposal of subsidiary......................... -- (2,544) --
Depreciation and amortization.......................... 2,745 2,846 2,729
Loss on disposition of property and equipment.......... 2 1 1
Changes in operating assets and liabilities:
Accounts receivable.................................. 3,641 (184) (85)
Prepaid expenses..................................... (65) (7) (73)
Inventories.......................................... 13 (37) --
Accounts payable..................................... (224) (318) 163
Accrued expenses..................................... (740) (3) 133
Other liability...................................... 106 117 134
------- ------- -------
Net cash provided by operating activities................. 8,704 5,890 7,924
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in commercial paper............................ -- -- (1,000)
Proceeds from (investment in) municipal bonds............. (1,200) 1,200 --
Purchases of property and equipment....................... (848) (1,330) (227)
Investment in cell development............................ (855) (1,590) (1,069)
Investment in other assets................................ (353) (393) (448)
------- ------- -------
Net cash used in investing activities..................... (3,256) (2,113) (2,744)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on short-term borrowings..................... (1,000) -- --
Proceeds from long-term debt.............................. 1,000 -- --
Principal payments on long-term debt...................... (3,142) (1,989) (2,870)
Capital contributions..................................... 400 -- --
Distributions paid to partners............................ (2,080) (1,609) (1,841)
------- ------- -------
Net cash used in financing activities..................... (4,822) (3,598) (4,711)
------- ------- -------
Net increase in cash and cash equivalents................. 626 179 469
Cash and cash equivalents, beginning of period.............. 774 1,400 1,579
------- ------- -------
Cash and cash equivalents, end of period.................... $ 1,400 $ 1,579 $ 2,048
======= ======= =======
SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND
NON-CASH TRANSACTIONS:
Cash paid for interest................................. $ 1,872 $ 1,657 $ 1,501
Advance due to partner contributed to Columbia......... $ 75 $ -- $ --
Marketable securities received for sale of
subsidiary........................................... $ -- $ 3,900 $ --
</TABLE>
See accompanying notes.
F-55
<PAGE> 131
COLUMBIA RESOURCE CO., L.P.
AND FINLEY-BUTTES LIMITED PARTNERSHIP
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
1. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Columbia Resource Co., L.P. (Columbia) is a Washington limited partnership
which was formed in December 1989. On January 1, 1992, Columbia began
significant operations. Columbia has a long-term contract with a county in
Washington (the County) to receive and dispose of all municipal waste generated
within its geographical boundaries. Columbia's headquarters are located in
Vancouver, Washington.
Finley-Buttes Limited Partnership (Finley) is an Oregon limited partnership
which was formed in December 1989. On November 1, 1990, Finley began significant
operations. Finley has a long-term contract with a governmental subdivision of
Oregon to operate a regional landfill for solid waste. A substantial portion of
Finley's operations involves providing landfill services to Columbia.
The general partner of both partnerships is Management Environmental
National of Washington, Inc. (MENWI). The limited partner of both partnerships
is RH Financial Corporation (RHFC). Both partners are Washington corporations
and are owned by the same individual. MENWI and RHFC have no operations or
activity other than those of Columbia and Finley, as reflected in the
accompanying financial statements.
PRINCIPLES OF COMBINATION
The combined financial statements include the accounts of Columbia and
Finley (the Partnerships) as a result of their common ownership and management.
Significant intercompany balances and transactions have been eliminated in
combination. For periods prior to the sale of Columbia's subsidiary on December
31, 1997, the combined financial statements also include the accounts of
Wastech, Inc. (Note 10).
CASH AND CASH EQUIVALENTS
The Partnerships consider all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents.
CONCENTRATIONS OF CREDIT RISK
The Partnerships grant credit to customers with a large portion of revenue
generated from business with large regional and national commercial waste
hauling companies. The Partnership maintains allowances for losses based on the
expected collectibility of accounts receivable. Credit losses have been within
management's expectations.
The Partnerships limit their credit exposure for cash and cash equivalents
by investing in what they believe to be only high quality investments.
The Partnerships maintain cash in bank deposit accounts which may exceed
federally insured limits. The Partnerships have not experienced any losses in
such accounts.
INVESTMENT IN COMMERCIAL PAPER
Investments in commercial paper of $1,000 at December 31, 1998 maturing on
February 17, 1999 are considered available for sale and are recorded at cost
which approximates fair value.
F-56
<PAGE> 132
COLUMBIA RESOURCE CO., L.P.
AND FINLEY-BUTTES LIMITED PARTNERSHIP (CONTINUED)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
INVESTMENT IN EQUITY SECURITIES
Equity securities (Note 10) are accounted for at fair value. Unrealized
holding gains and losses on securities classified as available for sale are
excluded from earnings and reported as a separate component of other
comprehensive income until realized. Realized gains and losses are determined on
the basis of historical cost.
The fair value of such securities was $3,900 and $4,640 at December 31,
1997 and 1998, respectively. Unrealized holding gains, added to other
comprehensive income during 1998 was $740. There have been no realized gains or
losses on these securities.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
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 these activities,
including legal, engineering, construction of landfill improvements, cell
development costs and direct costs of personnel dedicated for these purposes.
Certain landfill costs related to the entire landfill are depreciated on
the straight-line method over the estimated useful life of the landfill.
Landfill preparation costs related specifically to cell development are
depreciated as airspace of the related cell is consumed. Finley estimates the
rate used to depreciate cell development costs by estimating costs in developing
cells which have been designed and the additional airspace which will be gained
upon completion of development. These estimates are updated on an annual basis.
Depreciation of other property and equipment is provided on the
straight-line method based upon the estimated useful lives of the assets. The
estimated useful lives are as follows:
<TABLE>
<S> <C>
Land improvements........................................... 15 - 20 years
Landfill, excluding cell development costs.................. 50 years
Buildings................................................... 20 - 31 years
Machinery and equipment..................................... 3 - 15 years
Furniture and fixtures...................................... 3 - 7 years
</TABLE>
DEFERRED COSTS
The Partnerships use the straight-line method for amortization of deferred
costs. Bid costs are amortized over 20 years, the life of the related contract.
Loan fees are amortized over the lives of the related loans. Bond issuance costs
are amortized over 15 years, the term of the related bond.
INCOME TAXES
Columbia and Finley are not taxpaying entities for federal or state income
tax purposes. Activity from the partnerships is taxable to each partner and is
reportable in the partners' tax returns.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Partnerships adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"),
which establishes new rules for the reporting
F-57
<PAGE> 133
COLUMBIA RESOURCE CO., L.P.
AND FINLEY-BUTTES LIMITED PARTNERSHIP (CONTINUED)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
and display of comprehensive income and its components; however, the adoption
had no impact on the Partnership's net income or partners' capital. SFAS 130
requires unrealized gains or losses on the Partnership's available for sale
securities, which prior to adoption would have been reported separately in
partners' capital, to be included in other comprehensive income. There was no
effect on prior year financial statements to conform to the requirements of SFAS
130.
ENVIRONMENTAL RISKS -- The Partnerships 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. Any substantial liability for environmental
damage incurred by the Partnerships could have a material adverse effect on the
Partnership'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
Partnerships 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 Partnerships. From time to time the Partnerships
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, 1998, there are no current
proceedings or litigation involving the Partnerships that they believe will have
a material adverse impact on the Partnerships' business, financial condition,
results of operations or cash flows.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- --------
<S> <C> <C>
Land and land improvements.................................. $ 6,137 $ 6,137
Landfill, including cell development costs.................. 15,330 16,399
Buildings................................................... 7,193 7,231
Machinery and equipment..................................... 6,622 6,793
Furniture and fixtures...................................... 303 249
-------- --------
35,585 36,809
Less accumulated depreciation............................... (14,408) (16,989)
-------- --------
$ 21,177 $ 19,820
======== ========
</TABLE>
F-58
<PAGE> 134
COLUMBIA RESOURCE CO., L.P.
AND FINLEY-BUTTES LIMITED PARTNERSHIP (CONTINUED)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
3. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
------ ------
<S> <C> <C>
Pollution liability self-insurance fund (Note 9)............ $1,778 $2,226
Deferred bid costs, net of accumulated amortization of $234
in 1997 and $273 in 1998.................................. 546 507
Deferred bond issuance costs, net of accumulated
amortization of $227 in 1997 and $265 in 1998............. 340 302
Other....................................................... 24 22
------ ------
2,688 3,057
Less current portion (Note 9)............................... -- (668)
------ ------
$2,688 $2,389
====== ======
</TABLE>
The pollution liability self-insurance fund is invested primarily in
short-term government bonds which are being held to maturity and recorded at
amortized cost which approximates fair value.
4. LINE OF CREDIT
Columbia has available a revolving line of credit of $1,000 with U.S. Bank
(the bank) which is subject to periodic review. Interest on the revolving line
of credit is payable monthly at the bank's prime rate plus a margin based on the
combined net worth of the Partnerships (7.75% at December 31, 1998). The
outstanding principal balance of this note is required to be paid in full for 30
consecutive days each year. This credit agreement also provides for a term loan
to Finley, which is supported by the same collateral base (Note 5).
Amounts due the bank are collateralized by essentially all assets of the
Partnerships. Also, the agreement contains provisions, among others, requiring
the maintenance of certain levels of net worth and operating income and limits
the amount of capital expenditures. As of December 31, 1998, the Partnerships
were in compliance with the covenants.
The note payable due to a related party totaling $5,575 at December 31,
1998 is subordinated to the bank to secure the Partnerships' obligations to the
bank (Note 5).
F-59
<PAGE> 135
COLUMBIA RESOURCE CO., L.P.
