-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IexCsHHrmZrAOTZAEDvtRIM2dH+Jgf1QKfjjCFRSynJPaEUAkV6xCGHaQphtG6FR w7mUoDNZzqQl91h1RkrYfg== 0000950149-99-000018.txt : 19990108 0000950149-99-000018.hdr.sgml : 19990108 ACCESSION NUMBER: 0000950149-99-000018 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19990107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WASTE CONNECTIONS INC/DE CENTRAL INDEX KEY: 0001057058 STANDARD INDUSTRIAL CLASSIFICATION: REFUSE SYSTEMS [4953] IRS NUMBER: 943283464 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-70253 FILM NUMBER: 99502444 BUSINESS ADDRESS: STREET 1: 2260 DOUGLAS BLVD STREET 2: SUITE 280 CITY: ROSEVILLE STATE: CA ZIP: 95661 BUSINESS PHONE: 9167722221 MAIL ADDRESS: STREET 1: 2260 DOUGLAS BLVD STREET 2: SUITE 280 CITY: ROSEVILLE STATE: CA ZIP: 95661 S-1 1 FORM S-1 FOR WASTE CONNECTIONS, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 7, 1999. REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ WASTE CONNECTIONS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 4953 94-3283464 (STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
2260 DOUGLAS BOULEVARD, SUITE 280 ROSEVILLE, CALIFORNIA 95661 (916) 772-2221 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) RONALD J. MITTELSTAEDT PRESIDENT, CHIEF EXECUTIVE OFFICER AND CHAIRMAN WASTE CONNECTIONS, INC. 2260 DOUGLAS BOULEVARD, SUITE 280 ROSEVILLE, CALIFORNIA 95661 (916) 772-2221 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) COPIES OF ALL COMMUNICATIONS TO: CAROLYN S. REISER, ESQ. STEPHEN A. RIDDICK, ESQ. SHARTSIS, FRIESE & GINSBURG LLP PIPER & MARBURY L.L.P. ONE MARITIME PLAZA, 18TH FLOOR 36 SOUTH CHARLES STREET (415) 421-6500 BALTIMORE, MARYLAND 21201 SAN FRANCISCO, CALIFORNIA 94111 (410) 539-2530
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this Registration Statement. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box. [ ] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------------------- TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM SECURITIES TO BE AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE - ------------------------------------------------------------------------------------------------------------------------- Common Stock, $0.01 par value.................. 3,737,500 shares $17.875 $66,807,812 $18,572.57 - ------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c) and based on the average bid and asked price of the common stock reported by the Nasdaq National Market on January 5, 1999. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE RELATED REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION OR ANY APPLICABLE STATE SECURITIES COMMISSION BECOMES EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL, NOR IS IT SEEKING AN OFFER TO BUY, THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION JANUARY 7, 1999 3,250,000 SHARES [LOGO] COMMON STOCK Waste Connections, Inc. 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. We are offering all of the 3,250,000 shares to be sold in this offering. Our common stock is traded on the Nasdaq National Market under the symbol "WCNX." On January 6, 1999, the last reported sale price of our common stock on the Nasdaq National Market was $18.25 per share. INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
PER SHARE TOTAL --------- -------- Public offering price....................................... $ $ Underwriting discounts...................................... $ $ Proceeds, before expenses, to Waste Connections............. $ $
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. We, and certain of our non-employee shareholders, have granted the underwriters an option to purchase an additional 487,500 shares at the public offering price, less underwriting discounts and commissions, to fulfill over-allotments that occur during the offering process. We will not receive any of the proceeds from the sale of shares by these shareholders. ------------------------ The underwriters are severally underwriting the shares being offered. The underwriters expect to deliver the shares of common stock against payment in Baltimore, Maryland on , 1999. BT ALEX. BROWN CIBC OPPENHEIMER FIRST ANALYSIS SECURITIES CORPORATION PROSPECTUS DATED , 1999. 3 This prospectus contains registered service marks, trademarks and trade names of the Company, including the Waste Connections, Inc. name and logo. 4 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 "Waste Connections" or the "Company" mean Waste Connections, Inc. and our subsidiaries, and all references to "solid waste" mean non-hazardous solid waste. WASTE CONNECTIONS 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. We currently own and operate 27 collection operations, seven transfer stations and two Subtitle D landfills and operate an additional five transfer stations, one Subtitle D landfill and five recycling facilities. As of January 6, 1999, we served more than 230,000 commercial, industrial and residential customers in ten states: California, Idaho, Kansas, Nebraska, Oklahoma, Oregon, South Dakota, Utah, Washington, and Wyoming. More than 75% of our pro forma revenues for the nine months ended September 30, 1998 were derived from exclusive arrangements. Waste Connections was formed in September 1997 to build a leading solid waste services company in the secondary markets of the Western U.S. We have targeted these markets because we believe that: (1) a large number of independent solid waste services companies suitable for acquisition by us are located in these markets; (2) there is less competition in these markets from large, well-capitalized solid waste services companies; and (3) these markets have strong projected economic and population growth rates. In addition, our senior management team has extensive experience in acquiring, integrating and operating solid waste services businesses in the Western U.S. We have developed a two-pronged strategy tailored to the competitive and regulatory factors that affect our markets. In the markets where waste collection services are performed under exclusive arrangements, we generally focus on controlling the solid waste stream by providing collection services under such arrangements. In markets where we believe that competitive and regulatory factors make owning landfills advantageous, we generally focus on providing integrated services, from collection through disposal of solid waste in landfills that we own or operate. Acquisitions have been and will continue to be a principal component of our growth strategy. From our initial public offering in May 1998 to January 6, 1999, we acquired 33 solid waste services businesses, including 18 collection operations, two Subtitle D landfills, nine transfer stations and four recycling facilities. These acquisitions took Waste Connections into five new markets in five additional states: Kansas, Nebraska, Oklahoma, Oregon and Utah. Generating internal growth and securing additional exclusive arrangements are also important components of our growth strategy. Waste Connections' executive offices are located at 2260 Douglas Boulevard, Suite 280, Roseville, California 95661. Our telephone number is (916) 772-2221. PROPOSED MERGERS On October 22, 1998, Waste Connections and Murrey's Disposal Company, Inc., American Disposal Company, Inc., D.M. Disposal Co., Inc. and Tacoma Recycling Company, Inc. (together, the "Murrey Companies") entered into a merger agreement under which the Murrey Companies would become wholly-owned subsidiaries of Waste Connections. The Murrey Companies had revenues for the nine months ended September 30, 1998 of approximately $24.5 million, of 3 5 which more than 75% were derived from services provided under exclusive arrangements. The Murrey Companies, which provide solid waste services to more than 65,000 customers in the Seattle-Tacoma, Washington area, own and operate five collection operations and one transfer station and operate two transfer stations and one recycling facility. The aggregate consideration to be paid by Waste Connections to the shareholders of the Murrey Companies is between 2,750,000 and 3,250,000 shares of common stock, depending on the closing price of our common stock immediately prior to the closing date and the amount of the Murrey Companies' outstanding debt. The mergers are subject to several conditions, including the approval of our stockholders. A Special Meeting of Waste Connections' stockholders will be held on or about January 19, 1999 for the stockholders to vote on the proposed mergers. If these conditions are satisfied, we expect to consummate the mergers on or about January 19, 1999. We can give no assurance that the closing conditions will be satisfied. Except as otherwise noted, the information about Waste Connections in this prospectus does not include the Murrey Companies. However, the financial statements included in this prospectus include historical financial statements for the Murrey Companies and pro forma financial statements that give effect to our mergers with the Murrey Companies as if the mergers had occurred on January 1, 1997 or on September 30, 1998 and were accounted for as poolings-of- interests. 4 6 THE OFFERING The following information, and similar information throughout this prospectus relating to shares to be outstanding after this offering, assumes that the underwriters do not exercise the option granted by us and certain of our shareholders to purchase up to 487,500 additional shares. See "Plan of Distribution." Common stock offered by Waste Connections.... 3,250,000 shares Common stock to be outstanding after this offering................................... 12,564,290 shares(1) Use of proceeds.............................. Reduction of existing indebtedness and for general corporate purposes, including possible acquisitions and capital expenditures. Nasdaq National Market symbol................ WCNX
- --------------- (1) Excludes 2,442,699 shares of common stock issuable upon the exercise of warrants and options outstanding as of January 6, 1999, at a weighted average exercise price of $4.94 per share. See "Management -- Stock Option Plan," "Certain Transactions" and Note 9 of Notes to Waste Connections' Financial Statements included elsewhere in this prospectus. 5 7 WASTE CONNECTIONS, INC. SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NINE MONTHS ENDED PERIOD FROM YEAR ENDED SEPTEMBER 30, 1998 INCEPTION DECEMBER 31, 1997 ------------------------ (SEPTEMBER 9, 1997) PRO FORMA PRO FORMA THROUGH COMBINED COMBINED AS DECEMBER 31, 1997 AS ADJUSTED(1) ACTUAL ADJUSTED(1) ------------------- ----------------- ---------- ----------- HISTORICAL STATEMENT OF OPERATIONS DATA: Revenues..................... $ 6,237 $ 90,221 $ 35,336 $ 75,551 Cost of operations........... 4,703 67,694 24,007 53,855 Selling, general and administrative............ 619 9,735 3,518 7,415 Depreciation and amortization.............. 354 5,710 2,693 5,678 Other operating expense(2)... 4,888 4,888 561 561 ---------- ---------- ---------- ----------- Income (loss) from operations................ (4,327) 2,194 4,557 8,042 Other expense................ (1,071) (1,976) (1,427) (1,332) ---------- ---------- ---------- ----------- Income (loss) before income taxes..................... (5,398) 218 3,130 6,710 Income tax (provision) benefit................... 332 (1,775) (1,513) (2,816) Extraordinary item(3)........ -- -- (815) (815) ---------- ---------- ---------- ----------- Net income (loss)............ $ (5,066) $ (1,557) $ 802 $ 3,079 ========== ========== ========== =========== Redeemable convertible preferred stock accretion................. (531) (531) (917) (917) ---------- ---------- ---------- ----------- Net income (loss) applicable to common stockholders.... $ (5,597) $ (2,088) $ (115) $ 2,162 ========== ========== ========== =========== Diluted net income (loss) per share(4).................. $ (2.99) $ (0.24) $ (0.02) $ 0.22 ========== ========== ========== =========== Shares used in calculating diluted net income (loss) per share................. 1,872,567 8,700,306 7,438,658 13,654,186 ========== ========== ========== ===========
SEPTEMBER 30, 1998 ----------------------------------------- PRO FORMA DECEMBER 31, PRO FORMA COMBINED AS 1997 ACTUAL COMBINED(5) ADJUSTED(5)(6) ------------ -------- ----------- -------------- HISTORICAL BALANCE SHEET DATA: Cash and equivalents............. $ 820 $ 1,090 $ 1,781 $ 1,781 Working capital (deficit)........ 836 (1,482) (10,922) (10,922) Property and equipment, net...... 4,185 18,438 42,494 42,494 Total assets..................... 18,880 114,495 151,048 151,048 Long-term debt(7)................ 6,762 40,404 59,897 4,798 Redeemable convertible preferred stock......................... 7,523 -- -- -- Total stockholders' equity (deficit)..................... (551) 59,822 61,397 116,496
(See footnotes on Page 7) 6 8 - --------------- (1) Assumes Waste Connections' acquisitions of Arrow Sanitary Service, Inc. ("Arrow"), B&B Sanitation, Inc., Red Carpet Landfill, Inc., and Darlin Equipment, Inc. (together with B&B Sanitation, Inc. and Red Carpet Landfill, Inc., "B&B"), J&J Sanitation, Inc. and Big Red Roll Off, Inc. (together with J&J Sanitation, Inc. "J&J"), Contractor's Waste Removal, L.C. ("Contractors"), Curry Transfer & Recycling, Inc. ("Curry"), Amador Disposal Service, Inc./Mother Lode Sani-Hut, Inc. ("Amador"), Butler County Landfill, Inc./Kobus Construction, Inc. ("Butler"), Shrader Refuse and Recycling Service Company ("Shrader"), Madera Disposal Systems, Inc. ("Madera") and Waste Connections' predecessors and the mergers with the Murrey Companies (accounted for as poolings-of-interests) occurred as of January 1, 1997, adjusted to reflect the sale of the common stock offered hereby at an assumed public offering price of $18.25 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Unaudited Pro Forma Financial Statements" included elsewhere herein. (2) Other operating expense consists of start-up and integration costs and stock compensation charges. (3) Extraordinary item represents the expense from early extinguishment of debt, net of income tax effects. See Note 12 of Waste Connections' historical financial statements included elsewhere herein. (4) The pro forma combined as adjusted per share calculation for the nine months ended September 30, 1998 is before extraordinary item. (5) Assumes the acquisitions of Amador and Butler occurred on September 30, 1998 and the mergers with the Murrey Companies are accounted for as poolings-of-interests. See "Unaudited Pro Forma Financial Statements" included elsewhere herein. (6) Adjusted to reflect the sale of the common stock offered by Waste Connections through this prospectus at an assumed public offering price of $18.25 per share and the application of the estimated net proceeds of this offering as described in "Use of Proceeds." (7) Excludes redeemable convertible preferred stock which converted into common stock upon our May 1998 initial public offering. 7 9 RISK FACTORS You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of our common stock could decline, and you may lose all or part of your investment. This prospectus also contains 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. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors, including the risks described below and elsewhere in this prospectus. Limited Operating History; Integration of Acquisitions. Waste Connections was formed in September 1997 and commenced operations on October 1, 1997. Accordingly, we have only a limited operating history on which you may evaluate our business and prospects. You should consider the disclosures about Waste Connections in this prospectus in light of the risks, expenses and difficulties that companies frequently encounter in their early stages of development. Our recently assembled senior management team may not be able to manage Waste Connections successfully or to implement our operating and growth strategies. Our growth and future financial performance depend significantly on our ability to integrate acquired businesses into our organization and operations. Part of our strategy is to achieve economies of scale and operating efficiencies by growing through acquisitions. We may not achieve these goals unless we effectively combine the operations of acquired businesses with our existing operations. Our senior management team may not be able to integrate our completed and future acquisitions. Any difficulties Waste Connections encounters in the integration process could materially and adversely affect our business and financial results. Growth Strategy Implementation; Ability to Manage Growth. Our growth strategy includes expanding through acquisitions, acquiring additional exclusive arrangements and generating internal growth. Whether we can execute our growth strategy depends on several factors, including the success of existing and emerging competition, the availability of acquisition candidates, our ability to maintain profit margins in the face of competitive pressures, our ability to continue to recruit, train and retain qualified employees, the strength of demand for our services and the availability of capital to support our growth. From inception through January 6, 1999, we acquired 43 solid waste services related businesses. Waste Connections may grow rapidly at times, which could significantly strain our management, operational, financial and other resources. To maintain and manage our growth, we will need to expand our management information systems capabilities and our operational and financial systems and controls. We 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 our business and financial results. Possible Non-Consummation of Murrey Companies Mergers. The consummation of the Murrey Companies mergers is subject to certain conditions, including the approval of our stockholders. We can give no assurance that the closing conditions will be satisfied. We anticipate that the Murrey Companies mergers will be consummated on or about January 19, 1999, but we can give no assurance that there will not be a delay, which could be substantial, in completing the Murrey Companies mergers. 