AND FINLEY-BUTTES LIMITED PARTNERSHIP (CONTINUED)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- -------
<S> <C> <C>
Industrial revenue bonds, collateralized by essentially all
assets of the Partnerships and by an irrevocable letter of
credit totaling $13,599 at December 31, 1998, interest at
6% to 7.5% paid semi-annually, principal payments due
periodically through 2006................................. $10,450 $ 9,565
Note payable to a related party, collateralized by
essentially all assets of the Partnerships, interest
payable monthly at 6.18% through January 2003, monthly
payments of $66 including interest from January 2003
through May 2012 (Notes 4 and 12)......................... 5,575 5,575
Note payable to bank, collateralized by essentially all
assets of the Partnerships, payable in monthly
installments of $70, plus interest at the prime rate plus
a margin based on debt to worth ratio (7.75% at December
31, 1998), through June 2002 (Notes 4 and 12)............. 3,776 2,937
Other notes payable......................................... 1,146 --
------- -------
20,947 18,077
Less current portion........................................ (2,039) (1,779)
------- -------
$18,908 $16,298
======= =======
</TABLE>
At December 31, 1998, annual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
INDUSTRIAL NOTE PAYABLE
REVENUE TO A RELATED OTHER NOTES
BONDS PARTY PAYABLE TOTAL
---------- ------------ ----------- -------
<S> <C> <C> <C> <C>
Year ending December 31,
1999................................................. $ 940 $ -- $ 839 $ 1,779
2000................................................. 1,000 -- 839 1,839
2001................................................. 1,065 -- 839 1,904
2002................................................. 1,135 -- 420 1,555
2003................................................. 1,215 418 -- 1,633
Thereafter........................................... 4,210 5,157 -- 9,367
------ ------ ------ -------
$9,565 $5,575 $2,937 $18,077
====== ====== ====== =======
</TABLE>
The industrial revenue bond agreement requires Columbia to maintain a
certain level of partnership capital and restricts distributions from Columbia.
The note payable of $5,575 contains provisions, among others, requiring the
maintenance of certain levels of net worth and operating income and limits the
amount of capital expenditures.
As of December 31, 1998 the Partnerships were in compliance with the
covenants.
6. RELATED PARTY TRANSACTIONS
The following is a summary of significant related party transactions:
- Disposal fees and freight charges paid to a related entity totaled $3,118
in 1996, $2,979 in 1997 and $3,234 in 1998.
F-60
<PAGE> 136
COLUMBIA RESOURCE CO., L.P.
AND FINLEY-BUTTES LIMITED PARTNERSHIP (CONTINUED)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
- Interest paid to related parties totaled $366 in 1996, $349 in 1997 and
$344 in 1998.
- Revenues for landfill and disposal services provided to affiliated
companies totaled $635 in 1996 and $12 in 1997.
A substantial amount of the accounts payable due to related parties
represents balances due for regular disposal fees and freight charges.
7. MAJOR CUSTOMERS
In 1996, one customer represented approximately 22% and two customers
represented approximately 17% each of the revenue of the Partnerships.
In 1997, two customers represented approximately 20% each and Waste
Connections, Inc. (WCI) represented approximately 10% of the revenue of the
Partnerships.
In 1998, WCI represented approximately 29% and Waste Management, Inc.
represented 19% of the revenues of the Partnerships.
8. RETIREMENT PLAN
The Partnerships sponsor a 401(k) retirement plan. Substantially all
employees are covered under the plan. Contributions are made to the plan at the
discretion of management and totaled approximately $62 in 1996, $66 in 1997 and
$69 in 1998. Included in the contributions were approximately $4 in 1996 and $3
in 1997 for Wastech, Inc., a former subsidiary (Note 10).
9. COMMITMENTS AND CONTINGENCIES
A pollution liability self-insurance fund was created pursuant to the
requirements of the contract with the County. Monthly deposits are made to the
fund by Columbia based on tonnage of waste received under the contract. Amounts
held in the fund are to be used for potential pollution claims made against
Columbia in its performance of the terms of the contract.
Columbia's contract with the County was amended effective January 1, 1999,
resulting in changes in tipping fees, administrative fees and the pollution
liability self-insurance fund. The liability representing the fund balance of
future disbursements to the County (30% of the fund balance) at the effective
date is to be distributed to that county and the obligation of Columbia to make
monthly deposits to this fund has ceased.
The remaining 70% of the fund balance is to be held for a period of ten
years after the last date waste is received under the contract. Provided there
are no claims against the fund, Columbia may take distributions from the fund.
The balance in the fund as of December 31, 1997 and 1998 totaled $1,970 and
$2,409, respectively. At December 31, 1997 and 1998, $192 and $183,
respectively, is included in cash and cash equivalents because Columbia has
received reimbursement of these amounts for income taxes paid as a result of
taxability of the fund. The remaining balance is included in other assets.
Columbia has expensed 30% of each monthly deposit (net of related income taxes
to be paid) to the fund with a corresponding increase to other liability to
reflect the portion of future disbursements from the fund due to the County.
There have been no claims to date, and it is not possible to determine the
amount of future liability, if any.
Performance under the terms of the contract with the County is secured by a
$2,000 letter of credit.
F-61
<PAGE> 137
COLUMBIA RESOURCE CO., L.P.
AND FINLEY-BUTTES LIMITED PARTNERSHIP (CONTINUED)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
Finley has a royalty agreement with the previous owner of the property
which requires payments of $200 per year through the life of the landfill.
Payments are expensed and totaled $200, in each of 1996, 1997 and 1998.
Performance under terms of a permit issued to Finley by the State of Oregon
is secured by a $1,000 letter of credit.
A contract with a governmental subdivision of Oregon requires Finley to pay
an annual license fee based upon the total number of tons of solid waste
generated from certain geographic boundaries. The minimum annual license fee is
$50, as adjusted from time to time.
Finley is responsible for all closure and post-closure costs relating to
the disposal site owned and operated by Finley. Pursuant to a contract with a
governmental subdivision of Oregon, Finley has established a fund to provide for
closure and post-closure costs (the Closure Fund) and a fund to provide for the
maintenance of roads giving access to the landfill (a Road Fund). The funds are
held by the governmental subdivision in interest-bearing accounts. Finley
deposits amounts into the funds monthly based upon tonnage of solid waste
delivered to the landfill. Payments are expensed as they are paid. Finley's
obligation to make deposits to the Closure Fund terminates at such time as the
total amounts deposited, including interest, total $1,000. Amounts deposited to
date in the Closure Fund, including interest, total approximately $362 at
December 31, 1998.
10. SALE OF WASTECH, INC.
On December 31, 1997, Columbia sold its wholly owned subsidiary, Wastech,
Inc. (the Subsidiary) to Waste Management, Inc. (the Company) for 99,506 shares
of stock of the Company (fair value of $3,900 at December 31, 1997). The stock
is considered available for sale.
11. PRO FORMA INCOME TAX INFORMATION (UNAUDITED)
As described in Note 1, the Partnerships are not subject to federal income
taxes. In connection with the proposed stock purchase agreement with Waste
Connections, Inc. (WCI) (Note 12), the Partnerships (as wholly-owned
subsidiaries of WCI) will be subject to corporate income taxes. The Partnerships
had combined income for income tax purposes of $2,706, $3,455 and $4,973 for
1996, 1997 and 1998, respectively. Had the Partnerships filed income tax returns
as regular corporations for 1996, 1997 and 1998, income tax expense under the
provisions of Financial Accounting Standards No. 109 would have been $1,255,
$1,935 and $1,785, respectively.
F-62
<PAGE> 138
COLUMBIA RESOURCE CO., L.P.
AND FINLEY-BUTTES LIMITED PARTNERSHIP (CONTINUED)
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS)
The following unaudited pro forma information reflects income tax expense
(benefit) for the Partnerships as if the Partnerships had been subject to income
taxes:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------
1996 1997 1998
------ ------ ------
<S> <C> <C> <C>
Current:
Federal............................................ $ 920 $1,175 $1,691
State.............................................. 126 158 198
------ ------ ------
1,046 1,333 1,889
Deferred............................................. 209 602 (104)
------ ------ ------
Pro forma income taxes............................... $1,255 $1,935 $1,785
====== ====== ======
</TABLE>
The pro forma provisions for income taxes for the years ended December 31,
1996, 1997 and 1998 differ from the amounts computed by applying the applicable
statutory federal income tax rate of (34%) to income before income taxes due to
certain non-deductible expenses, state income taxes and differences in the book
and tax gains on the sale of Wastech, Inc. in 1997.
The Partnership's pro forma deferred income tax asset of approximately $193
and $265 as of December 31, 1997 and 1998, respectively, relates principally to
differences in the recognition of vacation accruals, liability reserves and
certain other temporary differences. The Partnerships also had pro forma
deferred tax liabilities as of December 31, 1997 and 1998 of approximately
$1,168 and $1,131 which relate to differences between tax and financial methods
of depreciation, the unrealized gain on the investment in marketable securities,
and differences between the book and tax basis of accounts receivable and
accrued liabilities.
12. SUBSEQUENT EVENTS
On January 15, 1999, Finley distributed $365 to Partners for income tax
payments.
On February 12, 1999, MENWI, RHFC, the sole stockholder of MENWI and RHFC,
and Waste Connections, Inc. (WCI) announced they had signed a definitive
agreement under which all of the outstanding shares of MENWI and RHFC would be
sold to WCI for cash. The transaction closed on March 31, 1999. Prior to
closing, Columbia distributed to the partners the marketable securities
discussed in Note 10. At the time the transaction closed, the notes payable of
$5,575 and $2,937 (Note 5) became due and payable.
13. YEAR 2000 ISSUE (UNAUDITED)
Like other companies, the Partnerships could be adversely affected if the
computer systems we, our suppliers or customers use do not properly process and
calculate date-related information and data from the period surrounding and
including January 1, 2000. This is commonly known as the "Year 2000" issue.