8 10 Availability of Acquisition Candidates. Although we have identified numerous acquisition candidates that we believe are suitable, we may not be able to acquire them at prices or on terms and conditions favorable to us. As a result, our growth would be limited. We compete for acquisition candidates with other entities, some of which have greater financial resources than Waste Connections. Increased competition for acquisition candidates may make fewer acquisition opportunities available to us, and may cause us to make acquisitions on less attractive terms, such as higher purchase prices. Acquisition costs may increase to levels beyond our financial capability or that would adversely affect our operating results and financial condition. Our ongoing ability to make acquisitions will depend in part on the relative attractiveness of our common stock as consideration for potential acquisition candidates. This attractiveness may depend largely on the relative market price and capital appreciation prospects of our common stock compared to the stock of our competitors. If the market price of our common stock were to decline materially over a prolonged period of time, it may be difficult to make acquisitions on attractive terms. Highly Competitive Industry. Our industry is highly competitive and fragmented and requires substantial labor and capital resources. Some of the markets in which we compete 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. We also compete with counties, municipalities and solid waste districts that maintain their own waste collection and disposal operations. These operators may have financial advantages over Waste Connections because of their access to user fees and similar charges, tax revenues and tax-exempt financing. Some of our competitors may also be better capitalized, have greater name recognition or be able to provide services at a lower cost than Waste Connections. Our inability to compete with governmental service providers and larger and better capitalized companies could materially and adversely affect our business and financial results. We derive a substantial portion of our revenue from services provided under exclusive municipal contracts, franchise agreements and governmental certificates. Many of these will be subject to competitive bidding at some time in the future. We also intend to bid on additional municipal contracts and franchise agreements. However, we may not be the successful bidder. In addition, some of our customers may terminate their contracts with us 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 governmental certificates issued to us by the Washington Utilities and Transportation Commission (the "WUTC"). Such annexation would reduce the areas covered by our governmental certificates and subject more of our Washington operations to competitive bidding in the future. Moreover, legislative action could amend or repeal the laws governing governmental certificates, which could materially and adversely affect Waste Connections. If we were not able to replace revenues from contracts lost through competitive bidding or early termination or the renegotiation of existing contracts with other revenues within a reasonable time period, the lost revenues could materially and adversely affect our business and financial results. We face intense competition not only to provide services to customers but also to acquire other businesses within each market. Other companies have adopted or will probably adopt our strategy of acquiring and consolidating regional and local businesses. We expect that increased consolidation in the solid waste services industry will increase competitive pressures. Potential Inability to Finance Future Growth. We expect to finance future acquisitions through cash from operations, borrowings under our credit facility, issuing equity or debt securities and/or seller financing. If acquisition candidates are unwilling to accept, or we are unwilling to issue, shares of our common stock as part of the consideration for such acquisitions or if our common stock does not maintain a sufficient market value, we may have to use more of 9 11 our cash or borrowings under our credit facility to fund acquisitions. Using cash for acquisitions limits our financial flexibility and makes us more likely to seek additional capital through future debt or equity financings. If available cash from operations and borrowings under the credit facility are not sufficient to fund acquisitions, we will need additional equity and/or debt financing. If we seek more debt, we may have to agree to financial covenants that limit our operational and financial flexibility. If we seek more equity, we may dilute the ownership interests of our then-existing stockholders. We will also need to make substantial capital expenditures to develop or acquire new landfills, transfer stations and other facilities and to maintain such properties. We may not have enough capital or be able to raise enough additional capital on satisfactory terms to meet our capital requirements. Our credit facility requires us to obtain the consent of the lending banks before acquiring any other business for more than $10 million in cash (including all liabilities assumed). If we are not able to obtain such consent, we may not be able to complete certain acquisitions, which could inhibit our growth. Our credit facility also contains financial covenants based on our current and projected financial condition after completing an acquisition. If we cannot satisfy these financial covenants on a pro forma basis after completing an acquisition, we would not be able to complete the acquisition without a waiver from our lending banks. Whether or not a waiver is needed, if the results of our future operations differ materially from what we expect, we may no longer be able to comply with the covenants in the credit facility. Our failure to comply with such covenants may result in a default under the credit facility, which would allow our lending banks to accelerate the date for repayment of debt incurred under the credit facility and materially and adversely affect our business and financial results. Dependence on Management. Waste Connections depends significantly on the services of the members of our senior management team. The departure of any of those persons might materially and adversely affect our business and financial results. We currently maintain "key man" life insurance for Ronald J. Mittelstaedt, the President, Chief Executive Officer and Chairman, in the amount of $3 million. Key members of our management have entered into employment agreements with Waste Connections with terms ranging from three to five years. We may not be able to enforce these agreements. Geographic Concentration. We operate in ten states: California, Idaho, Kansas, Nebraska, Oklahoma, Oregon, South Dakota, Utah, Washington and Wyoming. We expect to focus our operations on the Western U.S. for at least the foreseeable future. We estimate that more than 50% of our pro forma revenues for the nine months ended September 30, 1998 were derived from services provided in Washington. If we complete our proposed mergers with the Murrey Companies, our geographic concentration in Washington will increase. Therefore, our business and financial results would be harmed by downturns in the general economy of 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 us to expand vertically in those markets. We may not complete enough acquisitions in other markets to lessen our geographic concentration. Seasonality of Business. Based on historic trends experienced by the businesses we have acquired, we expect our 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. 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, some of our operating costs should be generally higher in the winter months because adverse winter weather conditions slow waste collection activities, resulting in higher labor and operational costs, and greater precipitation increases the weight of collected waste, resulting in higher disposal costs, which are calculated on a per ton basis. Because we expect most of our operating expenses to 10 12 remain fairly constant throughout the year, we expect operating income to be generally lower in the winter months. Our business and financial results may be materially and adversely affected by future seasonal and quarterly fluctuations. Government Regulation. Waste Connections 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 Waste Connections and affect our business in many ways, including as set forth below. 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 Waste Connections. To own and operate landfills, we 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. We may not be able to obtain and maintain the permits and approvals we need to own or operate landfills (including increasing their capacity), and failure to do so could materially and adversely affect our business and financial condition. 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 Waste Connections fails to comply with these regulations, we 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 us to modify, supplement or replace equipment or facilities at substantial costs. If regulatory agencies fail to enforce these regulations vigorously or consistently, our competitors whose facilities do not comply with the Subtitle D Regulations or their state counterparts may obtain an advantage over us. Our financial obligations arising from any failure to comply with these regulations could materially and adversely affect our business and financial results. 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 impose fines or penalties on us. They may also attempt to revoke or deny renewal of our operating permits, franchises or licenses for violations or alleged violations of environmental laws or regulations, or to require us to remediate potential environmental problems relating to waste that we or our predecessors collected, transported, disposed of or stored. Individuals or community groups might also bring actions against us in connection with our operations. Any adverse outcome in these proceedings could have a material adverse effect on our business and financial results and create adverse publicity about Waste Connections. Potential Environmental Liability. Waste Connections is liable for any environmental damage that our 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. We may be liable for damage resulting from conditions existing before we acquired these facilities. We may also be liable for any off-site environmental contamination caused by pollutants or hazardous substances whose transportation, treatment or disposal that we or our predecessors arranged. Any substantial liability for environmental damage could materially and adversely affect our business and financial results. Each business that we acquire or have acquired may have liabilities that we fail or are unable to discover, including liabilities that arise from prior owners' failure to comply with environmental laws. As a successor owner, we may be legally responsible for these liabilities. Even if we obtain legally enforceable representations, warranties and indemnities from the sellers of such 11 13 businesses, they may not cover fully the liabilities. Some environmental liabilities, even if we do not expressly assume them, may be imposed on Waste Connections under various legal theories. Our insurance program does not cover liabilities associated with any environmental cleanup or remediation of our own sites. A successful uninsured claim against Waste Connections could materially and adversely affect our business and financial results. Limitations on Landfill Permitting and Expansion. We currently own and operate two landfills and operate another landfill. Our ability to meet our growth objectives may depend in part on our ability to acquire, lease and expand landfills and develop new landfill sites. We may not be able to obtain new landfill sites or expand the permitted capacity of our landfills when necessary. In some areas in which we operate, suitable land for new sites or expansion of existing landfill sites may be unavailable. Operating permits for landfills in states where we operate must generally be renewed at least every five years. It has become increasingly difficult and expensive to obtain required permits and approvals to build, operate and expand solid waste management facilities, including landfills and transfer stations. The process 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. We may not be able to obtain or maintain the permits we require 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 our ability to obtain permits to expand landfills. If we were to exhaust our permitted capacity at a landfill, our ability to expand internally would be limited, and we 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 our competitors. The resulting increased costs would materially and adversely affect our business and financial results. Alternatives to Landfill Disposal; Waste Reduction Programs. Some areas in which we operate offer alternatives to landfill disposal, such as recycling, composting and incineration. 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 and several other states in which we operate have adopted plans that set goals for percentages of certain solid waste items to be recycled. These plans are being phased in over the next several years. Increased use of alternatives to landfill disposal may materially and adversely affect our business and financial results. Potential Inadequacy of Accruals for Closure and Post-Closure Costs. We may be required to pay closure and post-closure costs of landfills and any disposal facilities that we own or operate. We accrue for future closure and post-closure costs of our 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. Our obligations to pay closure or post-closure costs may exceed the amount we accrued and reserved and other amounts available from funds or reserves established to pay such costs. This could materially and adversely affect our business and financial results. Charges Related to Capitalized Expenditures. In accordance with generally accepted accounting principles, we capitalize some expenditures and advances relating to acquisitions, pending acquisitions and landfill development projects. We expense indirect acquisition costs such as executive salaries, general corporate overhead, public affairs and other corporate services as we incur those costs. We charge against earnings any unamortized capitalized expenditures and advances (net of any portion thereof that we estimate we 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 we do not expect to complete. 12 14 Therefore, Waste Connections may incur charges against earnings in future periods, which could materially and adversely affect our business and financial results. Potential Inability to Obtain Performance or Surety Bonds, Letters of Credit or Insurance. Municipal solid waste services contracts and landfill closure obligations may require Waste Connections to obtain performance or surety bonds, letters of credit, or other means of financial assurance to secure our performance. Some of our existing solid waste collection and recycling contracts require us to obtain performance bonds, which we have obtained. In the future, if we are not able to obtain performance or surety bonds or letters of credit in sufficient amounts or at acceptable rates, we may not be able to enter into additional municipal solid waste services contracts or obtain or retain landfill operating permits. Any future difficulty we encounter in obtaining insurance could also make it more difficult for us to secure future contracts conditioned on our having adequate insurance coverage. Our failure to obtain means of financial assurance or adequate insurance coverage could materially and adversely affect our business and financial results. Commodity Risk On Resale of Recyclables. We provide recycling services to some of our customers. The sale prices of and demand for recyclable waste products, particularly wastepaper, are frequently volatile and may affect our operating results. Potential Anti-Takeover Effect of Certain Charter and By-Law Provisions and Delaware Law. Certain provisions in our Amended and Restated Certificate of Incorporation and Amended and Restated By-Laws, and in the Delaware General Corporation Law may deter tender offers and hostile takeovers and delay or prevent changes in control or management of Waste Connections, 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. Immediate and Substantial Dilution. Purchasers of shares in this offering will incur immediate and substantial dilution of $16.51 per share in the net tangible book value per share of the common stock from the public offering price upon the closing of this offering. Investors will experience additional dilution when we issue common stock upon the exercise of outstanding stock options and warrants or as consideration for acquisitions. We have registered 6,644,165 additional shares of common stock since our May 1998 initial public offering to be issued from time to time in connection with future acquisitions, and have issued 521,143 of those shares as of the date of this prospectus. We may also make additional primary public offerings of our common stock in the future. If we issue shares of common stock in connection with future acquisitions or primary offerings, purchasers of shares of common stock in this offering may experience additional dilution. No Dividends. We do not intend to pay cash dividends on the common stock. In addition, our credit facility prohibits us from paying cash dividends without the consent of our lenders. Impact of the Year 2000. We will need to modify or replace portions of our software so that our computer systems will function properly with respect to dates in the year 2000 ("Year 2000") and afterwards. We expect to complete those modifications and upgrades during 1999 at a total cost of approximately $100,000. We have spent part of our Year 2000 budget on replacing our billing systems in Maltby and Vancouver, Washington. Because our operations rely primarily on mechanical systems such as trucks to collect solid waste, we do not expect our operations to be significantly affected by Year 2000 issues. Our customers may need to make Year 2000 modifications to software and hardware that they use to generate records, bills and payments relating to Waste Connections. We do not rely on vendors on a routine basis except for providers of disposal services. We take waste to a site and are normally billed based on tonnage disposed. We believe that if our disposal vendors encounter Year 2000 problems, they will convert to manual billing based on scale recordings until they resolve those issues. 13 15 In assessing our exposure to Year 2000 issues, we believe our biggest challenges lie in the following areas: Year 2000 issues at our banks, large (typically municipal) customers and acquired businesses between the time we acquire them and the time we implement our own systems. We are obtaining Year 2000 compliance certifications from our vendors, banks and customers. If Waste Connections and our vendors, banks and customers do not complete required Year 2000 modifications on time, the Year 2000 issue could materially affect our operations. We believe, however, that in the most reasonably likely worst case, the effects of Year 2000 issues on our operations would be brief and small relative to our overall operations. We have not made a contingency plan to minimize operational problems if Waste Connections and our vendors, banks and customers do not timely complete all required Year 2000 modifications. USE OF PROCEEDS We estimate that we will receive net proceeds from the sale of the 3,250,000 shares of common stock offered through this prospectus (after deducting underwriting discounts and commissions and estimated offering expenses) of $55.1 million ($62.7 million if the underwriters exercise their over-allotment option), assuming a public offering price of $18.25 per share. We intend to use the net proceeds to reduce outstanding indebtedness under our credit facility with BankBoston, N.A. Approximately $57.3 million was outstanding under that facility as of December 31, 1998. Our credit facility provides for borrowing capacity of up to $125 million, presently bears interest based on either an adjusted prime rate or the Eurodollar rate plus applicable margin (the applicable rate was 7.1% as of the date of this prospectus) and will mature in 2003. We obtained the credit facility primarily to fund acquisitions and to refinance debt. The terms of the credit facility permit us to draw on it as needed for future acquisitions and capital expenditures (subject to certain restrictions) and general corporate purposes. We will use the balance of the estimated net proceeds, if any, for acquisitions, capital expenditures and working capital. We intend to invest unused net proceeds in short-term, interest-bearing securities until we apply them to these specific purposes. We continually evaluate potential acquisition candidates and intend to continue to pursue acquisition opportunities. 14 16 PRICE RANGE OF COMMON STOCK Our common stock has traded on the Nasdaq National Market under the symbol "WCNX" since our initial public offering on May 22, 1998. The following table shows the high and low sale prices for the common stock as reported by the Nasdaq National Market for the periods indicated.
HIGH LOW ------ ------ 1998 Second Quarter (from May 22, 1998).......................... $20.75 $13.75 Third Quarter............................................... 23.38 17.75 Fourth Quarter.............................................. 21.13 15.88 1999 First Quarter (through January 6, 1999)..................... $19.00 $17.75
On January 6, 1999, the last sale price of the common stock as reported by the Nasdaq National Market was $18.25 per share. On that date, there were 115 record holders of Waste Connections common stock. DIVIDEND POLICY We have never paid cash dividends on our common stock. We do not currently anticipate paying any cash dividends on the common stock. We intend to retain all earnings to fund the operation and expansion of our business. In addition, our existing credit facility restricts the payment of cash dividends. 15 17 CAPITALIZATION The following table sets forth, as of September 30, 1998, (1) the long-term debt and capitalization of Waste Connections on an historical basis, (2) the pro forma combined long-term debt and capitalization of Waste Connections after giving effect to certain of the Company's acquisitions accounted for as purchases and the mergers with the Murrey Companies accounted for as poolings-of-interests, and (3) the pro forma combined as adjusted long-term debt and capitalization of Waste Connections after giving effect to certain of the Company's acquisitions accounted for as purchases and the mergers with the Murrey Companies accounted for as poolings-of-interests, as adjusted to give effect to our sale of the 3,250,000 shares offered hereby, at an assumed public offering price of $18.25 per share (after deducting underwriting discounts and commissions and estimated offering expenses) and after the application of the estimated net offering proceeds as described under "Use of Proceeds." This table should be read in conjunction with our Financial Statements and Notes thereto and the Unaudited Pro Forma Financial Statements and Notes thereto, which are included elsewhere in this prospectus.
SEPTEMBER 30, 1998 --------------------------------------- (IN THOUSANDS) PRO FORMA PRO FORMA COMBINED ACTUAL COMBINED AS ADJUSTED(1) -------- --------- -------------- Long-term debt, net.......................... $ 40,404 $ 59,897 $ 4,798 Stockholder's equity: Preferred stock, $.01 par value, 10,000,000 shares authorized; no shares issued and outstanding............................. -- -- -- Common stock, $.01 par value, 50,000,000 shares authorized; 9,204,632 shares issued and outstanding actual; 11,954,632 shares issued and outstanding pro forma combined; 15,204,632 shares issued and outstanding pro forma combined as adjusted(2)................. 92 120 153 Additional paid-in capital................... 65,944 66,416 121,482 Deferred stock compensation(3)............... (499) (499) (499) Accumulated deficit.......................... (5,715) (4,640) (4,640) -------- -------- -------- Total stockholders' equity................... 59,822 61,397 116,496 -------- -------- -------- Total capitalization............... $100,226 $121,294 $121,294 ======== ======== ========
- --------------- (1) A portion of the estimated net proceeds from this offering will be used to reduce our then outstanding indebtedness. (2) Excludes 2,496,662 shares issuable on the exercise of options and warrants outstanding at September 30, 1998, at a weighted average exercise price of $4.90 per share. See "Management -- 1997 Stock Option Plan," "Certain Transactions" and Note 9 of Notes to Financial Statements included elsewhere herein. (3) Deferred stock compensation relates to stock options granted to employees with exercise prices below the estimated fair value of the stock on the date of grant. Deferred stock compensation is being amortized to stock compensation expense over the vesting periods of the respective stock options. See Notes 1 and 9 of Notes to Financial Statements included elsewhere herein. 16 18 DILUTION The pro forma combined negative net tangible book value of our common stock as of September 30, 1998 was $(28.7) million, or $(2.40) per share. Pro forma combined negative net tangible book value per share represents the amount of our total tangible assets, less our total liabilities, divided by the total number of shares of common stock outstanding as of September 30, 1998, after giving effect to certain of the Company's acquisitions accounted for as purchases and the mergers with the Murrey Companies (accounted for as poolings-of-interests). After giving effect to our sale of 3,250,000 shares in this offering at an assumed public offering price of $18.25 (and after deducting underwriting discounts and commissions and estimated offering expenses), our pro forma combined net tangible book value as of September 30, 1998 would have been approximately $26.4 million, or $1.74 per share of common stock. This represents an immediate increase in pro forma combined net tangible book value of approximately $4.14 per share to existing stockholders and an immediate dilution of pro forma combined net tangible book value of approximately $16.51 per share to new investors purchasing common stock in this offering, as illustrated in the following table: Assumed public offering price per share..................... $18.25 Pro forma combined negative net tangible book value per share prior to this offering........................... $(2.40) Increase in pro forma combined net tangible book value per share attributable to new investors.................... 4.14 ------ Pro forma combined net tangible book value per share after this offering............................................. 1.74 ------ Dilution in pro forma combined net tangible book value per share to new investors.................................... $16.51 ======
The following table sets forth, as of September 30, 1998, on a pro forma combined basis giving effect to the issuance of 3,250,000 shares of common stock offered by this prospectus, and the mergers with the Murrey Companies as if we issued these shares on September 30, 1998, the difference between existing stockholders and new investors purchasing shares of common stock in this offering with respect to the number of shares purchased from Waste Connections (before deducting underwriting discounts and commissions and estimated offering expenses), the total consideration paid and the average price per share paid:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ---------------------- ----------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE ----------- ------- ------------ ------- --------- Existing stockholders........ 11,954,632 78.6% $110,235,000 65.0% $ 9.22 New investors......... 3,250,000 21.4 59,313,000 35.0 $18.25 ----------- ------ ------------ ------ Total....... 15,204,632 100.0% $169,548,000 100.0% =========== ====== ============ ======
As of September 30, 1998, stock options and warrants exercisable for 2,496,662 shares of common stock at a weighted average exercise price of $4.90 per share were outstanding. If these options and warrants are exercised, further dilution to new investors will occur. We may also issue additional shares to effect future business acquisitions or upon exercise of stock options granted in the future or other equity awards, which could result in additional dilution to then existing stockholders. See "Management -- Executive Compensation -- Stock Options and Warrants." 17 19 SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA The following tables present selected historical and pro forma consolidated 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 selected historical financial information of Waste Connections' predecessors as of December 31, 1996, for the nine months ended September 30, 1997 and for the years ended December 31, 1995 and 1996 is based on audited financial statements included elsewhere in this prospectus. The selected historical financial information of Waste Connections as of December 31, 1997, and for the period from inception (September 9, 1997) through December 31, 1997, is based on audited financial statements included elsewhere in this prospectus. The selected historical financial information of Waste Connections' predecessors as of December 31, 1993, 1994 and 1995, and for the years ended December 31, 1993 and 1994 is based on financial statements that have not been audited. Waste Connections' selected historical financial information as of September 30, 1998 and for the nine months ended September 30, 1998 is based on unaudited financial statements included elsewhere in this prospectus. Waste Connections' management believes that the unaudited financial data include all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the financial position and operating results for the unaudited periods. Waste Connections' operating results for the nine months ended September 30, 1998 do not necessarily indicate the results that may be expected for the year ended December 31, 1998. Various factors affect the year-to-year comparability of the amounts presented. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Basis of Presentation" and "-- Results of Operations" for additional information about Waste Connections and our predecessors. The selected pro forma financial information for the nine months ended September 30, 1998 and for the year ended December 31, 1997 gives effect to the sale of the common stock offered hereby and the application of the estimated net proceeds from this offering, and the purchases of Arrow, B&B, J&J, Contractors, Curry, Amador, Butler, Shrader, Madera and Waste Connections' predecessors and the mergers with the Murrey Companies (accounted for as poolings-of-interests) as of the dates and for the periods indicated. This information is based on unaudited pro forma financial statements included elsewhere in this prospectus. The pro forma financial information does not represent what Waste Connections' results actually would have been had those events occurred on the dates indicated, and it does not project our future results. You should read the selected historical and pro forma financial information with Management's Discussion and Analysis of Financial Condition and Results of Operations, the audited and unaudited Financial Statements and Notes of Waste Connections and our predecessors, and the Unaudited Pro Forma Financial Statements and Notes included in this prospectus. 18 20 WASTE CONNECTIONS, INC. AND PREDECESSORS SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FIBRES INTER- NATIONAL, INC. THE THE PERIOD FIBRES DISPOSAL FIBRES DISPOSAL FROM INTERNATIONAL GROUP INTERNATIONAL, GROUP JANUARY 1, PREDECESSORS INC. COMBINED INC. COMBINED 1995 ONE MONTH YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, NOVEMBER 30, DECEMBER 31, 1993 1993 1994 1994 1995 1995 ------------- ------------ -------------- ------------ ------------ ------------ HISTORICAL STATEMENTS OF OPERATIONS DATA(1): Revenues.................. $3,787 $20,794 $5,610 $22,004 $7,340 $595 Cost of operations........ 2,737 16,775 4,432 18,298 5,653 527 Selling, general and administrative.......... 553 3,559 552 3,320 823 72 Depreciation and amortization............ 428 520 642 606 715 74 ------ ------- ------ ------- ------ ---- Income (loss) from operations.............. 69 (60) (16) (220) 149 (78) Interest expense.......... (78) (390) (191) (548) (162) (1) Other income (expense), net..................... 1 684 (2) 871 98 5 Income (loss) before income taxes............ (8) 234 (209) 103 85 (74) Income tax (provision) benefit................. -- (77) -- -- (29) -- ------ ------- ------ ------- ------ ---- Net income (loss)......... $ (8) $ 157 $ (209) $ 103 $ 56 $(74) ====== ======= ====== ======= ====== ==== THE DISPOSAL GROUP THE COMBINED DISPOSAL FROM GROUP JANUARY 1, PREDECESSORS COMBINED 1996 COMBINED YEAR ENDED THROUGH PERIOD ENDED DECEMBER 31, JULY 31, DECEMBER 31, 1995 1996 1996 ------------ ------------ ------------ HISTORICAL STATEMENTS OF OPERATIONS DATA(1): Revenues.................. $19,660 $8,738 $13,422 Cost of operations........ 16,393 6,174 11,420 Selling, general and administrative.......... 3,312 2,126 1,649 Depreciation and amortization............ 628 324 962 ------- ------ ------- Income (loss) from operations.............. (673) 114 (609) Interest expense.......... (206) (12) (225) Other income (expense), net..................... -- 2,661 (147) Income (loss) before income taxes............ (879) 2,763 (981) Income tax (provision) benefit................. 298 (505) -- ------- ------ ------- Net income (loss)......... $ (581) $2,258 $ (981) ======= ====== =======
(See footnotes on page 21) 19 21
WASTE CONNECTIONS, INC. WASTE CONNECTIONS, INC. PREDECESSORS PERIOD FROM PRO FORMA NINE MONTHS ENDED COMBINED INCEPTION COMBINED SEPTEMBER 30, 1998 NINE MONTHS (SEPTEMBER 9, AS ADJUSTED ------------------------ ENDED 1997) THROUGH YEAR ENDED PRO FORMA SEPTEMBER 30, DECEMBER 31, DECEMBER 31, COMBINED AS 1997 1997 1997(2) ACTUAL ADJUSTED(2) ------------- ----------------- ------------ ---------- ----------- HISTORICAL STATEMENTS OF OPERATIONS DATA(1): Revenues............................... $18,114 $ 6,237 $ 90,221 $ 35,336 $ 75,551 Cost of operations..................... 14,753 4,703 67,694 24,007 53,855 Selling, general and administrative.... 3,009 619 9,735 3,518 7,415 Depreciation and amortization.......... 1,083 354 5,710 2,693 5,678 Start-up and integration............... -- 493 493 -- -- Stock compensation..................... -- 4,395 4,395 561 561 ------- ---------- ---------- ---------- ----------- Income (loss) from operations.......... (731) (4,327) 2,194 4,557 8,042 Interest expense....................... (456) (1,035) (2,572) (1,427) (1,392) Other income (expense), net............ 14 (36) 596 -- 60 ------- ---------- ---------- ---------- ----------- Income (loss) before income taxes...... (1,173) (5,398) 218 3,130 6,710 Income tax (provision) benefit......... -- 332 (1,775) (1,513) (2,816) ------- ---------- ---------- ---------- ----------- Income (loss) before extraordinary item................................. (1,173) (5,066) (1,557) 1,617 3,894 Extraordinary item -- early extinguishment of debt, net of income tax benefit of $165.................. -- -- -- (815) (815) ------- ---------- ---------- ---------- ----------- Net income (loss)...................... $(1,173) $ (5,066) $ (1,557) $ 802 $ 3,079 ======= ========== ========== ========== =========== Redeemable convertible preferred stock accretion............................ (531) (531) (917) (917) ---------- ---------- ---------- ----------- Net income (loss) applicable to common stockholders......................... $ (5,597) $ (2,088) $ (115) $ 2,162 ========== ========== ========== =========== Basic earnings (loss) per common share: Income (loss) before extraordinary item............................... $ (2.99) $ (0.24) $ 0.13 $ 0.25 ========== =========== Extraordinary item................... -- (0.15) ---------- ---------- Net income (loss) per common share... $ (2.99) $ (0.02) ========== ========== Diluted earnings (loss) per common share: Income (loss) before extraordinary item............................... $ (2.99) $ (0.24) $ 0.09 $ 0.22 ========== =========== Extraordinary item................... -- (0.11) ---------- ---------- Diluted net income (loss) per common share.............................. $ (2.99) $ (0.02) ========== ========== Shares used in calculating basic net income (loss) per share.............. 1,872,567 8,700,306 5,476,532 12,069,350 Shares used in calculating diluted earnings (loss) per share............ 1,872,567 8,700,306 7,438,658 13,654,186 Pro forma basic net income (loss) per share(3)............................. $ (1.16) $ 0.11 ========== ========== Shares used in calculating pro forma basic net income (loss) per share.... 4,372,565 7,117,557 Pro forma diluted net income (loss) per share(3)............................. $ (1.16) $ 0.09 ========== ========== Shares used in calculating pro forma diluted net income (loss) per share................................ 4,372,565 8,702,393
(See footnotes on page 21) 20 22