Additionally, this issue could impact non-computer systems and devices such as
production equipment, elevators, etc. At this time, because of the complexities
involved in the issue, management cannot provide assurances that the Year 2000
issue will not have an impact on the Partnerships' operations, however,
management does not expect operations to be significantly affected by Year 2000
issues.
F-63
<PAGE> 139
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Stockholders
Waste Connections, Inc.
We have audited the supplemental consolidated balance sheets of Waste
Connections, Inc., and Predecessors (resulting from the consolidation of Waste
Connections, Inc. and 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, 1997 and 1998 and the
related supplemental consolidated statements of operations, redeemable stock and
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998 which appear on pages F-65 through F-71 herein as listed
in the accompanying Index to Financial Statements. The supplemental consolidated
financial statements give retroactive effect to the mergers of Waste
Connections, Inc. and the Murrey Companies on January 19, 1999, which have been
accounted for using the pooling-of-interests method as described in the notes to
the supplemental consolidated financial statements. These supplemental financial
statements are the responsibility of the management of Waste Connections, Inc.
Our responsibility is to express an opinion on these supplemental 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, based on our audits, the supplemental consolidated
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Waste Connections, Inc. and Predecessors
at December 31, 1997 and 1998, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, after giving retroactive effect to the mergers of Waste Connections,
Inc. and the Murrey Companies, as described in the notes to the supplemental
consolidated financial statements, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
Sacramento, California
February 17, 1999,
except for the third and
fourth paragraphs of Note 15,
as to which the dates are
March 31, 1999
F-64
<PAGE> 140
WASTE CONNECTIONS, INC. AND PREDECESSORS
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
WASTE CONNECTIONS, INC.
SUPPLEMENTAL
CONSOLIDATED
DECEMBER 31,
1997 1998
--------- ----------
<S> <C> <C>
Current assets:
Cash and equivalents...................................... $ 946 $ 2,848
Accounts receivable, less allowance for doubtful accounts
$93 and $511 at December 31, 1997 and 1998,
respectively........................................... 6,719 13,776
Prepaid expenses and other current assets................. 437 2,273
------- --------
Total current assets.............................. 8,102 18,897
Property and equipment, net................................. 19,004 46,986
Intangible assets, net...................................... 11,412 100,586
Other assets................................................ 58 1,978
------- --------
$38,576 $168,447
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings..................................... $ 1,628 $ 1,500
Accounts payable.......................................... 4,226 8,107
Advances from a related party............................. 543 543
Deferred revenue.......................................... 1,516 3,147
Accrued liabilities....................................... 1,885 5,484
Current portion of long-term debt......................... 873 10,247
Other current liabilities................................. 251 2,193
------- --------
Total current liabilities......................... 10,922 31,221
Long-term debt.............................................. 11,669 63,985
Deferred income taxes....................................... 820 2,268
Other long term liabilities................................. 702 2,444
Commitments and contingencies (Note 8)
Redeemable convertible preferred stock: $.01 par value;
2,500,000 shares authorized at December 31, 1997;
2,499,998 shares issued and outstanding at December 31,
1997 (none authorized at December 31, 1998)............... 7,523 --
Stockholders' equity:
Preferred stock: $.01 par value; 7,500,000 and 10,000,000
shares authorized at December 31, 1997 and December 31,
1998, respectively; none issued and outstanding........ -- --
Common stock: $.01 par value; 50,000,000 shares
authorized; 5,188,880, and 12,324,113 shares issued and
outstanding at December 31, 1997 and 1998,
respectively........................................... 52 123
Additional paid-in capital.................................. 5,576 66,634
Stockholder notes receivable................................ (82) --
Deferred stock compensation................................. -- (428)
Retained earnings........................................... 1,394 2,200
------- --------
Total stockholders' equity........................ 6,940 68,529
------- --------
$38,576 $168,447
======= ========
</TABLE>
See accompanying notes.
F-65
<PAGE> 141
WASTE CONNECTIONS, INC. AND PREDECESSORS
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSORS
COMBINED NINE WASTE CONNECTIONS, INC.
MONTHS ENDED SUPPLEMENTAL CONSOLIDATED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
1997 (NOTE 1) 1997 1998
------------- ---------- -----------
<S> <C> <C> <C>
Revenues............................................ $18,114 $ 35,111 $ 86,570
Operating expenses:
Cost of operations................................ 14,753 27,836 62,964
Selling, general and administrative............... 3,009 2,942 8,108
Depreciation and amortization..................... 1,083 1,725 6,306
Start-up and integration.......................... -- 493 --
Stock compensation................................ -- 4,395 632
------- ---------- -----------
Income (loss) from operations....................... (731) (2,280) 8,560
Interest expense.................................... (456) (1,415) (2,792)
Other income (expense), net......................... 14 247 79
------- ---------- -----------
Income (loss) before income taxes................... (1,173) (3,448) 5,847
Income tax provision................................ -- (302) (2,930)
------- ---------- -----------
Income (loss) before extraordinary item............. (1,173) (3,750) 2,917
Extraordinary item -- early extinguishment of debt,
net of tax benefit of $264........................ -- -- (1,027)
------- ---------- -----------
Net income (loss)................................... $(1,173) $ (3,750) $ 1,890
======= ========== ===========
Redeemable convertible preferred stock accretion.... (531) (917)
---------- -----------
Net income (loss) applicable to common
stockholders...................................... $ (4,281) $ 973
========== ===========
Basic income (loss) per common share:
Income (loss) before extraordinary item........... $ (0.90) $ 0.21
Extraordinary item................................ -- (0.11)
---------- -----------
Net income (loss) per share....................... $ (0.90) $ 0.10
========== ===========
Diluted income (loss) per share:
Income (loss) before extraordinary item........... $ (0.90) $ 0.18
Extraordinary item................................ -- (0.09)
---------- -----------
Net income (loss) per common share................ $ (0.90) $ 0.09
========== ===========
Shares used in calculating basic net income (loss)
per share......................................... 4,761,447 9,349,173
========== ===========
Shares used in calculating diluted net income (loss)
per share......................................... 4,761,447 11,260,295
========== ===========
</TABLE>
See accompanying notes.
F-66
<PAGE> 142
WASTE CONNECTIONS, INC. AND PREDECESSORS
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREDECESSORS
-----------------------------------
THE DISPOSAL
GROUP
COMBINED PREDECESSORS WASTE CONNECTIONS, INC.
PERIOD FROM COMBINED PERIOD SUPPLEMENTAL
JANUARY 1, 1996 ENDED CONSOLIDATED
THROUGH DECEMBER 31, 1996 YEAR ENDED
JULY 31, 1996 (NOTE 1) DECEMBER 31, 1996
--------------- ----------------- -----------------------
<S> <C> <C> <C>
Revenues...................................... $8,738 $13,422 $ 25,024
Operating expenses:
Cost of operations.......................... 6,174 11,420 20,465
Selling, general and administrative......... 2,126 1,649 2,142
Depreciation and amortization............... 324 962 1,236
------ ------- ----------
Income (loss) from operations................. 114 (609) 1,181
Interest expense.............................. (12) (225) (284)
Other income (expense), net................... 2,661 (147) 309
------ ------- ----------
Income (loss) before income taxes............. 2,763 (981) 1,206
Income tax (provision) benefit................ (505) -- (543)
------ ------- ----------
Net income (loss)............................. $2,258 $ (981) $ 663
====== ======= ==========
Basic and diluted net income per share........ $ 0.23
==========
Shares used in per share calculation.......... 2,888,880
==========
</TABLE>
See accompanying notes.
F-67
<PAGE> 143
WASTE CONNECTIONS, INC. AND PREDECESSORS
SUPPLEMENTAL CONSOLIDATED STATEMENT OF REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
WASTE CONNECTIONS, INC. SUPPLEMENTAL CONSOLIDATED
-----------------------------------------------------------------
REDEEMABLE STOCKHOLDERS' EQUITY
CONVERTIBLE REDEEMABLE -------------------
PREFERRED STOCK COMMON STOCK COMMON STOCK
-------------------- -------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------- ---------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995......... -- $ -- -- $ -- 2,888,880 $ 29
Net income............................ -- -- -- -- -- --
---------- ------- ---------- ------- ---------- ----
Balances at December 31, 1996......... -- -- -- -- 2,888,880 29
Sale of redeemable convertible
preferred stock..................... 2,499,998 6,992 -- -- -- --
Sale of common stock.................. -- -- -- -- 2,300,000 23
Issuance of common stock warrants..... -- -- -- -- -- --
Issuance of stockholder notes
receivable.......................... -- -- -- -- -- --
Accretion of redeemable convertible
preferred stock..................... -- 531 -- -- -- --
Dividends paid........................ -- -- -- -- -- --
Net loss.............................. -- -- -- -- -- --
---------- ------- ---------- ------- ---------- ----
Balances at December 31, 1997......... 2,499,998 7,523 -- -- 5,188,880 52
Issuance of redeemable common stock... -- -- 1,000,000 7,500 -- --
Issuance of common stock warrants..... -- -- -- -- -- --
Common stock sold in connection with
initial public offering............. -- -- -- -- 2,300,000 23
Issuance of common stock.............. -- -- -- -- 1,054,634 10
Accretion of redeemable convertible
preferred stock..................... -- 917 -- -- -- --
Preferred stock dividend.............. -- (161) -- -- -- --
Conversion of redeemable preferred
stock............................... (2,499,998) (8,279) -- -- 2,499,998 25
Conversion of redeemable common
stock............................... -- -- (1,000,000) (7,500) 1,000,000 10
Deferred stock compensation associated
with stock options.................. -- -- -- -- -- --
Amortization of deferred stock
compensation........................ -- -- -- -- -- --
Exercise of stock options............. -- -- -- -- 57,912 1
Exercise of warrants.................. -- -- -- -- 222,689 2
Payment of stockholder notes
receivable.......................... -- -- -- -- -- --
Dividends paid........................ -- -- -- -- -- --
Net income............................ -- -- -- -- -- --
---------- ------- ---------- ------- ---------- ----
Balances at December 31, 1998......... -- $ -- -- $ -- 12,324,113 $123
========== ======= ========== ======= ========== ====
<CAPTION>
WASTE CONNECTIONS, INC. SUPPLEMENTAL CONSOLIDATED
------------------------------------------------------------
STOCKHOLDERS' EQUITY
------------------------------------------------------------
ADDITIONAL STOCKHOLDER DEFERRED
PAID-IN NOTES STOCK RETAINED
CAPITAL RECEIVABLE COMPENSATION EARNINGS TOTAL
---------- ----------- ------------ -------- -------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995......... $ 471 $ -- $ -- $5,095 $ 5,595
Net income............................ -- -- -- 663 663
------- ---- ----- ------ -------
Balances at December 31, 1996......... 471 -- -- 5,758 6,258
Sale of redeemable convertible
preferred stock..................... -- -- -- -- --
Sale of common stock.................. 4,395 -- -- -- 4,418
Issuance of common stock warrants..... 710 -- -- -- 710
Issuance of stockholder notes
receivable.......................... -- (82) -- -- (82)
Accretion of redeemable convertible
preferred stock..................... -- -- -- (531) (531)
Dividends paid........................ -- -- -- (83) (83)
Net loss.............................. -- -- -- (3,750) (3,750)
------- ---- ----- ------ -------
Balances at December 31, 1997......... 5,576 (82) -- 1,394 6,940
Issuance of redeemable common stock... -- -- -- -- --
Issuance of common stock warrants..... 2,388 -- -- -- 2,388
Common stock sold in connection with
initial public offering............. 23,963 -- -- -- 23,986
Issuance of common stock.............. 17,783 -- -- -- 17,793
Accretion of redeemable convertible
preferred stock..................... -- -- -- (917) (917)
Preferred stock dividend.............. -- -- -- -- --
Conversion of redeemable preferred
stock............................... 8,254 -- -- -- 8,279
Conversion of redeemable common
stock............................... 7,490 -- -- -- 7,500
Deferred stock compensation associated
with stock options.................. 821 -- (821) -- --
Amortization of deferred stock
compensation........................ -- -- 393 -- 393
Exercise of stock options............. 223 -- -- -- 224
Exercise of warrants.................. 136 -- -- -- 138
Payment of stockholder notes
receivable.......................... -- 82 -- -- 82
Dividends paid........................ -- -- -- (167) (167)
Net income............................ -- -- -- 1,890 1,890
------- ---- ----- ------ -------
Balances at December 31, 1998......... $66,634 $ -- $(428) $2,200 $68,529
======= ==== ===== ====== =======
</TABLE>
See accompanying notes.
F-68
<PAGE> 144
WASTE CONNECTIONS, INC. AND PREDECESSORS
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSORS
COMBINED NINE
MONTHS ENDED WASTE CONNECTIONS, INC.
SEPTEMBER 30, SUPPLEMENTAL CONSOLIDATED
1997 YEAR ENDED DECEMBER 31,
(NOTE 1) 1997 1998
------------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)....................................... $(1,173) $ (3,750) $ 1,890
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain on sale of assets............................... (4) -- --
Depreciation and amortization........................ 1,083 1,725 6,306
Deferred income taxes................................ -- (413) 1,356
Amortization of debt issuance costs, debt guarantee
fees and accretion of discount on long-term debt... -- 860 192
Stock compensation................................... -- 4,395 632
Gain on sale of land................................. -- -- (8)
Extraordinary item -- extinguishment of debt......... -- -- 1,291
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable, net........................... (604) (1,467) (2,387)
Prepaid expenses and other current assets.......... (74) (11) (1,535)
Accounts payable................................... (221) 3,116 (674)
Deferred revenue................................... (137) 323 1,054
Accrued liabilities................................ (450) 835 319
Other liabilities.................................. -- (65) 544
------- -------- --------
Net cash provided by (used in) operating activities..... (1,580) 5,548 8,980
Cash Flows From Investing Activities:
Proceeds from sale of property and equipment............ 188 -- 132
Payments for acquisitions, net of cash acquired......... -- (14,393) (56,341)
Prepaid acquisition costs............................... -- (20) --
Capital expenditures for property and equipment......... (735) (2,372) (8,122)
Proceeds from sale of land.............................. -- -- 625
Net change in other assets.............................. 22 (47) (247)
Proceeds from stockholder notes receivable.............. -- -- 82
Issuance of stockholder notes receivable................ -- (82) --
------- -------- --------
Net cash used in investing activities................... (525) (16,914) (63,871)
</TABLE>
F-69
<PAGE> 145
<TABLE>
<CAPTION>
PREDECESSORS
COMBINED NINE
MONTHS ENDED WASTE CONNECTIONS, INC.
SEPTEMBER 30, SUPPLEMENTAL CONSOLIDATED
1997 YEAR ENDED DECEMBER 31,
(NOTE 1) 1997 1998
------------- ----------- -----------
<S> <C> <C> <C>
Cash Flows From Financing Activities:
Net intercompany balance................................ $ 2,142 $ -- $ --
Proceeds from short-term borrowings..................... -- 600 --
Proceeds from long-term debt............................ -- 8,914 77,402
Principal payments on notes payable..................... (38) (2,724) (3,374)
Principal payments on long-term debt.................... -- (1,085) (40,273)
Proceeds from sale of redeemable convertible preferred
stock................................................ -- 6,992 --
Proceeds from sale of common stock...................... -- 23 23,986
Proceeds from option and warrant exercises.............. -- -- 362
Net change in short term borrowings..................... -- 19 (128)
Net change in advances from a related party............. -- (275) --
Payment of dividends.................................... -- (83) (328)
Debt issuance costs..................................... -- (150) (854)
------- -------- --------
Net cash provided by financing activities................. 2,104 12,231 56,793
------- -------- --------
Net increase (decrease) in cash and equivalents........... (1) 865 1,902
Cash and equivalents at beginning of period............... 102 81 946
------- -------- --------
Cash and equivalents at end of period..................... $ 101 $ 946 $ 2,848
======= ======== ========
Supplementary Disclosures of Cash Flow Information and
Non-Cash Transactions:
Cash paid for interest.................................. $ -- $ 541 $ 2,130
======= ======== ========
Cash paid for income taxes.............................. $ -- $ 744 $ 970
======= ======== ========
Redeemable convertible preferred stock accretion........ $ 531 $ 917
======== ========
Issuance of notes payable for land and buildings........ $ 315 $ --
======== ========
In connection with acquisitions, the Company assumed
liabilities as follows:
Fair value of assets acquired........................... $ 20,140 $120,507
Cash paid for acquisitions (including acquisition
costs)............................................... (11,693) (56,341)
-------- --------
Liabilities assumed, stock and notes payable issued to
sellers.............................................. $ 8,447 $ 64,166
======== ========
</TABLE>
See accompanying notes.
F-70
<PAGE> 146
WASTE CONNECTIONS, INC. AND PREDECESSORS
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSORS
------------------------------- WASTE
THE DISPOSAL CONNECTIONS, INC.
GROUP COMBINED PREDECESSORS SUPPLEMENTAL
PERIOD FROM COMBINED CONSOLIDATED
JANUARY 1, PERIOD ENDED YEAR ENDED
1996 THROUGH DECEMBER 31, DECEMBER 31,
JULY 31, 1996 1996 (NOTE 1) 1996
-------------- ------------- -----------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)............................. $2,258 $ (981) $ 663
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization.............. 324 962 1,236
Deferred income taxes...................... 298 -- (19)
Changes in operating assets and
liabilities, net of effects from
acquisitions:
Accounts receivable, net................. 1,201 (1,992) 63
Prepaid expenses and other current
assets................................ (2) (104) (36)
Accounts payable......................... (45) 713 932
Deferred revenue......................... (522) 421 42
Accrued liabilities...................... (987) 428 129
Income taxes payable..................... -- -- (232)
------ ------- -------
Net cash provided by (used in) operating
activities................................. 2,525 (553) 2,778
Cash Flows From Investing Activities:
Proceeds from sale of property and
equipment.................................. -- 117 --
Capital expenditures for property and
equipment.................................. (7) (282) (4,790)
Net change in other assets.................... -- 33 31
------ ------- -------
Net cash used in investing activities......... (7) (132) (4,759)
Cash Flows From Financing Activities:
Net intercompany balance...................... -- 642 --
Proceeds from long-term debt.................. 142 -- 1,418
Principal payments on long-term debt.......... (427) -- (615)
Principal payments on notes payable........... -- (39) --
Net change in short-term borrowings........... -- -- 659
Net change in advances to related party....... -- -- (259)
------ ------- -------
Net cash provided by (used in) financing
activities.................................... (285) 603 1,203
------ ------- -------
Net increase (decrease) in cash................. 2,233 (82) (778)
Cash and equivalents beginning of period........ 961 184 859
------ ------- -------
Cash and equivalents at end of period........... $3,194 $ 102 $ 81
====== ======= =======
Supplementary Disclosures of Cash Flow
Information and Non-Cash Transactions:
Cash paid for interest........................ $ -- $ -- $ 284
====== ======= =======
Cash paid for income taxes.................... $ -- $ -- $ 792
====== ======= =======
Issuance of notes payable for land and
buildings.................................. $ -- $ -- $ 260
====== ======= =======
</TABLE>
See accompanying notes.
F-71
<PAGE> 147
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 in California, Idaho, Kansas, Nebraska, Oklahoma, Oregon, South
Dakota, Utah, Washington and Wyoming.