FIBRES THE DISPOSAL FIBRES THE DISPOSAL THE DISPOSAL INTERNATIONAL, GROUP INTERNATIONAL, GROUP PREDECESSORS GROUP INC. COMBINED INC. COMBINED COMBINED COMBINED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1993 1994 1994 1995 1995 -------------- ------------ -------------- ------------ ------------ ------------ HISTORICAL BALANCE SHEET DATA(1): Cash and equivalents....... $ 3 $ 196 $ 321 $ 203 $ 184 $ 961 Working capital (deficit)................ 494 (1,497) 155 (4,279) 90 2,498 Property and equipment, net...................... 1,454 2,440 3,810 2,771 4,035 2,221 Total assets......... 3,325 7,455 6,317 7,318 9,151 6,942 Long-term debt(6).......... 1,167 1,258 2,353 90 149 6,890 Redeemable convertible preferred stock.......... -- -- -- -- -- -- Total stockholders' equity (deficit)... 991 (163) 3,045 (1,486) -- (2,067) WASTE CONNECTIONS, INC. SEPTEMBER 30, 1998 --------------------------------------------------- PREDECESSORS PRO FORMA COMBINED COMBINED DECEMBER 31, DECEMBER 31, PRO FORMA AS ADJUSTED 1996 1997 ACTUAL COMBINED(4) (4)(5) ------------ ------------ -------- ----------- ----------- HISTORICAL BALANCE SHEET DATA(1): Cash and equivalents....... $ 102 $ 820 $ 1,090 $ 1,781 $ 1,781 Working capital (deficit)................ 695 836 (1,482) (10,922) (10,922) Property and equipment, net...................... 5,069 4,185 18,438 42,494 42,494 Total assets......... 15,291 18,880 114,495 151,048 151,048 Long-term debt(6).......... 89 6,762 40,404 59,897 4,798 Redeemable convertible preferred stock.......... -- 7,523 -- -- -- Total stockholders' equity (deficit)... -- (551) 59,822 61,397 116,496
- --------------- (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 -- Basis of Presentation" and "-- Results of Operations" for additional information concerning Waste Connections and our predecessors. (2) Assumes Waste Connections' acquisitions of Arrow, B&B, J&J, Contractors, Curry, Amador, Butler, Shrader, Madera and Waste Connections' predecessors and the mergers with the Murrey Companies (accounted for as poolings-of-interests) occurred as of January 1, 1997, adjusted to reflect the sale of the common stock offered hereby at an assumed public offering price of $18.25 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Unaudited Pro Forma Financial Statements" included elsewhere herein. (3) Adjusted to reflect the conversion of all outstanding shares of redeemable convertible preferred stock for the period from inception through December 31, 1997, and the conversion of redeemable convertible preferred stock and all outstanding shares of redeemable common stock for the nine months ended September 30, 1998, as if such conversions had occurred as of the first day of each of the periods presented. See Note 11 of Notes to Waste Connections' Historical and Supplemental Financial Statements included elsewhere herein for an explanation of the pro forma historical per share calculations. (4) Assumes the acquisitions of Amador and Butler occurred on September 30, 1998 and the mergers with the Murrey Companies are accounted for as poolings-of- interests. See "Unaudited Pro Forma Financial Statements" included elsewhere herein. (5) Adjusted to reflect the sale of common stock offered by Waste Connections through this prospectus at an assumed offering price of $18.25 per share and the application of the estimated net proceeds of this offering as described in "Use of Proceeds." (6) Excludes redeemable convertible preferred stock, which converted into common stock on our May 1998 initial public offering. 21 23 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. Waste Connections' 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. Waste Connections intends to continue to pursue its acquisition-based growth strategy and has acquired 43 companies since our inception in September 1997. We will account for the mergers with the Murrey Companies as poolings-of-interests if they are consummated. We accounted for the remainder of our acquisitions as purchases. Accordingly, we have included the operating results of the acquired businesses accounted for as purchases in our financial statements only from the dates that we acquired them. We expect a substantial part of our 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 our operating results. We also expect to invest in collection vehicles and equipment, maintenance of existing equipment, and management information systems, which should enable us to expand internally and through acquisitions based on our existing infrastructure. We expect to fund future acquisitions through cash from operations, borrowings under our credit facility, the issuance of shares of our common stock and/or seller financing. As of January 6, 1999, we had completed the following acquisitions: Initial Acquisitions. In September 1997, Waste Connections joined with two other parties to bid on certain solid waste and recycling businesses offered for sale by BFI. We 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 governmental certificate in and around Clark County, Washington, and the stock of its subsidiary, Fibres International, Inc., a provider of solid waste services to more than 24,000 customers through eight municipal contracts and one governmental certificate in King and Snohomish Counties, Washington. The acquired companies subsequently changed their names to Waste Connections of Washington, Inc. and Waste Connections International, Inc., respectively. The two other parties acquired selected BFI solid waste collection and transportation assets and operations in Idaho, and BFI's recycling assets and operations in Washington, Idaho and Oklahoma. California Acquisitions. Effective February 1, 1998, Waste Connections acquired the stock of Madera, an integrated solid waste services company operating in north central California. In connection with the Madera acquisition, we acquired one franchise agreement and one municipal contract, pursuant to which we serve more than 9,000 commercial, industrial and residential customers, and agreements to operate two transfer stations, one Subtitle D landfill and one recycling facility. On September 9, 1998, we acquired certain collection assets from Youngclaus Enterprises, which "tuck in" to our Madera operations. On September 22, 1998, Curry Transfer and Recycling, a wholly-owned subsidiary of Waste Connections, 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, Waste Connections acquired the stock of Amador Disposal Service, Inc. and Mother Lode 22 24 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, Waste Connections 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 Waste Connections to acquire certain assets of Browning-Ferris Industries of Idaho, Inc. Effective March 1, 1998, Waste Connections of Idaho, Inc. acquired certain solid waste collection assets from Hunter Enterprises, Inc., a solid waste services company located in eastern Idaho, serving approximately 2,800 residential and commercial customers. On October 15, 1998, we acquired the assets of R&N, LLC, which provides solid waste collection and transportation services to approximately 4,300 customers in southwestern Idaho. These assets "tuck in" to our Idaho operations. Kansas Acquisition. On December 21, 1998, a wholly-owned subsidiary of Waste Connections acquired the assets of Heartland Waste Management, Inc., which provides solid waste collection services to approximately 2,500 customers in southern Kansas and "tucks in" to our western Oklahoma operations. Nebraska Acquisitions. On July 31, 1998, a wholly-owned subsidiary of Waste Connections merged into Shrader, which provides solid waste and recyclables collection services to more than 22,500 customers in eastern Nebraska. On August 3, 1998, Waste Connections acquired the stock of J&J, which serves an aggregate of more than 9,500 customers in eastern Nebraska. On September 18, 1998, Waste Connections of Nebraska, Inc., a wholly-owned subsidiary of Waste Connections, 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. These assets "tuck in" to our eastern Nebraska operations. In addition, on January 6, 1999, we purchased the stock of Butler County Landfill, Inc. and a wholly-owned subsidiary of Waste Connections purchased certain business assets of Kobus Construction, Inc. These entities provide solid waste disposal and transportation services to approximately 300 customers in eastern Nebraska. Oklahoma Acquisitions. On June 5, 1998, Waste Connections acquired the stock of B&B, which provides solid waste and recyclables collection and transportation, landfill and equipment leasing services to an aggregate of more than 2,600 customers in western Oklahoma. Oregon Acquisitions. On June 17, 1998, Waste Connections 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, Waste Connections acquired the stock of Curry and certain real estate located in Curry County, Oregon and used in that business. Curry provides solid waste and recyclables collection and transportation services to more than 5,400 customers in southwestern Oregon. On September 25, 1998, Curry acquired certain business assets of Westlane Disposal, which provides solid waste collection and transportation services to approximately 2,200 customers in southwestern Oregon. On November 5, 1998, Waste Connections 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, Waste Connections acquired the stock of Columbia Sanitary 23 25 Services, Inc. and Moreland Sanitary Service, Inc., which provide solid waste collection services to approximately 4,800 customers in northwestern Oregon and southwestern Washington. Arrow, Columbia Sanitary and Moreland Sanitary all "tuck in" to our southwestern Washington operations, while Veneta, B&G and Suislaw all "tuck in" to our southwestern Oregon operations. South Dakota and Wyoming Acquisitions. On May 8, 1998, Waste Connections 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, Waste Connections acquired certain assets of a South Dakota waste collection business owned by the shareholders of J&J, which "tuck in" to our Wyoming and South Dakota operations. (See "Nebraska Acquisitions" above). On April 8, 1998, Waste Connections of Wyoming, Inc. acquired certain solid waste collection assets from A-1 Disposal, Inc. and Jesse's Disposal, operating in northeastern Wyoming, and serving an aggregate of approximately 2,300 customers. On May 11, 1998, Waste Connections acquired T&T Disposal, Inc., a provider of solid waste and recyclables collection services to more than 500 customers in northeastern Wyoming. Utah Acquisitions. On June 1, 1998, Waste Connections of Utah, Inc., a wholly-owned subsidiary of Waste Connections, acquired substantially all of the business assets of Contractors, 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, Waste Connections of Utah, Inc. acquired certain business assets of Miller Containers, Inc., ABC Waste, Inc., and Contractors Waste, Inc., which provide solid waste collection services to an aggregate of approximately 290 customers in central Utah and "tuck in" to our Utah operations. On September 21, 1998, Waste Connections of Utah, Inc. acquired certain assets of Country Garbage Services, Inc., which provides solid waste collection and transportation services in central Utah. On December 30, 1998, Waste Connections acquired the stock of City Sanitation, Inc., which provides solid waste collection services to more than 4,200 customers in central Utah. Washington Acquisitions. On September 21, 1998, a wholly-owned subsidiary of Waste Connections merged into Evergreen Waste Systems, Inc. As a result of this merger, Evergreen Waste Systems, Inc. became a wholly-owned subsidiary of Waste Connections that provides solid waste and recyclables collection and transportation services to more than 6,500 customers in southwestern Washington and northwestern Oregon and "tucks in" to our southwestern Washington operations. On October 22, 1998, Waste Connections and the Murrey Companies entered into a merger agreement under which the Murrey Companies would become wholly-owned subsidiaries of Waste Connections. The Murrey Companies, which provide solid waste services to more than 65,000 customers in the Seattle-Tacoma, Washington area, had revenues for the nine months ended September 30, 1998 of $24.5 million, over 75% of which were derived from services provided under exclusive arrangements. The mergers are contingent on satisfaction of several conditions, including the approval of Waste Connections' stockholders. If these conditions are satisfied, we expect the acquisition to be consummated on or about January 19, 1999. GENERAL Our revenues consist mainly of fees we charge customers for solid waste collection, transfer, disposal and recycling services. A large part of our collection revenues comes from providing commercial, industrial and residential services. We frequently perform 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. Our existing franchise agreements and all of our existing municipal contracts give Waste Connections 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 24 26 subsequently on a bid or negotiated basis. We also provide residential collection services on a subscription basis with individual households. More than 75% of our pro forma revenues for the nine months ended September 30, 1998 were derived from services provided under exclusive franchise agreements, long term municipal contracts and governmental certificates. Governmental certificates grant Waste Connections perpetual and exclusive collection rights in the covered areas. Contracts with counties and municipalities and governmental certificates provide relatively consistent cash flow during the terms of the contracts. Because we bill most residential customers quarterly, subscription agreements also provide a stable source of revenues for Waste Connections. Our collection business also generates revenues from the sale of recyclable commodities. We charge transfer station and landfill customers a tipping fee on a per ton basis for disposing of their solid waste at the transfer stations, the disposal facility we operate in Madera, California and the landfills we own and operate in Major County, Oklahoma and Butler County, Nebraska. Most of our transfer and landfill customers have entered into one to ten year disposal contracts with us, most of which provide for annual cost of living increases. We typically determine the prices for our 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 our contracts sometimes limit our 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 we purchase for recycling, third party transportation expense, district and state taxes and host community fees and royalties. Waste Connections owns and/or operates 12 transfer stations, which reduce our costs by allowing us to use collection personnel and equipment more efficiently and by consolidating waste to gain 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 our marketing and sales force, professional services and community relations expense. Depreciation and amortization expense includes depreciation of fixed assets over their estimated useful life using the straight line method and amortization of goodwill and other intangible assets using the straight line method. Waste Connections capitalizes some third party expenditures related to pending acquisitions or development projects, such as legal and engineering expenses. We expense indirect acquisition costs, such as executive and corporate overhead, public relations and other corporate services, as we incur them. We charge against net income any unamortized capitalized expenditures and advances (net of any portion that we believe we 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. We routinely evaluate all capitalized costs, and expense those related to projects that we believe are not likely to succeed. As of September 30, 1998, Waste Connections had no capitalized expenditures relating to landfill development projects and $32,610 in capitalized expenditures relating to acquisitions and pending acquisitions. We accrue for estimated landfill closure and post-closure maintenance costs at the Red Carpet Landfill we own in Major County, Oklahoma and the Butler County Landfill we own in Butler County, Nebraska. Under applicable regulations, Waste Connections and Madera County, as operator and owner, respectively, are jointly liable for closure and post-closure liabilities with 25 27 respect to the Fairmead Landfill. We have 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, we do not believe that Madera had any financial obligation for closure and post-closure costs for the Fairmead Landfill as of September 30, 1998. We will have additional material financial obligations relating to closure and post-closure costs of any disposal facilities we may own or operate in the future. In such case, Waste Connections will accrue for those obligations, based on engineering estimates of consumption of permitted landfill airspace over the useful life of any such landfill. BASIS OF PRESENTATION The entities Waste Connections acquired in September 1997 from BFI are collectively called Waste Connections' predecessors. BFI acquired the predecessors at various times during 1995 and 1996. Before being acquired by BFI, the predecessors operated as separate stand-alone businesses. During the periods in which our predecessors operated as wholly-owned subsidiaries of BFI, they maintained intercompany accounts with BFI for recording intercompany charges for costs and expenses, intercompany purchases of equipment and additions under capital leases and intercompany transfers of cash, among other transactions. It is not feasible to ascertain the amount of related interest expense that would have been recorded in the historical financial statements had the predecessors been operated as stand-alone entities. BFI allocated charges for interest expense to Waste Connections' predecessors as disclosed in the statement of operations data. The interest expense allocations from BFI are based on formulas that may not correspond to the balances in the related intercompany accounts. Moreover, the financial position and results of operations of the predecessors during this period may not indicate the financial position or results of operations that would have been realized had the predecessors been operated as stand-alone entities. For the periods in which the predecessors operated as wholly owned subsidiaries of BFI, the statements of operations include amounts allocated by BFI to the predecessors for SG&A expenses, which Waste Connections' management believes are reasonable. BFI accounted for the acquisitions of the predecessors using the purchase method of accounting and allocated the respective purchase prices to the fair values of the assets acquired and liabilities assumed. Similarly, we accounted for our acquisitions of the predecessors from BFI in September 1997 using the purchase method of accounting and allocated the purchase price to the fair value of the assets acquired and liabilities assumed. Consequently, the amounts of depreciation and amortization included in the statements of operations for the periods presented reflect the changes in basis of the underlying assets that resulted from changes in ownership that occurred during those periods. In addition, because the predecessors operated independently and were not under common control or management during these periods, and because different tax strategies may have influenced their operating results, the data may not be comparable to or indicative of their operating results after their acquisition by BFI. 26 28 RESULTS OF OPERATIONS The financial information for Waste Connections and our predecessors included in this section and in the audited financial statements included elsewhere in this prospectus relates to the following entities for the periods indicated: YEAR ENDED DECEMBER 31, 1995: The Disposal Group Combined Year ended December 31, 1995 Fibres International, Inc. January 1, 1995 through November 30, 1995 (BFI acquisition date) Predecessors One month ended December 31, 1995 (represents the results of operations of Fibres International, Inc. subsequent to the BFI acquisition date) YEAR ENDED DECEMBER 31, 1996: The Disposal Group Combined January 1, 1996 through July 31, 1996 (BFI acquisition date) Predecessors Combined Period ended December 31, 1996 (represents the combined results of operations of The Disposal Group subsequent to the BFI acquisition date and the operations for the year ended December 31, 1996 of Fibres International, Inc., which was acquired by BFI in 1995) YEAR ENDED DECEMBER 31, 1997: Predecessors Combined Nine months ended September 30, 1997 (represents the combined results of operations for the nine month period of the entities acquired by BFI in 1995 and 1996 described above) Waste Connections, Inc. Period from inception (September 9, 1997) through December 31, 1997
The Disposal Group Combined consists of three entities that were under common control before their acquisition by BFI: Diamond Fab and Welding Service, Inc., Buchmann Sanitary Service, Inc. and The Disposal Group. Because the predecessors existed for different periods, year-to-year comparisons are not meaningful and therefore we have not included discussions of SG&A, depreciation and amortization and interest expense in this prospectus. WASTE CONNECTIONS, INC. -- NINE MONTHS ENDED SEPTEMBER 30, 1998 VS. PREDECESSORS COMBINED -- NINE MONTHS ENDED SEPTEMBER 30, 1997 Revenues. Revenues for the nine months ended September 30, 1998 increased $17.2 million, or 95.1% to $35.3 million from $18.1 million for the nine months ended September 30, 1997. Approximately $16.2 million of the increase resulted primarily from acquisitions closed since the beginning of 1998 and approximately $964,000 resulted from growth in the base business. Cost of Operations. Cost of operations for the nine months ended September 30, 1998 increased $9.3 million, or 62.7%, to $24.0 million from $14.8 million for the nine months ended September 30, 1997. The increase resulted primarily from acquisitions closed since the beginning of 1998 and a decline in expenses in the base business as a result of cost reduction measures. 1997 VS. 1996 Revenues. Our total revenues for 1997 were $6.2 million. The total 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 27 29 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. The total cost of operations in 1997 was $4.7 million, or 75.4% of revenues. The total 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. 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. 1996 VS. 1995 Revenues. Waste Connections' Predecessors Combined total revenues for 1996 was $13.4 million. The Disposal Group Combined total revenues for the period from January 1, 1996 to July 31, 1996 was $8.7 million. Waste Connections' Predecessors Combined had revenues of $595,000 for the period ended December 31, 1995. The Disposal Group Combined had revenues of $19.7 million for the year ended December 31, 1995. Fibres International, Inc. had revenues of $7.3 million for the period from January 1, 1995 to November 30, 1995. The monthly revenues for all of Waste Connections' predecessors declined in 1996 from 1995 because of the expiration of a municipal contract and a reduction in revenue from sales of recyclable materials due to a reduction in prices of recyclable materials. Cost of Operations. Waste Connections' Predecessors Combined total cost of operations for 1996 was $11.4 million, or 85.1% of revenues, and The Disposal Group Combined cost of operations for the period from January 1, 1996 to July 31, 1996 was $6.2 million, or 70.7% of revenues. Cost of operations of Waste Connections' Predecessors Combined for the period ended December 31, 1995 was $527,000 or 88.6% of revenues. Cost of operations of The Disposal Group Combined for the year ended December 31, 1995 was $16.4 million, or 83.4% of revenues. Cost of operations of Fibres International, Inc. for the period from January 1, 1995 to November 30, 1995 was $5.7 million, or 77.0% of revenues. Cost of operations as a percentage of revenues increased because of reductions in prices of recyclable materials in 1996, but that was offset by the expiration of a low margin municipal contract in 1995. LIQUIDITY AND CAPITAL RESOURCES Our business is capital intensive. Our capital requirements include acquisitions and fixed asset purchases. We expect that we will also make capital expenditures for landfill cell construction, landfill development and landfill closure activities in the future. We plan to meet our capital needs through various financing sources, including internally generated funds and debt and equity financings. As of September 30, 1998, Waste Connections had a working capital deficit of $1.5 million, including cash and cash equivalents of $1 million. In managing our working capital, we generally 28 30 apply the cash generated from our operations that remains after satisfying our working capital and capital expenditure requirements to reduce our indebtedness under our bank revolving credit facility and to minimize our cash balances. We finance our working capital requirements from internally generated funds and bank borrowings. At inception, Waste Connections 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, we received approximately $23.9 million in net proceeds from the sale of 2,300,000 shares in our initial public offering (including exercise by the underwriters of their overallotment option). As of January 6, 1999, Waste Connections had sold or issued an additional 2,214,292 shares of common stock at a weighted average value of $10.38 per share, and had options and warrants outstanding to purchase 2,442,699 shares of common stock at a weighted average exercise price of $4.94 per share. The weighted average value at which we issued shares, and the weighted average exercise price of the outstanding options and warrants, are below the assumed public offering price of $18.25 per share in this offering. Our liquidity and capital resources would be greater if we had sold shares at higher prices and issued options and warrants with higher exercise prices. In addition, our earnings per share would be higher if there were fewer shares outstanding. Waste Connections has a $125 million revolving credit facility with a syndicate of banks for which BankBoston, N.A. acts as agent. All of our assets, including Waste Connections' interest in the equity securities of our subsidiaries, secure our obligations under the credit facility. The credit facility matures in 2003 and bears interest at a rate per annum equal to, at our discretion, either the BankBoston Base Rate plus applicable margin, or the Eurodollar Rate plus applicable margin. The credit facility requires Waste Connections 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. As of December 31, 1998, an aggregate of approximately $57.3 million was outstanding under our credit facility, and the interest rate on outstanding borrowings under the credit facility was approximately 6.7%. For the nine months ended September 30, 1998, operations provided approximately $4.4 million of net cash, of which operating results for the period exclusive of non-cash charges provided $3.5 million and a decrease in working capital (net of acquisitions) for the period provided $839,000. For the nine months ended September 30, 1998, we used $46.1 million for investing activities. Of this amount, we used $44.2 million to fund the cash portion of acquisitions and invested the remainder in management information systems, trucks and containers. For the nine months ended September 30, 1998, financing activities provided net cash of $42.0 million, which included net borrowings under our credit facility and $23.9 million in proceeds from the sale of common stock in our initial public offering. Waste Connections recorded an income tax benefit of $332,000 for the period from inception (September 9, 1997) through December 31, 1997. We recognized the income tax benefit because we believe we will likely use it when existing temporary differences reverse. We made approximately $5.6 million in capital expenditures in 1998. We expect to make capital expenditures of approximately $5.5 million in 1999 in connection with our existing business. We intend to fund our planned 1999 capital expenditures principally through existing cash, internally generated funds, and borrowings under our existing credit facility. In addition, we may make substantial additional capital expenditures in acquiring solid waste collection and disposal businesses. If we acquire additional landfill disposal facilities, we may also have to make significant expenditures to bring them into compliance with applicable regulatory requirements, obtain permits or expand our available disposal capacity. We cannot currently determine the 29 31 amount of these expenditures because they will depend on the number, nature, condition and permitted status of any acquired landfill disposal facilities. We believe that our credit facility, the funds we expect to generate from operations and the net proceeds of this offering will provide adequate cash to fund our working capital and other cash needs for the foreseeable future. Goodwill represents the excess of the purchase price over the fair value of the net assets of the acquired entity and is amortized on a straight line basis over the period of expected benefit of 40 years. Within the purchase price of an acquired company, we first assign 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. We determine value of the other intangible assets by considering, among other things, the present value of the cash flows associated with those assets. We continually evaluate the value and future benefits of our intangible assets. We assess 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 our best estimate for expected future cash flows of the related business would be less than the carrying amount of the intangible assets over the remaining amortization period. As of September 30, 1998, there have been no adjustments to the carrying amounts of intangibles resulting from these evaluations. As of September 30, 1998, our goodwill represented approximately 71% of our total assets and 136% of stockholder's equity. We derive a substantial portion of our revenues from services provided under exclusive municipal contracts and franchise agreements. Our single largest contract, with the City of Vancouver, accounted for approximately 18.1% of our revenues during the period from inception (September 9, 1997) through December 31, 1997, and 10.1% during the nine months ended September 30, 1998. Approximately nine years remain under that contract. No other single contract or customer accounted for more than 7.1% of our revenues during the period from inception (September 9, 1997) through December 31, 1997, or more than 5.0% during the nine months ended September 30, 1998. INFLATION To date, inflation has not significantly affected our operations. Consistent with industry practice, many of our contracts allow us to pass through certain costs to our customers, including increases in landfill tipping fees and, in some cases, fuel costs. Therefore, we believe that we should be able to increase prices to offset many cost increases that result from inflation. However, competitive pressures may require us to absorb at least part of these cost increases, particularly during periods of high inflation. SEASONALITY Based on historic trends experienced by the businesses we have acquired, we expect our 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. YEAR 2000 ISSUES We will need to modify or replace portions of our software so that our computer systems will function properly with respect to dates in the year 2000 and afterwards. We expect to complete those modifications and upgrades during 1999, at a total cost of approximately $100,000. We have spent part of our Year 2000 budget on replacing our billing systems in Maltby and Vancouver, Washington. Because our operations rely primarily on mechanical systems such as trucks to collect solid waste, we do not expect our operations to be significantly affected by Year 2000 issues. Our customers may need to make Year 2000 modifications to software and hardware that 30 32 they use to generate records, bills and payments relating to Waste Connections. We do not rely on vendors on a routine basis except for providers of disposal services. We bring waste to a site and are normally billed based on tonnage received. We believe that if our disposal vendors encounter Year 2000 problems, they will convert to manual billing based on scale recordings until they resolve those issues. In assessing our exposure to Year 2000 issues, management believes our biggest challenges lie in the following areas: Year 2000 issues at Waste Connections' banks, large (typically municipal) customers, and acquired businesses between the time Waste Connections acquires them and the time we implement our own systems. We are obtaining Year 2000 compliance certifications from our vendors, banks and customers. If Waste Connections and our vendors, banks and customers do not complete the required Year 2000 modifications on time, the Year 2000 issue could materially affect our operations. We believe, however, that in the most reasonably likely worst case, the effects of Year 2000 issues on our operations would be brief and small relative to our overall operations. We have not made a contingency plan to minimize operational problems if we and our vendors, banks and customers do not timely complete all required Year 2000 modifications. 