BASIS OF PRESENTATION
These supplemental consolidated financial statements include the accounts
of WCI and its wholly-owned subsidiaries. The consolidated entity is referred to
herein as the Company. All intercompany accounts and transactions have been
eliminated in consolidation.
As more fully described in Note 2, on January 19, 1999, the Company entered
into a business combination with the Murrey Companies. The business combination
has been accounted for as pooling-of-interests and the historical consolidated
financial statements of the Company and its predecessors for all years prior to
the business combination have been restated in the accompanying supplemental
consolidated financial statements to include the financial positions, results of
operations and cash flows of the Murrey Companies. The supplemental financial
statements will become the historical financial statements of the Company upon
issuance of financial statements for a subsequent period that includes the date
of the merger.
The supplemental consolidated financial statements of the Company include
reclassifications made to conform financial statement presentation of the Murrey
Companies to that of Waste Connections, Inc.
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 management of the Company 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
F-72
<PAGE> 148
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
method of accounting, and the respective purchase prices were allocated to the
fair values of the assets acquired and liabilities assumed. Similarly, the
Company's acquisitions of the predecessors from BFI in September 1997 were
accounted for using the purchase method of accounting, and the purchase price
was allocated to the fair value of the assets acquired and liabilities assumed.
Consequently, the amounts of depreciation and amortization included in the
statements of operations for the periods presented reflect the changes in basis
of the underlying assets that were made as a result of the changes in ownership
that occurred during the periods presented. In addition, because the predecessor
companies operated independently and were not under common control or management
during these periods, and because different tax strategies may have influenced
their results of operations, the data may not be comparable to or indicative of
their operating results after their acquisition by BFI.
Due to the manner in which BFI intercompany transactions were recorded as
described above, it is not feasible to present a detailed analysis of
transactions reflected in the net intercompany balance with BFI. The change in
the predecessors' combined intercompany balance with BFI (net of income (loss)
and initial 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's
predecessors for the years ended December 31, 1996 and 1997 are comprised of the
following entities for the periods indicated:
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 twelve month period of the entities
acquired by BFI in 1995 and 1996 described
above)
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.
For periods prior to WCI's incorporation on September 9, 1997, the
supplemental consolidated financial statements of the Company consist solely of
the Murrey Companies. The financial statements of the Murrey Companies include
the combined accounts of Murrey's Disposal Company, Inc. ("Murrey's"), American
Disposal Company, Inc. ("American"), D.M. Disposal Co., Inc. ("DM"), and Tacoma
Recycling Company, Inc. ("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.
F-73
<PAGE> 149
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 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.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less at purchase to be cash equivalents. As of December 31,
1998, cash equivalents consist of demand money market accounts.
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 allowances 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>
Buildings................................................... 20 years
Machinery and equipment..................................... 3 - 15 years
Rolling stock............................................... 10 years
Containers.................................................. 5 - 15 years
Furniture and fixtures...................................... 3 - 6 years
</TABLE>
In connection with 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 fifteen 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
F-74
<PAGE> 150
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
activities, including legal, engineering and construction. Interest is
capitalized on landfill permitting and construction projects and other projects
under development while the assets are undergoing activities to ready them for
their intended use. The interest capitalization rate is based on the Company's
weighted average cost of indebtedness. No interest was capitalized in 1998.
Landfill permitting, acquisition and preparation costs 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, and is amortized on a straight-line
basis over the period of expected benefit of 40 years. Accumulated amortization
amounted to $81 and $1,687 as of December 31, 1997 and 1998, respectively.
The Company continually evaluates the value and future benefits of its
intangible assets, including goodwill. The Company assesses recoverability from
future operations using cash flows and income from operations of the related
acquired business as measures. 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 related intangible assets. There have been no adjustments to the carrying
amount of intangible assets resulting from these evaluations as of December 31,
1998.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash, trade
receivables, restricted funds held in trust, trade payables and debt
instruments. The carrying values of cash, trade receivables, restricted funds
held in trust, and trade payables are considered to be representative of their
respective fair values. The carrying values of the Company's debt instruments
approximate their fair values as of December 31, 1997 and 1998, based on current
incremental borrowing rates for similar types of borrowing arrangements.
INTEREST RATE PROTECTION AGREEMENTS
Interest rate protection agreements are used to reduce interest rate risks
and interest costs of the Company's debt portfolio. The Company enters into
these agreements to change the fixed/variable interest rate mix of the portfolio
to reduce the Company's aggregate exposure to increases in interest rates. The
Company does not hold or issue derivative financial instruments for trading
purposes. Hedge accounting treatment is applied to interest rate derivative
contracts that are designated as hedges of specified debt positions. Amounts
payable or receivable under interest rate swap agreements are recognized as
adjustments to interest expense in the periods in which they accrue. Net
premiums paid for derivative financial instruments are deferred and recognized
ratably over the life of the instruments. Under hedge accounting treatment,
current period income is not affected by the increase or decrease in the fair
market value of derivative instruments as interest rates change and these
instruments are not reflected in the financial statements at fair market value.
Early termination of a hedging instrument does not result in recognition of
immediate gain or loss except in those cases when the debt instruments to which
a contract is specifically linked is terminated.
F-75
<PAGE> 151
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INCOME TAXES
The Company, The Disposal Group, and DM 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.
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.
REVENUE RECOGNITION
Revenues are recognized as services are provided. Certain customers are
billed in advance and, accordingly, recognition of the related revenues is
deferred until the services are provided.
START-UP AND INTEGRATION EXPENSES
During the period from inception (September 9, 1997) through December 31,
1997, the Company incurred certain start-up expenses relating to the formation
of the Company, primarily for legal and other professional services, and the
costs associated with recruiting the Company's initial management team. In
addition, the Company incurred certain integration expenses relating to its
initial acquisitions. These start-up and integration expenses have been charged
to operations as incurred.
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 12). Earnings per share data have not
been presented for the predecessor operations because such data is not
meaningful.
F-76
<PAGE> 152
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CLOSURE AND POST-CLOSURE COSTS
The Company does not accrue for closure and post-closure costs related to
the Fairmead Landfill it operates in Madera County, California. Madera County as
required by state law, has established a special fund to pay such liabilities.
In 1998, the Company acquired the stock of Red Carpet Landfill ("Red Carpet") in
Oklahoma and Butler County Landfill ("Butler") in Nebraska. Both Red Carpet and
Butler are engaged in landfilling of municipal solid waste and other acceptable
waste streams. 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. 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. As of December 31, 1998, the Company estimates that
total closure and post-closure costs relating to its landfills will be
approximately $5,474, of which approximately $1,233 has been accrued as of
December 31, 1998 and included in other long-term liabilities in the
accompanying balance sheet.
SEGMENT INFORMATION
The Company adopted FASB Statement No. 131, Disclosure About Segments of an
Enterprise and Related Information in 1998. Statement 131 established standards
for the way that public business enterprises report information about operating
segments. It also established standards for related disclosures about products
and services, geographic areas and major customers. Implementation of the
provisions of Statement 131 did not have a significant impact on the Company's
disclosures.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. The statement, which is
to be applied prospectively, is effective for the Company's year ended December
31, 2000. The Company is currently evaluating the impact of SFAS No. 133 on its
future results of operations and financial position.
In April 1998, Statement of Position ("SOP") No. 98-5 -- "Reporting on the
Costs of Start-Up Activities" was issued by the American Institute of Certified
Public Accountants. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. Initial application of the
F-77
<PAGE> 153
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
statement, which is effective for the Company's year ended December 31, 1999, is
to be reported as a cumulative effect of a change in accounting principle. The
Company believes that the future adoption of SOP No. 98-5 will not have a
material effect on its results of operations or financial position.
RECLASSIFICATIONS
Certain amounts reported in the Company's prior year's financial statements
have been reclassified to conform with the 1998 presentation.
2. ACQUISITIONS
THE MURREY COMPANIES
On January 19, 1999, Waste Connections, Inc. consummated a business
combination with the Murrey Companies which included the exchange of 2,888,880
shares of Waste Connections, Inc. common stock for all outstanding shares of the
Murrey Companies. This business combination will be accounted for as
poolings-of-interests, and accordingly, the historical financial statements of
the Company have been restated on a supplemental basis to include the
consolidated financial statements of Waste Connections, Inc. and the Murrey
Companies for all periods presented.
The supplemental consolidated financial statements have been prepared to
give retroactive effect to the business combination with the Murrey Companies.
Generally accepted accounting principles prohibit giving effect to a consummated
business combination accounted for by the pooling-of-interests method in
financial statements that do not include the date of consummation. The
accompanying supplemental consolidated financial statements do not extend
through the date of consummation, however, they will become the historical
consolidated financial statements of the Company after financial statements
covering the date of consummation of the business combinations are issued.
In connection with the business combination with the Murrey Companies,
Waste Connections, Inc. incurred transaction related costs of approximately
$6,200 which will be to charged to operations in the period during which the
merger is consummated.
The table below sets forth the combined revenues and net income (loss) for
the years ended December 31, 1996, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
WASTE THE MURREY SUPPLEMENTAL
CONNECTIONS, INC. COMPANIES CONSOLIDATED
----------------- ---------- ------------
<S> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Revenues.............................................. $ -- $25,024 $25,024
Net income............................................ -- 663 663
YEAR ENDED DECEMBER 31, 1997:
Revenues.............................................. $ 6,237 $28,874 $35,111
Net income (loss)..................................... (5,066) 1,316 (3,750)
YEAR ENDED DECEMBER 31, 1998:
Revenues.............................................. $54,042 $32,528 $86,570
Net income............................................ 1,748 142 1,890
</TABLE>
F-78
<PAGE> 154
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1998 ACQUISITIONS
During 1998, the Company acquired 42 businesses, including 2 operational
landfills, which were accounted for as purchases. Aggregate consideration for
these acquisitions consisted of $56,341 in cash (net of cash acquired), $12,488
in notes payable to sellers, 2,054,634 shares of common stock valued at $25,293,
and warrants to purchase 267,925 shares of common stock valued at $1,293. The
results of operations of the acquired businesses have been included in the
Company's consolidated financial statements from their respective acquisition
dates.