31 33 BUSINESS INDUSTRY OVERVIEW According to Waste Age, an industry trade publication, the U.S. solid waste services industry generated estimated revenues of $36.9 billion in 1997. The solid waste services industry has undergone significant consolidation and integration since 1990. We believe that, particularly in the Western U.S., the following factors have primarily caused the consolidation and integration of the waste services industry: - Increased Impact of Regulations. 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, and mandates liner systems, leachate collection, treatment and monitoring systems and gas collection and monitoring systems. These ongoing costs are combined with increased financial reserve requirements for solid waste landfill operators relating to closure and post-closure monitoring. As a result, the number of solid waste landfills is declining while the average size is increasing. - Increased Integration of Collection and Disposal Operations. In certain markets, 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 to capture significant waste stream volumes to gain leverage in negotiating lower landfill fees and securing long-term, most-favored-pricing contracts with high capacity landfills. - Pursuit of Economies of Scale. Larger operators achieve economies of scale by vertically integrating their operations or by spreading their facility, asset and management infrastructure over larger volumes. Larger solid waste collection and disposal companies have become more cost-effective and competitive through control of a larger waste stream and by gaining access to significant financial resources to make acquisitions. - Regulatory Framework in the Western U.S. 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 governmental certificates awarded to waste collection service providers in unincorporated areas and electing municipalities of Washington by the WUTC, typically grant the certificate holder the exclusive and perpetual right to provide specific residential, commercial and industrial waste services in a territory at specified rates. 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 governmental 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 these services in their area. These exclusive rights and contractual arrangements create barriers to entry that can be overcome primarily through acquisitions of companies with such exclusive rights or contractual arrangements. 32 34 Despite the ongoing consolidation, the solid waste services 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. We expect 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. In addition, many independent operators may wish to sell their businesses to achieve liquidity in their personal finances or as part of their estate planning. We believe that the fragmented nature of the industry offers significant consolidation and growth opportunities, especially in secondary markets of the Western U.S., for companies with disciplined acquisition programs, decentralized operating strategies and access to financial resources. STRATEGY Our objective is to build a leading integrated solid waste services company in secondary markets of the Western U.S. We have developed a two-pronged strategy tailored to the competitive and regulatory factors that affect our markets. First, in markets where waste collection services are provided under exclusive arrangements, or where waste disposal is municipally funded or available from multiple municipal sources, we believe that controlling the waste stream by providing collection services under exclusive arrangements is often more important to our growth and profitability than owning or operating landfills. In addition, regulations in some Western U.S. markets dictate the disposal facility to be used. The large size of many western states increases the cost of interstate and long haul disposal, heightening the effects of regulations that direct waste disposal, which may make it more difficult for a landfill to obtain the disposal volume necessary to operate profitably. In markets with these characteristics, we believe that landfill ownership or vertical integration is not critical to our success. Second, in markets where we believe that owning landfills is a strategic element to a collection operation because of competitive and regulatory factors, we generally focus on providing integrated services, from collection through disposal of solid waste in landfills that we own or operate. GROWTH STRATEGY - Expansion Through Acquisitions. We intend to expand significantly the scope of our operations by continuing to acquire solid waste operations in new markets and in existing or adjacent markets that are combined with or "tuck in" to existing operations. We intend to expand into new geographic regions by entering these markets through acquisitions. We use an initial acquisition in a new market as an operating base. Then we seek to strengthen the acquired operation's presence in that market by providing additional services, adding new customers and making "tuck-in" acquisitions. We next seek to broaden our regional presence by adding additional operations in markets adjacent to the new location. We are currently examining opportunities in states other than those in which we currently operate and are assessing potential acquisitions of solid waste operations in Colorado, Montana and Texas. We believe that many "tuck-in" acquisition opportunities exist within our current and targeted market areas. For example, we have identified more than 300 independent entities that provide collection and disposal services in the states where we currently operate. We believe that throughout the Western U.S., many independent entities are suitable for acquisition by Waste Connections and provide opportunities to increase our market share and route density. 33 35 - Exclusive Arrangements. We derive a significant portion of our revenues from arrangements, including franchise agreements, municipal contracts and governmental certificates, under which we are the exclusive service provider in a specified market. We intend to devote significant resources to securing additional franchise agreements and municipal contracts through competitive bidding and additional governmental certificates by acquiring other companies. In bidding for franchises and municipal contracts and evaluating acquisition candidates holding governmental certificates, our management team draws on its experience in the waste industry and its knowledge of local service areas in existing and target markets. Our district managers maintain relationships with local governmental officials within their 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 and contracts. - Internal Growth. To generate continued internal growth, we will focus on increasing market penetration in our 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, we intend to leverage our franchise-based platforms to expand our customer base beyond our exclusive market territories. As customers are added in existing markets, our revenue per routed truck increases, which generally increases our collection efficiencies and profitability. In markets in which we have exclusive contracts, franchises and certificates, we expect internal volume growth generally to track population and business growth. Transfer stations are an important part of our internal growth strategy. They extend our direct-haul reach and link disparate collection operations with disposal capacity that we own, operate or contract. We currently own and/or operate 12 transfer stations. By operating transfer stations, we also engage in direct communications with municipalities and private operators that deliver waste to our transfer stations. This positions us to gain additional business in our markets if a municipality privatizes any solid waste operations it owns or rebids existing contracts, and it increases our opportunities to acquire other private collection operations that use the transfer stations. OPERATING STRATEGY - Decentralized Operations. We manage our operations on a decentralized basis. This places decision-making authority close to the customer, enabling us to identify customers' needs quickly and to address those needs in a cost-effective manner. We believe that decentralization provides a low-overhead, highly efficient operational structure that allows us to expand into geographically contiguous markets and operate in relatively small communities that larger competitors may not find attractive. We believe that this structure gives us a strategic competitive advantage, given the relatively rural nature of much of the Western U.S., and makes us an attractive buyer to many potential acquisition candidates. We currently deliver our services from 27 operating locations serving 10 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 and are responsible for integrating them into our operations and obtaining the permits and other governmental approvals required for us to operate the acquired business. 34 36 - Operating Enhancements. We develop company-wide operating standards, which are tailored for each of our markets based on industry standards and local conditions. Using these standards, we track collection and disposal routing efficiency and equipment utilization. We also implement cost controls and employee training and safety procedures, and establish a sales and marketing plan for each market. We have 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. While district management operates with a high degree of autonomy, our senior officers monitor district operations and require adherence to Waste Connections' accounting, purchasing, marketing and internal control policies, particularly with respect to financial matters. Our executive officers regularly review the performance of district managers and operations. We believe that by establishing operating standards, closely monitoring performance and streamlining certain administrative functions, we can improve the profitability of existing operations. To improve an acquired business' operational productivity, administrative efficiency and profitability, we apply the same operating standards, information systems and financial controls to acquired businesses as our existing operations employ. Moreover, if we can internalize the waste stream of acquired operations, we can further increase operating efficiencies and improve capital utilization. Where not restricted by exclusive agreements, contracts, permits or certificates, we also solicit 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 Waste Connections currently operates in ten states in the Western U.S. We focus our acquisition efforts on markets in the Western U.S. that generally exhibit the characteristics listed below, which we believe provide significant growth opportunities for a well-capitalized market entrant and create economic and operational barriers to entry by new competitors. - A potential market revenue base of at least $15 million, usually in market areas with a geographically dispersed population of 75,000 or less; - A fragmented market with additional acquisition candidates; - The opportunity to acquire a significant market share; - Strong projected economic or population growth rates; - The availability of adequate disposal capacity, through acquisition or agreements with third parties; and - A favorable regulatory environment. We believe that our experienced management, decentralized operating strategy, financial strength, size and public company status make us an attractive buyer to certain solid waste collection and disposal acquisition candidates. We have developed a set of financial, geographic and management criteria to evaluate specific acquisition candidates. The factors that we consider in evaluating an acquisition candidate include: - The candidate's historical and projected financial performance; - The return on capital invested in a candidate, its margins and capital requirements and its impact on our earnings; 35 37 - 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 Waste Connections; - 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; - Whether the geographic location of the candidate will enhance or expand our market area or ability to attract other acquisition candidates; - Whether the acquisition will increase our market share or help protect our existing customer base; - Any potential synergies that may be gained by combining the candidate with our existing operations; and - The liabilities of the candidate. Before completing an acquisition, we perform extensive environmental, operational, engineering, legal, human resources and financial due diligence. Our management evaluates and approves all acquisitions. Ronald J. Mittelstaedt, President, Chief Executive Officer and Chairman of the Board, is authorized to approve acquisitions for consideration of up to $1 million; the Executive Committee of the Board of Directors must approve all other acquisitions. We seek to integrate each acquired business promptly and to minimize disruption to the ongoing operations of both Waste Connections and the acquired business, and generally attempt to retain the senior management of acquired businesses. We believe our senior management team has a proven track record in integrating acquisitions. 36 38 The following table sets forth Waste Connections' acquisitions completed from our inception in September 1997 through January 6, 1999:
ACQUIRED BUSINESS MONTH ACQUIRED PRINCIPAL BUSINESS LOCATION MARKET AREA ----------------- -------------- ------------------ -------- ----------- 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 Services, November 1998 Collection Portland, OR Northwestern Oregon and Inc. and Moreland Sanitary Southwestern Washington Service, Inc. B&G Sanitation November 1998 Collection Cottage Grove, OR Southwestern Oregon Veneta Garbage Service November 1998 Collection Veneta, OR Southwestern Oregon Siuslaw Disposal, Inc. November 1998 Collection Florence, OR Southwestern Oregon R&N, LLC October 1998 Collection Mountain Home, ID Southwestern Idaho Westlane Disposal September 1998 Collection Florence, OR Southwestern Oregon Harrell's Septic Service September 1998 Septic Services Crescent City, CA Northwestern California and Southwestern Oregon Evergreen Waste Systems, 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, Central Utah UT Youngclaus Enterprises September 1998 Collection Madera, CA North Central California Affiliated Waste Services, September 1998 Collection Norfolk, NE Eastern Nebraska L.L.C. J&J Sanitation, Inc. August 1998 Collection O'Neill, NE Eastern Nebraska Contractors Waste, Inc. August 1998 Collection Salt Lake City, Central Utah UT Big Red Roll Off, Inc. August 1998 Collection O'Neill, NE Eastern Nebraska ABC Waste, Inc. August 1998 Collection Salt Lake City, Central Utah UT Miller Containers, Inc. July 1998 Collection Salt Lake City, Central Utah UT 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 Contractor's Waste Removal, L.C June 1998 Collection Orem, UT Central Utah Arrow Sanitary Services, Inc. June 1998 Collection Portland, OR Northwestern Oregon and Southwestern Washington T&T Disposal, Inc. May 1998 Collection Gillette, WY Northeastern Wyoming Sunshine Sanitation May 1998 Collection Spearfish, SD Western South Dakota Incorporated Sower's Sanitation, Inc. May 1998 Collection Belle Fourche, SD Western South Dakota Jesse's Disposal April 1998 Collection Gillette, WY Northeastern Wyoming A-1 Disposal, Inc. April 1998 Collection Gillette, WY Northeastern Wyoming 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.