Certain items affecting the purchase price allocations are preliminary. A
summary of the preliminary purchase price allocations as of December 31, 1998
for the acquisitions consummated in 1998 is as follows:
<TABLE>
<S> <C>
Acquired assets:
Accounts receivable....................................... $ 4,670
Prepaid expenses and other current assets................. 301
Property and equipment.................................... 25,853
Goodwill.................................................. 86,358
Long-term franchise agreements and other.................. 2,390
Non-competition agreement................................. 540
Other assets.............................................. 395
Assumed liabilities:
Deferred revenue.......................................... (577)
Accounts payable and accrued liabilities.................. (9,210)
Other accrued liabilities................................. (1,575)
Long-term liabilities assumed............................. (13,638)
Deferred income taxes..................................... (92)
--------
$ 95,415
========
</TABLE>
In connection with certain of the acquisitions in 1998, the Company is
required to pay contingent consideration to certain former shareholders of the
respective companies, subject to the occurrence of specified events. As of
December 31, 1998, contingent payments relating to these acquisitions total
approximately $4,400, including 51,746 shares placed into escrow, are payable
primarily in cash and stock, and are earned based upon the achievement of
certain milestones. No amounts related to these contingent payments have been
included in the Company's financial statements as the events which would give
rise to such payments have not yet occurred nor are probable.
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, $9,869 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.
F-79
<PAGE> 155
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
A summary of the purchase price allocation for the BFI 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.................................................. 9,869
Non-competition agreement................................. 150
Assumed liabilities:
Deferred revenue.......................................... (428)
Accounts payable and accrued liabilities.................. (26)
Accrued losses on acquired contracts...................... (1,309)
Deferred income taxes..................................... (532)
-------
$15,036
=======
</TABLE>
ISLAND DISPOSAL
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 "Murrey
Acquisitions"). The total purchase price for the Murrey 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
Murrey 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.
A summary of the purchase price allocation is as follows:
<TABLE>
<S> <C>
Acquired assets:
Property and equipment.................................... $1,229
Goodwill.................................................. 1,791
Non-competition agreements................................ 80
------
$3,100
======
</TABLE>
PREDECESSOR ACQUISITIONS
As described in Note 1, BFI acquired for cash and debt The Disposal Group
Combined on July 31, 1996 in a transaction accounted for as a purchase.
Accordingly, the respective purchase price was allocated to the fair values of
the assets acquired and liabilities assumed. The following presents purchase
price information for this acquisition:
<TABLE>
<S> <C>
Tangible assets acquired.................................... $2,076
Goodwill.................................................... 2,671
Assumed liabilities......................................... (33)
------
$4,714
======
</TABLE>
F-80
<PAGE> 156
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following unaudited pro forma results of operations assume that the
Company's significant acquisitions included above had occurred at the beginning
of each period presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1998
--------- ----------
(UNAUDITED)
<S> <C> <C>
Total revenue........................................... $90,221 $102,888
Net income (loss)....................................... (3,871) 2,820
Basic income (loss) per share........................... (0.79) 0.19
Diluted income (loss) per share......................... (0.79) 0.17
</TABLE>
The unaudited pro forma results do not purport to be indicative of the
results of operations which actually would have resulted had the acquisitions
occurred on January 1, 1997, nor are they necessarily indicative of future
operating results.
3. INTANGIBLE ASSETS
Intangible assets consist of the following as of December 31, 1997 and
1998:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
------- --------
<S> <C> <C>
Goodwill................................................ $11,263 $ 98,336
Long-term franchise agreements and contracts............ -- 2,390
Non-competition agreement............................... 230 770
Other, net.............................................. -- 777
------- --------
11,493 102,273
Less accumulated amortization........................... (81) (1,687)
------- --------
$11,412 $100,586
======= ========
</TABLE>
The Company acquired certain long-term franchise agreements, contracts and
non-competition agreements in connection with certain of its acquisitions. 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 estimated fair value of the
non-competition agreements was determined by management based on the discounted
adjusted operating income stream that would have otherwise been subject to
competition. The amounts assigned to the franchise agreements, contracts, and
non-competition agreements is being amortized on a straight-line basis over the
lesser of 40 years or the remaining term of the related agreements (ranging from
17 to 40 years).
F-81
<PAGE> 157
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31, 1997 and
1998:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
------- --------
<S> <C> <C>
Land and buildings...................................... $ 6,668 $ 19,461
Rolling stock........................................... 9,923 19,713
Containers.............................................. 6,375 12,644
Machinery and equipment................................. 3,840 7,638
Furniture and fixtures.................................. 322 335
------- --------
27,128 59,791
Less accumulated depreciation........................... (8,124) (12,805)
------- --------
$19,004 $ 46,986
======= ========
</TABLE>
Landfill costs of approximately $9,044 are included in land, buildings and
improvements at December 31, 1998. No landfills were owned as of December 31,
1997.
Combined depreciation expense for the predecessor operations was $1,101 and
$789 for the year ended December 31, 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 and for the year ended
December 31, 1998 was $1,652 and $4,689, respectively.
5. OTHER ASSETS
Other assets consist of the following as of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1997 1998
---- ------
<S> <C> <C>
Restricted cash............................................. $-- $1,521
Other....................................................... 58 457
--- ------
$58 $1,978
=== ======
</TABLE>
Restricted funds held in trust are included as part of other assets and
consist of amounts on deposit with various banks that support the Company's
financial assurance obligations for its landfill facilities' closure and
postclosure costs and amounts outstanding under the Madera Bond (Note 7).
6. SHORT-TERM BORROWINGS
Short-term borrowings consist of various revolving and non-revolving
lines-of-credit with a bank, bearing interest at 8.50% as of December 31, 1998
and which mature at various dates through February 28, 1999. The lines of credit
are secured by all accounts receivable and inventory accounts, which totaled
$3,176 as of December 31, 1998. The lines-of-credit were fully utilized as of
December 31, 1998.
7. LONG-TERM DEBT
On January 30, 1998, the Company obtained a revolving credit facility from
BankBoston N.A. (the "January Credit Facility"). The maximum amount available
under the January 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 January Credit Facility allowed for
the Company to issue up to $5,000 in stand-by
F-82
<PAGE> 158
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
letters-of-credit. The January Credit Facility required quarterly payments of
interest and required the Company to pay an annual commitment fee equal to 0.5%
of the unused portion of the January Credit Facility. In connection with the
January 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
(Note 10).
On May 28, 1998, the Company entered into a new revolving credit facility
with a syndicate of banks for which BankBoston N.A. acted as agent (the "May
Credit Facility"). The maximum amount available under the May Credit Facility
was $60,000 (including stand-by letters of credit) and the borrowings bore
interest at various fixed and/or variable rates at the Company's option. The May
Credit Facility replaced the January Credit Facility. The May Credit Facility
allowed for the Company to issue up to $5,000 in stand-by letters-of-credit. The
May Credit Facility required quarterly payments of interest and borrowings 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 facility.
On November 20, 1998, the Company entered into a new revolving credit
facility with a syndicate of banks for which BankBoston N.A. acted as agent (the
"November Credit Facility"). As of December 31, 1998, the maximum amount
available under the November Credit Facility is $115,000 (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 December 31,
1998). The maximum amount available was increased to $125,000 in January 1999.
The November Credit Facility replaced the May Credit Facility. The November
Credit Facility allows for the Company to issue up to $15,000 in stand-by
letters-of-credit, of which $1,829 were issued as of December 31, 1998. The
November Credit Facility requires quarterly payments of interest and it matures
in November 2003. Borrowings are secured by substantially all of the Company's
assets and the Company is required to pay an annual commitment fee equal to
0.375% of the unused portion of the 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
contains covenants that require specified financial ratios and balances be
maintained. As of December 31, 1998, the Company was in compliance with these
covenants.
On June 16, 1998, the Company completed a $1,800 tax-exempt bond financing
for its Madera subsidiary (the "Madera Bond"). These funds will be used for
specified capital expenditures and improvements, including installation of a
landfill gas recovery system. The bonds mature on May 1, 2016 and bear interest
at variable rates based on market conditions for California tax exempt bonds
(approximately 3.8% at December 31, 1998). The bonds are backed by a letter of
credit issued by BankBoston N.A. under the November Credit Facility for $1,800.
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 in the accompanying consolidated balance sheet.
F-83
<PAGE> 159
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Long-term debt consists of the following as of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------- --------
<S> <C> <C>
November Credit Facility.................................... $ -- $ 57,281
Madera Bond................................................. -- 1,800
Term loan payable to the Bank bearing interest at the Bank's
prime rate plus 2.0% (aggregating 10.5% as of December 31,
1998); 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 WCI's assets; subordinate
to the notes payable to BFI with respect to certain
specified assets.......................................... 5,343 --
Note payable to sellers in connection with acquisition,
non-interest bearing, due January 1999.................... -- 8,546
Note payable to a bank bearing interest at a variable rate
(approximately 8.4% as of December 31, 1998); 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 1,866
Notes payable to a bank bearing interest at various fixed
rates (ranging from 9.1% to 9.2% as of December 31, 1998);
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 $2,463 as
of December 31, 1998...................................... 1,544 1,350
Equipment financing notes payable bearing interest at
various rates (ranging from 8.6% to 8.8% as of December
31, 1998); monthly payments of principal and interest
aggregating $21; maturing at various dates through
September 2001; secured by equipment with an aggregate net
book value of approximately $660 as of December 31,
1998...................................................... 822 423
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 $400 as of December 31, 1998
and certain cash accounts................................. 632 514
Notes payable to sellers bearing interest at 9.0% as of
December 31, 1998; monthly principal and interest payments
of $3; maturing October 2007; secured by land and
buildings with a net book value of approximately $901 as
of December 31, 1998...................................... 471 291
Note payable to BFI bearing interest at 6.0%; all
outstanding principal and interest are due December 1997;
secured by substantially all of WCI'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 WCI's assets.............. 500 --
Unsecured notes payable to seller bearing interest at 8.0%
as of December 31, 1998; monthly principal and interest
payments of $4; maturing in June 2002..................... 189 90
Revolving line of credit from a bank bearing interest at the
bank's prime rate plus 1.5% (aggregating 10% at December
31, 1997); interest was payable monthly and the line was
to expire on September 29, 1998; secured by substantially
all of the Company's assets............................... 600 --
Other....................................................... 122 2,071
------- --------
12,542 74,232
Less: current portion....................................... (873) (10,247)
------- --------
$11,669 $ 63,985
======= ========
</TABLE>
F-84
<PAGE> 160
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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
10).
As of December 31, 1998, aggregate contractual future principal payments by
calendar year on long-term debt are due as follows:
<TABLE>
<S> <C>
1999....................................... $10,247
2000....................................... 1,497
2001....................................... 1,433
2002....................................... 420
2003....................................... 57,593
Thereafter................................. 3,042
-------
$74,232
=======
</TABLE>
Management used borrowings from the January Credit Facility 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.
The Company has entered into an interest rate protection agreement (the
"Interest Agreement"), with its primary banking institution to reduce its
exposure to fluctuations in variable interest rates. The Interest Agreement,
which is effective November 2, 1998 through November 2, 2000, effectively
changes the Company's interest rate paid on a notional amount of $27,700 of its
floating rate long-term debt to a weighted average fixed rate (approximately
6.43% at December 31, 1998). The fair value of the Interest Agreement as of
December 31, 1998 was approximately $188, which reflects the estimated amounts
that the Company would receive to terminate the Interest Agreement based on
quoted market prices of comparable contracts as of December 31, 1998. In the
event of nonperformance by the counterparty, the Company would be exposed to
interest rate risk if the variable interest rate received were to exceed the
fixed rate paid by the Company under the terms of the Interest Agreement.
8. 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. The
Company's supplemental consolidated rent expense under operating leases during
the years ended December 31, 1996, 1997 and 1998 was $170, $235 and $730,
respectively.
F-85
<PAGE> 161
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
As of December 31, 1998, future minimum lease payments under these leases,
by calendar year, are as follows:
<TABLE>
<S> <C>
1999........................................ $ 715
2000........................................ 713
2001........................................ 599
2002........................................ 504
2003........................................ 485
Thereafter.................................. 2,059
------
$5,075
======
</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, 1998, WCI had provided customers and various regulatory authorities
with bonds and letters of credit of approximately $3,692 to secure its
obligations. The Company's November Credit Facility provides for the issuance of
letters of credit in an amount up to $15,000, 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, 1998, the Company is not aware of any such
environmental liabilities.
Legal Proceedings
In the normal course of its business and as a result of the extensive
governmental regulation of the solid waste industry, the Company is 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,
1998 there is no
F-86
<PAGE> 162
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
current proceeding or litigation involving the Company that the Company believes
will have a material adverse impact on its 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 $2,600 from the lawsuit, which is included
in other income in the accompanying statement of operations.
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 was closed on December 31,
1998; and subsequent to that date, all of the waste collected by the Murrey
Companies in Pierce County was long hauled to an alternate disposal site pending
completion of a new solid waste landfill in Pierce County. Management of the
Company does not believe that the closure of the Hidden Valley Landfill will
have a material adverse impact on it's business, financial position, results of
operations or cash flows.
Employees
Approximately 67 drivers and mechanics at WCI'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.
Approximately 46 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.
9. 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 accrued 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. Each share of Preferred Stock was
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 Preferred Stock and any accumulated and unpaid dividends were convertible at
the holder's option into shares of the Company's common stock at the calculated
rate of $2.80
F-87
<PAGE> 163
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
per share divided by the "Conversion Price" subject to certain anti-dilution
adjustments. Each share was automatically converted into common stock
immediately upon the closing of the Company's initial public offering of common
stock at a Conversion Price of $2.80 per share.
10. STOCKHOLDERS' EQUITY (DEFICIT)
Common Stock
Of the 37,675,887 shares of common stock authorized but unissued as of
December 31, 1998, the following shares were reserved for issuance:
<TABLE>
<S> <C>
Stock option plan........................................... 1,139,214
Stock purchase warrants..................................... 1,291,135
Shares held in escrow....................................... 51,746
---------
2,482,095
=========
</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 bore interest at 8%, were
secured by the Preferred Stock purchased and common stock owned by the
employees, and were paid in full during 1998.
STOCK OPTIONS
In November 1997, WCI'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"), 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, WCI's Board of Directors approved the
reservation of 1,200,000 shares of common stock for issuance thereunder. As of
December 31, 1997 and 1998, 35,000 and 333,121 options to purchase common stock
were exercisable under the Option Plan, respectively. In addition, as of
December 31, 1997 and 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 WCI's stock option activity and related information during the
period from inception (September 9, 1997) through December 31, 1997 and the year
ended December 31, 1998 is presented below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES (OPTIONS) EXERCISE PRICE
---------------- ----------------
<S> <C> <C>
Outstanding at inception....................... -- $ --
Granted........................................ 528,500 4.92
-------
Outstanding as of December 31, 1997............ 528,500 4.92
Granted (unaudited)............................ 511,050 9.58
Forfeited (unaudited).......................... 2,874 5.00
Exercised (unaudited).......................... 57,912 4.69
-------
Outstanding as of December 31, 1998............ 978,764 7.38
=======
</TABLE>
F-88
<PAGE> 164
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table summarizes information about stock options outstanding as of
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------
WEIGHTED OPTIONS EXERCISABLE
AVERAGE --------------------
WEIGHTED REMAINING WEIGHTED
AVERAGE CONTRACTUAL AVERAGE
EXERCISE LIFE EXERCISE
EXERCISE RANGE SHARES PRICE (IN YEARS) SHARES PRICE
-------------- ------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
$ 2.80 to 5.00................. 544,099 $ 2.92 8.9 190,869 $ 2.97
$ 6.00 to 9.50................. 62,415 8.42 8.9 14,582 8.01
$10.50 to 12.50................. 240,000 11.06 9.2 80,003 11.05
$15.19 to 19.00................. 95,750 17.25 9.5 47,667 16.23
$21.00 to 22.13................. 36,500 21.90 9.6 -- --
------- -------
978,764 7.38 8.9 333,121 7.04
======= =======
</TABLE>
The weighted average grant date fair values for options granted during 1997
and 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------
1997 1998
----- -----
<S> <C> <C>
Exercise prices equal to market price of stock.............. $ -- $5.28
Exercise prices less than market price of stock............. -- 6.52
Exercise prices greater than market price of stock.......... 0.30 3.09
</TABLE>
Pro Forma information regarding net income (loss) 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 and the year ended December 31, 1998: risk-free interest rate of 6%;
and 5%, respectively; dividend yield of zero; volatility factor of the expected
market price of the Company's common stock of .40 and .55, respectively; and a
weighted-average expected life of the option of 4 years.
The Black-Scholes option valuation model was developed for use 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 following
table summarizes the Company's pro forma net loss and pro forma
F-89
<PAGE> 165
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
basic net loss per share for the period from inception (September 9, 1997)
through December 31, 1997 and for the year ended December 31, 1998:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1997 1998
------- ------
<S> <C> <C>
Pro forma net income (loss)............................... $(3,754) $ 567
Pro forma net loss applicable to common stockholders...... (4,285) (350)
Pro forma basic net loss per share........................ (.90) (0.04)
</TABLE>
During the year ended December 31, 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 $393 was recorded during the year
ended December 31, 1998 relating to these options, and the remaining $428 will
be amortized into expense in future periods.
Stock Purchase Warrants
At December 31, 1998, the Company had outstanding warrants to purchase
1,291,135 shares of the Company's common stock at exercise prices between $0.01
and $22.13 per share. The warrants are exercisable upon vesting and notification
and expire between 2000 and 2008.
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 of credit and
term loan payable. The exercise price of the warrant is $.01 per share and
contains provisions for a cashless exercise at the bank's option. 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 1998, the bank received 172,578 shares of
common stock through the exercise of 172,689 warrants.
In connection with their guarantee of certain of the Company's debt
obligations, the Company issued in December 1997 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 January 1998, the Company issued a warrant to purchase 140,000 shares of
its common stock to BankBoston N.A. in connection with the January Credit
Facility. The exercise price of the warrant is $2.80 per share. The warrant was
valued at $855 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%,
estimated fair value of the common stock of $7.50 per share and an expected life
of 10 years. The value assigned to the warrant was reflected as a discount on
long-term debt and accreted to interest expense using the interest method over
the expected term
F-90
<PAGE> 166
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
of the January Credit Facility. The January Credit Facility was extinguished in
May 1998 and the unamortized discount on the debt was expensed as an
extraordinary loss on early extinguishment of debt.
In February 1998, the Company issued warrants to purchase 200,000 shares of
its common stock with an exercise price of $4.00 per share in connection with an
acquisition. The warrants were valued at $954 using the Black-Scholes pricing
model and recorded as an element of purchase price for the acquisition.
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 $240 relating to these
warrants. All such warrants were exercised in 1998.