37 39 SERVICES COMMERCIAL, INDUSTRIAL AND RESIDENTIAL WASTE SERVICES Waste Connections serves more than 230,000 commercial, industrial and residential customers. Of these, we serve more than 49,000 under governmental certificates that grant us rights, generally perpetual and exclusive, to provide services within specified areas, more than 26,500 under exclusive franchise agreements with remaining terms ranging from seven to 18 years, and more than 98,700 under exclusive municipal contracts with generally shorter contract terms. We provide commercial and industrial services not performed under governmental certificates, franchise agreements or municipal contracts under one to five year service agreements. We determine fees under these agreements 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 our markets for similar service. Collection of larger volumes associated with commercial and industrial waste streams generally helps improve our operating efficiencies, and consolidation of these volumes allows us to negotiate more favorable disposal prices. Our commercial and industrial customers use portable containers for storage, enabling us to service many customers with fewer collection vehicles. Commercial and industrial collection vehicles normally require one operator. We provide 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, we install stationary compactors that compact waste prior to collection on the premises of a substantial number of large volume customers. We provide residential waste services that we do not perform under governmental certificates, franchise agreements or municipal contracts under contracts with homeowners' associations, apartment owners or mobile home park operators, or on a subscription basis with individual households. We base residential contract fees 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 Waste Connections has an active program to acquire, develop, own and operate transfer stations in markets proximate to our operations. Currently, we operate three transfer stations in California, two transfer stations in Nebraska, one transfer station in Washington and six transfer stations in Oregon, which receive, compact, and transfer solid waste to be transported by larger vehicles to landfills. We believe that the transfer stations benefit Waste Connections by: - concentrating the waste stream from a wider area, which increases the volume of disposal at landfills that we operate and gives us greater leverage in negotiating for more favorable disposal rates at other landfills; - improving utilization of collections personnel and equipment; and - building relationships with municipalities and private operators that deliver waste, which can lead to additional growth opportunities. LANDFILLS Waste Connections seeks to identify solid waste landfill acquisition candidates to achieve vertical integration in markets where the economic and regulatory environment makes such acquisitions attractive. We believe that in some markets, acquiring landfills provides opportunities 38 40 to vertically integrate our collection, transfer and disposal operations while improving operating margins. We evaluate 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 Waste Connections' 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, we pursue long term disposal contracts with facilities, which are typically municipally controlled. We operate the Fairmead Landfill and own and operate the Red Carpet Landfill and the Butler County Landfill, all of which are Subtitle D landfills. Fairmead Landfill. We operate the Fairmead Landfill under an operating agreement with Madera County with a remaining term of 18 years. As of January 6, 1999, the Fairmead Landfill consisted of 160 total acres, of which 20 acres were permitted for disposal. As of that date, the Fairmead Landfill had approximately 550,000 tons of unused permitted capacity remaining, with approximately 3.5 million additional tons of capacity in various stages of permitting, and was estimated to have a remaining life of 26 years at current disposal rates. The Fairmead Landfill is currently permitted to accept up to 395 tons per day of municipal solid waste. Red Carpet Landfill. As of January 6, 1999, the Red Carpet Landfill consisted of 82 total acres, of which 40 acres were permitted for disposal. As of that date, the Red Carpet Landfill had approximately 625,000 tons of unused permitted capacity remaining, with approximately 1.7 million additional tons of capacity in various stages of permitting, and was estimated to have a remaining life of 40 years at current disposal rates. The Red Carpet Landfill is currently permitted to accept up to 350 tons per day of municipal solid waste. Butler County Landfill. As of January 6, 1999, the Butler County Landfill consisted of approximately 200 acres, of which 80 acres were permitted for disposal. As of that date, the Butler County Landfill had approximately 4.2 million tons of unused permitted capacity remaining, and was estimated to have a remaining life of 25 years at current disposal rates. We monitor the available permitted in-place disposal capacity of the Fairmead, Red Carpet and Butler County Landfills on an ongoing basis and evaluate whether to seek to expand this capacity. In making this evaluation, we consider 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 Waste Connections will be able to obtain the necessary approvals and permits required for the expansion and the costs that would be involved in developing the additional capacity. We also regularly consider 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. RECYCLING SERVICES We offer 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. We operate five recycling processing facilities and sell other collected recyclable materials to third parties for processing before resale. The profits from our resale of recycled materials are often shared between Waste Connections and the other parties to our recycling contracts. For example, certain of our municipal recycling contracts in Washington and Idaho, negotiated before we acquired those businesses, specify certain benchmark resale prices for recycled commodities. To the extent the prices we actually receive for the processed recycled commodities collected under the contract exceed the prices specified in the contract, we share the excess with the municipality, after recovering any previous shortfalls resulting from actual market prices falling below the prices specified in the contract. To reduce our exposure to commodity price risk with respect to recycled materials, we have adopted a pricing strategy of 39 41 charging collection and processing fees for recycling volume collected from third parties. We believe 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. G CERTIFICATES We perform a substantial portion of our collection business in Washington under governmental certificates (referred to as "G certificates") awarded by 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 exclusive and perpetual right to provide certain 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 Waste Connections, 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 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 our existing markets, we provide waste collection, transfer and disposal services 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 Waste Connections has grown to date primarily through acquisitions, we 40 42 have generally assumed existing franchise agreements, municipal contracts and G certificates from the acquired companies, rather than obtaining new contracts. For these reasons, our sales and marketing efforts to date have been narrowly focused. We expect to add sales and marketing personnel as necessary to solicit new customers in markets where we are not the exclusive provider of solid waste services, expand our presence into areas adjacent to or contiguous with our existing markets, and 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., Browning-Ferris Industries, Inc., Republic Services, Inc., and Waste Management, Inc. Casella Waste Systems, Inc., Superior Services, Inc. and Waste Industries, Inc. are other public companies with annual revenues in excess of $100 million. Certain of the markets in which Waste Connections competes or will likely compete are served by one or more large, national solid waste companies, as well as by numerous privately-held regional and local solid waste companies of varying sizes and resources, some of which have accumulated substantial goodwill in their markets. We also compete 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 Waste Connections, because of their access to user fees and similar charges, tax revenues and tax-exempt financing. We compete for collection, transfer and disposal volume based primarily on the price and quality of our 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 Waste Connections to reduce the price of our services or, if we elect not to do so, to lose business. We provide a substantial portion of our residential, commercial and industrial collection services under exclusive franchise and municipal contracts and certificates, some of which are subject to periodic competitive bidding. We provide the balance of our services under subscription agreements with individual households and one to five year service contracts with commercial and industrial customers. Intense competition exists not only for collection, transfer and disposal volume, but also for acquisition candidates. We generally compete for acquisition candidates with publicly owned regional and large national waste management companies. REGULATION INTRODUCTION Waste Connections' 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 Waste Connections are administered by the EPA and other federal, state and local environmental, zoning, health and safety agencies. The WUTC regulates the portion of our collection business in Washington performed under G certificates, which generally grant Waste Connections perpetual and exclusive collection rights in certain areas. Waste Connections is currently in substantial compliance with applicable federal, state and local environmental laws, permits, orders and regulations. We do not currently anticipate any material environmental costs necessary to bring our operations into compliance (although there can be no assurance in this regard). We anticipate that regulation, legislation and regulatory enforcement actions related to the solid waste services industry will continue to increase. We attempt to anticipate future regulatory requirements and to plan in advance as necessary to comply with them. 41 43 The principal federal, state and local statutes and regulations that apply to our 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 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 January 6, 1999, Waste Connections did not, to our knowledge, transport hazardous wastes under circumstances that would subject Waste Connections to hazardous waste regulations under RCRA. Some of our ancillary operations (e.g., vehicle maintenance operations) may generate hazardous wastes. Waste Connections 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 we operate or in which we may 42 44 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 Waste Connections' 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 our transfer stations or run-off or collected leachate from Waste Connections' owned or operated landfills is discharged into streams, rivers or other surface waters, the Clean Water Act would require Waste Connections to apply for and obtain a discharge permit, conduct sampling and monitoring and, under certain circumstances, reduce the quantity of pollutants in such discharge. Also, virtually all landfills are required to comply with the EPA's storm water regulations issued in November 1990, which are designed to prevent contaminated landfill storm water runoff from flowing into surface waters. We believe that our facilities comply in all material respects with the Clean Water Act requirements. Various states in which we operate or in which we 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 Waste Connections were found to be a responsible party for a CERCLA cleanup, the enforcing agency could hold Waste Connections, 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. Waste Connections' ability to obtain reimbursement from others for their allocable shares of such costs would be limited by our 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. 43 45 THE CLEAN AIR ACT The Clean Air Act generally, through state implementation of federal requirements, regulates emissions of air pollutants from certain landfills based on factors such as the date of the landfill construction and tons per year of emissions of regulated pollutants. Larger landfills and landfills located in areas where the ambient air does not meet certain requirements of the Clean Air Act may be subject to even more extensive air pollution controls and emission limitations. In addition, the EPA has issued standards regulating the disposal of asbestos-containing materials. Air permits to construct may be required for gas collection and flaring systems, and operating permits may be required, depending on the potential air emissions. State air regulatory programs may implement the federal requirements but may 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 Waste Connections' 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 Waste Connections 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 Waste Connections' landfills. These restrictions could also result in higher disposal costs for our collection operations. If we were unable to pass such higher costs through to our customers, our 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, we 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 our ability to operate our landfills at their full capacity and/or reduce the prices that we can charge for landfill disposal services. These restrictions may also result in higher disposal costs for our collection operations. If we were unable to pass such higher costs through to our customers, Waste Connections' business, financial condition and operating results could be adversely affected. 44 46 STATE AND LOCAL REGULATION Each state in which Waste Connections 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 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 Waste Connections' 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 Waste Connections from operating our 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 Waste Connections 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 Waste Connections owns or operates landfills could adversely affect our 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 WUTC. The WUTC also sets rates for regulated solid waste collection services in Washington. RISK MANAGEMENT, INSURANCE AND PERFORMANCE BONDS Waste Connections maintains an environmental and other risk management programs appropriate for our business. Our environmental risk management program includes evaluating existing facilities and potential acquisitions for environmental law compliance. We do not presently expect environmental compliance costs to increase above current levels, but we cannot predict whether future acquisitions will cause such costs to increase. We also maintain a worker safety program that encourages safe practices in the workplace. Operating practices at all Waste Connections operations emphasize minimizing the possibility of environmental contamination 45 47 and litigation. Our facilities comply in all material respects with applicable federal and state regulations. We carry a broad range of insurance, which our management considers adequate to protect our 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 our limited landfill operations, we have not obtained such coverage. If Waste Connections were to incur liability for environmental cleanups, corrective action or damage, our financial condition could be materially and adversely affected. We will continue to investigate the possibility of obtaining environmental impairment liability insurance, particularly if we acquire or operate landfills other than the Fairmead Landfill, the Red Carpet Landfill and the Butler County Landfill. We believe 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. We have not experienced difficulty in obtaining performance bonds or letters of credit for our current operations. At January 6, 1999, we had provided customers and various regulatory authorities with surety bonds and letters of credit in the aggregate amount of approximately $1.9 million to secure our obligations. Our credit facility provides for the issuance of letters of credit in an amount up to $15 million, but any letters of credit issued reduce the availability of borrowings for acquisitions and other general corporate purposes. If we were unable to obtain surety bonds or letters of credit in sufficient amounts or at acceptable rates, we could be precluded from entering into additional municipal solid waste collection contracts or obtaining or retaining landfill operating permits. PROPERTY AND EQUIPMENT As of January 6, 1999, we owned and operated 27 collection operations, seven transfer stations and two Subtitle D landfills and operated an additional five transfer stations, one Subtitle D landfill and five recycling facilities. We lease various offices and facilities, including our corporate offices in Roseville, California. The real estate owned by Waste Connections is not subject to material encumbrances. We own various equipment, including waste collection and transportation vehicles, related support vehicles, carts, containers, and heavy equipment used in landfill operations. We believe that our existing facilities and equipment are generally adequate for our current operations. However, we expect to make additional investments in property and equipment for expansion and replacement of assets and in connection with future acquisitions. EMPLOYEES At January 6, 1999, we employed approximately 650 full-time employees, including approximately 40 persons classified as professionals or managers, approximately 550 employees involved in collection, transfer, disposal and recycling operations, and approximately 60 sales, clerical, data processing or other administrative employees. Approximately 55 drivers and mechanics at our Vancouver, Washington operation are represented by the Teamsters Union, with which Browning-Ferris Industries of Washington, Inc., Waste Connections' 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 65 drivers at Murrey's Disposal Company and American Disposal Company are represent by the Teamsters Union, with which those companies entered into a three-year collective bargaining agreement in June 1996. In addition, in July 1997, the employees 46 48 at our facility in Issaquah, Washington, adopted a measure to select a union to represent them in labor negotiations with management. The union and management operated under a one-year negotiating agreement that ended on July 27, 1998. Since that date, negotiations have continued between the union and Waste Connections, although the union is permitted to call a strike or call for arbitration of the outstanding issues. The employees at Issaquah have filed to decertify the union, and the union has filed a claim with the National Labor Relations Board to attempt to block the decertification. We are not aware of any other organizational efforts among our employees and believe that our relations with our employees are good. LEGAL PROCEEDINGS Waste Connections 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 our business, financial condition, operating results or cash flows. 47 49 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information concerning Waste Connections' executive officers and directors as of January 6, 1999:
NAME AGE POSITIONS ---- --- --------- Ronald J. 35 President, Chief Executive Officer and Chairman Mittelstaedt(1)(2)......... Steven F. Bouck.............. 41 Executive Vice President and Chief Financial Officer Eugene V. Dupreau(3)......... 51 Vice President -- Madera; Director Charles B. Youngclaus........ 58 Vice President -- Madera; Advisory Director Darrell W. Chambliss......... 34 Vice President -- Operations; Secretary Michael R. Foos.............. 33 Vice President and Corporate Controller Eric J. Moser................ 32 Treasurer and Assistant Corporate Controller David M. Hall................ 41 Vice President -- Business Development Michael W. Harlan(1)(2)(3)... 37 Director William J. 51 Director Razzouk(1)(2)(3)...........