During 1998, the Company issued warrants to certain market development
consultants to purchase 67,935 shares of the Company's common stock with
exercise prices ranging from $12.00 to $22.13 per share. The warrants were
valued at $339 using the Black-Scholes pricing model and recorded as an element
of purchase price of the related acquisitions.
11. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31,
1996, 1997 and 1998 consists of the following:
<TABLE>
<CAPTION>
PREDECESSOR WCI
THE DISPOSAL GROUP SUPPLEMENTAL
COMBINED CONSOLIDATED
PERIOD FROM YEAR ENDED
JANUARY 1, 1996 DECEMBER 31,
THROUGH -----------------------
JULY 31, 1996 1996 1997 1998
------------------ ---- ----- ------
<S> <C> <C> <C> <C>
Current:
Federal.......................................... $207 $562 $ 716 $1,432
State............................................ -- -- -- 142
Deferred:
Federal.......................................... 298 (19) (414) 1,217
State............................................ -- -- -- 139
---- ---- ----- ------
$505 $543 $ 302 $2,930
==== ==== ===== ======
</TABLE>
F-91
<PAGE> 167
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Significant components of deferred income tax assets and liabilities are as
follows as of December 31, 1997 and 1998:
<TABLE>
<CAPTION>
WCI SUPPLEMENTAL
CONSOLIDATED
------------------
1997 1998
------- -------
<S> <C> <C>
Deferred income tax assets:
Accounts receivable reserves........................... $ 8 $ 152
Amortization........................................... 290 --
Accrued expenses....................................... -- 8
Vacation accrual....................................... 15 6
State taxes............................................ -- 22
Other.................................................. -- 49
Net operating losses................................... 54 --
------- -------
Total deferred income tax assets.................. 367 237
Deferred income tax liabilities:
Amortization........................................... -- (757)
Depreciation........................................... (1,187) (1,368)
Other liabilities...................................... -- (146)
Prepaid expenses....................................... -- (234)
------- -------
Total deferred income tax liabilities............. (1,187) (2,505)
------- -------
Net deferred income tax liability......................... $ (820) $(2,268)
======= =======
</TABLE>
The differences between the Company's provision (benefit) for income taxes
as presented in the accompanying statements of operations and benefit for income
taxes computed at the federal statutory rate is comprised of the items shown in
the following table as a percentage of pre-tax income (loss):
<TABLE>
<CAPTION>
PREDECESSORS
----------------------------------------------------------
THE DISPOSAL
GROUP
COMBINED PREDECESSORS
PERIOD FROM PREDECESSORS COMBINED
JANUARY 1, 1996 COMBINED NINE MONTHS
THROUGH PERIOD ENDED ENDED
JULY 31, 1996 DECEMBER 31, 1996 SEPTEMBER 30, 1997
--------------- ----------------- ------------------
<S> <C> <C> <C>
Income tax provision
(benefit) at the statutory
rate...................... 34.0% (34.0)% (34.0)%
Effect of allowance......... (16.0) 34.0 34.0
----- ----- -----
18.0% --% --%
===== ===== =====
</TABLE>
F-92
<PAGE> 168
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
WCI SUPPLEMENTAL
CONSOLIDATED
YEARS ENDED DECEMBER 31,
------------------------
1996 1997 1998
----- ------ -----
<S> <C> <C> <C>
Income tax provision (benefit) at the statutory
rate................................................ 34.0% (34.0)% 34.0%
State taxes, net of federal benefit................... -- -- 4.0
Goodwill amortization................................. -- -- 3.0
Tax effect of companies reporting under Subchapter
S................................................... 10.0 (1.0) 5.0
Stock compensation expense............................ -- 44.0 3.0
Other................................................. 1.0 -- 1.0
---- ----- ----
45.0% 9.0% 50.0%
==== ===== ====
</TABLE>
12. 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 for
the years ended December 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997 DECEMBER 31, 1998
BASIC AND BASIC AND ------------------------
DILUTED DILUTED BASIC DILUTED
NET INCOME NET LOSS NET INCOME NET INCOME
PER SHARE PER SHARE PER SHARE PER SHARE
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Numerator:
Income (loss) before extraordinary item..... $ 663 $ (3,750) $ 2,917 $ 2,917
Redeemable convertible preferred stock
accretion................................ -- (531) (917) (917)
---------- ---------- ---------- -----------
Income (loss) applicable to common
stockholders before extraordinary item... $ 663 $ (4,281) $ 2,000 $ 2,000
========== ========== ========== ===========
Extraordinary item.......................... -- -- (1,027) (1,027)
---------- ---------- ---------- -----------
Net income (loss) applicable to common
stockholders............................. $ 663 $ (4,281) $ 973 $ 973
========== ========== ========== ===========
Denominator:
Weighted average common shares
outstanding.............................. 2,888,880 4,761,447 9,349,173 9,349,173
Dilutive effect of stock options and
warrants outstanding..................... -- -- -- 1,628,930
Incremental common shares issuable upon
redemption of redeemable common stock.... -- -- -- 282,192
---------- ---------- ---------- -----------
2,888,880 4,761,447 9,349,173 11,260,295
========== ========== ========== ===========
</TABLE>
As of December 31, 1998, outstanding options to purchase 87,832 shares of
common stock (with exercise prices ranging from $18.62 to $22.13) could
potentially dilute basic net income 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.
F-93
<PAGE> 169
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. RELATED PARTY TRANSACTIONS
Recycling Agreement
WCI has entered into certain transactions with Continental Paper, LLC
("Continental"), in which WCI delivers to Continental all of it's collected
recyclable materials in areas in which Continental has processing facilities and
Continental pays WCI market rates for the recyclable materials. Certain of WCI's
stockholders are the majority owners of Continental. During the period from
inception (September 9, 1997) through December 31, 1997 and the year ended
December 31, 1998, the Company received, after deducting amounts paid to
Continental, approximately $10 and paid approximately $108, respectively,
to/from Continental in these 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, 1996, 1997 and 1998.
Advances
As of December 31, 1997 and 1998, the Murrey Companies had non-interest
bearing advances payable to one of their shareholders totaling $543.
Disposal Fees
During the years ended December 31, 1996, 1997 and 1998, the Murrey
Companies paid $7,730, $8,592 and $8,816, 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.
14. EMPLOYEE BENEFIT PLAN
WCI has a voluntary savings and investment plan (the "401(k) Plan"). The
401(k) Plan is available to all eligible, non-union employees of WCI. Under the
401(k) Plan, WCI's contributions are 40% of the first 5% of the employee's
contributions. During the period from inception (September 9, 1997) through
December 31, 1997 and the year ended December 31, 1998, WCI's 401(k) Plan
expense was approximately $2 and $58, respectively.
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. During the years ended
December 31, 1996, 1997 and 1998, the Murrey Companies' 401(k) Plan expense was
approximately $267, $316 and $336, respectively.
15. SUBSEQUENT EVENTS
Murrey Companies Merger
On January 19, 1999, WCI merged with Murreys Disposal Company, Inc., DM
Disposal Co., Inc., American Disposal Company, Inc., and Tacoma Recycling, Inc.
(Collectively, the "Murrey Companies"). The transaction was accounted for as
poolings-of-interests, whereby the Company issued 2,888,880 shares of its common
stock for all of the outstanding shares of the Murrey Companies. In Connection
with the merger
F-94
<PAGE> 170
WASTE CONNECTIONS, INC. AND PREDECESSORS
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
with the Murrey Companies, the Company incurred transaction related costs of
approximately $6,200, which will be charged to operations in the first quarter
of 1999.
Secondary Public Offering
Effective February 9, 1999, the Company sold approximately 4,000,000 shares
of common stock at $17.50 per share. As a result of the offering, the Company
received approximately $65,300 in net proceeds and used the proceeds to pay down
approximately $50,200 of its then outstanding debt.
Acquisition of Columbia Resource Co. L.P. and Finley-Buttes Limited
Partnership (CRCFBLP)
On March 31, 1999, the Company acquired the stock of two companies that are
the sole partners of CRCFBLP. Total consideration paid for CRCFBLP was
approximately $66,900 in cash.
New Credit Facility
On March 30, 1999, the Company obtained commitments from a syndicate of
banks led by BankBoston, N.A., which increased the Company's borrowing capacity
from $125,000 to $225,000 and modified certain covenants. The revised credit
facility matures in 2004.
F-95
<PAGE> 171
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------------------------------------------------------
PROSPECTIVE INVESTORS MAY RELY ONLY ON THE INFORMATION IN THIS PROSPECTUS.
NEITHER THE COMPANY NOR ANY SELLING STOCKHOLDER HAS AUTHORIZED ANYONE TO PROVIDE
PROSPECTIVE INVESTORS WITH INFORMATION DIFFERENT FROM THAT IN THIS PROSPECTUS.
THIS PROSPECTUS IS NOT AN OFFER TO SELL, AND IT DOES NOT SEEK AN OFFER TO BUY,
THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
THE INFORMATION IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS
PROSPECTUS, REGARDLESS OF WHEN THIS PROSPECTUS IS DELIVERED OR THESE SECURITIES
ARE SOLD.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information............... 2
Prospectus Summary.................. 3
Risk Factors........................ 6
Dividend Policy..................... 15
Price Range of Common Stock......... 15
Selected Historical and Pro Forma
Financial and Operating Data...... 16
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 22
Business............................ 37
Management.......................... 56
Certain Transactions................ 64
Principal Stockholders.............. 67
Description of Capital Stock........ 69
Shares Eligible for Future Sale..... 72
Outstanding Securities Covered by
This Prospectus................... 73
Legal Matters....................... 75
Experts............................. 75
Index to Financial Statements....... F-1
</TABLE>
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3,000,000 SHARES
[LOGO]
COMMON STOCK
--------------------
PROSPECTUS
--------------------
APRIL 29, 1999
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