- --------------- (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 Waste Connections since the company was formed, and was elected Chairman in January 1998. He also served as a consultant to Waste Connections 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 Waste Connections 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 focused on the environmental industry that were managed by First Analysis. In connection with those investments, he served on the boards of directors of several companies. While at First Analysis, Mr. Bouck also provided analytical research coverage of a number of publicly traded environmental services companies. Mr. Bouck holds B.S. and M.S. degrees in mechanical engineering from Rensselaer Polytechnic Institute and an M.B.A. in Finance from the Wharton School. He has been a Chartered Financial Analyst since 1990. Eugene V. Dupreau has been Vice President -- Madera and a director of Waste Connections 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 Waste Connections acquired Madera in 1998. Mr. Dupreau holds a B.S. in Business Administration from 48 50 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 Waste Connections since February 23, 1998. Mr. Youngclaus founded Madera Disposal Systems, Inc. in 1981 and was its Chief Operating Officer and Vice President before Waste Connections acquired it 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 Waste Connections 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 Waste Connections 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 of experience in the solid waste industry with extensive operating and marketing experience in the Western U.S. From October, 1995 to July 1998, Mr. Hall was the Divisional Vice President of USA Waste Services, Inc., Rocky Mountain Division (including for Sanifill, Inc. which was acquired by USA Waste Services, Inc.). In that position, he oversaw all operations and business development in six Rocky Mountain states. Prior to his employment with 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. 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 Waste Connections' 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 49 51 company, landfill and transfer station. Mr. Moser holds a B.S. in Accounting from Illinois State University. Michael W. Harlan has been a director of Waste Connections since January 30, 1998. From November 1997 to January 30, 1998, Mr. Harlan served as a consultant to Waste Connections 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 Waste Connections 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, filling of prescriptions, 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 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. Waste Connections has agreed to appoint a representative of the shareholders of the Murrey Companies to Waste Connections' Board of Directors. The Murrey Companies' nominee would be appointed, after consummation of the mergers with the Murrey Companies, to a class of directors whose term of office ends at the annual meeting of stockholders for the fiscal year ending December 31, 2000. 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) 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, an Audit Committee and a Compensation Committee. A majority of the members of the Executive Committee are, and both 50 52 members of each of the Audit and Compensation Committees are, independent directors who are not employees of Waste Connections or one of our subsidiaries. COMPENSATION OF DIRECTORS Directors who are officers or employees of Waste Connections 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 Waste Connections 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 our common stock at the time of his or her initial election or appointment. Waste Connections granted to each of Messrs. Harlan and Razzouk options to purchase 15,000 shares of common stock at $3.00 per share, which became exercisable on October 1, 1998. Beginning in 1999, Waste Connections will grant each independent director, on February 1 of each year during which such person serves on the Board, an option to purchase 7,500 shares of our common stock. All such options will have an exercise price equal to the fair market value of the common stock on the grant date, will vest in full on the grant date, and will expire upon the earlier to occur of ten years after the grant date or one year after the director ceases to be a member of the Board. EXECUTIVE COMPENSATION Summary Compensation Information Waste Connections 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
LONG-TERM COMPENSATION ----------------------------- SHARES ANNUAL COMPENSATION UNDERLYING ----------------------------- RESTRICTED OPTIONS/WARRANTS ALL OTHER YEAR SALARY BONUS OTHER STOCK GRANTED(2) COMPENSATION ---- ------- ------- ------- ---------- ---------------- ------------ Ronald J. Mittelstaedt........... 1997 $39,903(1) $25,000(1) -- -- 200,000 $10,000(3) 1998 176,577 100,000 $10,254 -- -- -- Steven F. Bouck.................. 1998 92,887 150,000 -- -- 250,000 -- Darrell W. Chambliss............. 1998 89,972 76,882 -- -- -- -- Michael R. Foos.................. 1998 89,809 67,039 -- -- -- -- Eric J. Moser.................... 1998 74,115 31,563 -- -- -- --
- --------------- (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 the 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 Waste Connections' organization. 51 53 Stock Options and Warrants Option and Warrant Grants. The following table contains information concerning the grant of options and warrants to purchase shares of our common stock during 1998 to the named executive officers. No options or warrants were granted to Messrs. Mittlestaedt, Chambliss, Foos or Moser in 1998. 1998 OPTION AND WARRANT GRANTS
POTENTIAL REALIZABLE VALUE AT ASSUMED % OF TOTAL ANNUAL RATES OF NUMBER OF OPTIONS AND STOCK PRICE SHARES WARRANT APPRECIATION FOR UNDERLYING GRANTED TO OPTION/WARRANT OPTIONS AND EMPLOYEES TERM(3) NAME OF WARRANT IN EXERCISE PRICE EXPIRATION ----------------------- BENEFICIAL OWNER GRANTED(1) 1998 PER SHARE(2) DATE 5% 10% ---------------- ----------- ----------- -------------- ------------- ---------- ---------- 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
- --------------- (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. (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 the warrant immediately before they expire, assuming that our 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 our common stock when the options 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; we do not project those rates. Our common stock may not appreciate at those rates. Option and Warrant Values. The following table shows information about the named executive officers' exercises of options and warrants during 1998 and the value of their unexercised options and warrants outstanding as of December 31, 1998. AGGREGATED OPTION EXERCISES IN 1998 AND YEAR-END OPTION AND WARRANT VALUES
NUMBER OF SHARES VALUE OF UNEXERCISED IN- UNDERLYING UNEXERCISED THE-MONEY OPTIONS AND OPTIONS AND WARRANT AT WARRANT AT SHARES DECEMBER 31, 1998 DECEMBER 31, 1998(1) ACQUIRED VALUE --------------------------- --------------------------- ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- --------- ----------- ------------- ----------- ------------- 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 M. 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
- --------------- (1) Based on the closing price of our common stock of $18.375 on the Nasdaq National Market on December 31, 1998. EMPLOYMENT AGREEMENTS We have 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. 52 54 Waste Connections 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 was $170,000. Mr. Mittelstaedt's base salary was adjusted to $200,000 on October 1, 1998. 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 Waste Connections or extended further by the Board. Waste Connections or Mr. Mittelstaedt may terminate the agreement with or without cause at any time. If we terminate the agreement without cause (as defined in the agreement) or if Mr. Mittelstaedt terminates the agreement for good reason (as defined in the agreement), we are required to make certain severance payments, and all of Mr. Mittelstaedt's unvested options, warrants and rights relating to capital stock of Waste Connections will immediately vest. A change of control of Waste Connections (as defined in the agreement) is generally treated as a termination of Mr. Mittelstaedt without cause. Under the employment agreement, Waste Connections sold Mr. Mittelstaedt 617,500 shares of our common stock for $0.01 per share and 357,143 shares of our Series A Preferred Stock for $1,000,000. Mr. Mittelstaedt may recommend nominees for election to the Board of Directors. If the Board has five or fewer members, Mr. Mittelstaedt may recommend two nominees, and if it consists of more than five members, he may recommend three nominees. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The full Board of Directors served as the compensation committee of the Board during 1997. When the employment agreement with Mr. Mittelstaedt was approved by the Board of Directors, Mr. Mittelstaedt was one of three members of the Board of Directors. No executive officer of Waste Connections 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 Waste Connections. 1997 STOCK OPTION PLAN The 1997 Stock Option Plan (the "Stock Option Plan") was adopted by the Board of Directors effective as of October 1, 1997, and was approved by the stockholders on March 12, 1998. The Stock Option Plan is intended to provide employees, consultants and directors with additional incentives by increasing their proprietary interests in Waste Connections. Under the Stock Option Plan, Waste Connections may grant options with respect to a maximum of 1.2 million shares of Waste Connections common stock. As of January 6, 1999, we had options to purchase 978,764 shares of common stock outstanding at a weighted average exercise price of $7.37 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 Waste Connections employees 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 Waste Connections' outstanding capital stock (a "Ten Percent Stockholder")). The exercise price of ISOs granted under the Stock Option Plan must be at least 53 55 the fair market value of a share of common stock on the grant date (or 110% of such fair market value, in the case of ISOs granted to Ten Percent Stockholders). If an Optionee with outstanding options retires or becomes disabled and does not die within the three months after retirement or disability, the Optionee may exercise his or her options, but generally only within the period ending on the earlier of: (i) six months after retirement or disability; or (ii) the expiration of the option set forth in the option agreement. If the Optionee does not exercise his or her options within that time period, the options terminate, and the shares of common stock subject to the options become available for issuance under the Stock Option Plan. If the Optionee ceases to be an employee, consultant or director of Waste Connections 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 Waste Connections the right to repurchase shares acquired by an Optionee under the Stock Option Plan upon termination of the Optionee. 54 56 CERTAIN TRANSACTIONS INITIAL FUNDING In September and October 1997, Waste Connections 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 Waste Connections, 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 Waste Connections, 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 Waste Connections. 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 first becomes exercisable on each of October 1, 1998, October 1, 1999, and October 1, 2000. On December 15, 1997, Michael W. Harlan was granted a warrant to purchase 5,000 shares of common stock at an exercise price of $2.80 per share, exercisable on October 1, 1998. On January 30, 1998, Mr. Harlan and William J. Razzouk were each granted an option to purchase 15,000 shares of common stock at an exercise price of $3.00 per share, exercisable on October 1, 1998. 55 57 On February 1, 1998, Steven F. Bouck was granted options to purchase 200,000 shares of common stock, pursuant to his employment agreement with Waste Connections. These options include an option to purchase 100,000 shares at an exercise price of $2.80 per share, of which one-third is first 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 first becomes exercisable 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 Waste Connections' 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 are first exercisable on each of October 1, 1998, October 1, 1999, and October 1, 2000. PURCHASE OF WASTE CONNECTIONS OF IDAHO, INC. On January 30, 1998, Waste Connections purchased all of the outstanding stock of Waste Connections of Idaho, Inc. from Ronald J. Mittelstaedt, J. Bradford Bishop and James N. Cutler, Jr., the sole shareholders of Waste Connections of Idaho, Inc. 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 of Idaho, Inc. 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 Waste Connections acquired it on February 23, 1998. Charles B. Youngclaus was Chief Operating Officer and a 16.7% shareholder of Madera before Waste Connections acquired it. For their shares of Madera's common stock, each of Messrs. Dupreau and Youngclaus received $630,662 in cash, 333,333 shares of Waste Connections common stock and warrants to purchase 66,667 shares of Waste Connections common stock at an exercise price of $4.00 per share. Each of Messrs. Dupreau and Youngclaus has been engaged by Waste Connections as Vice President -- Madera. Mr. Dupreau was appointed a director of Waste Connections, effective February 23, 1998. Pursuant to the agreement under which Waste Connections acquired Madera, we will issue additional restricted shares of our 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 we acquired Madera. PURCHASE OF YOUNGCLAUS ENTERPRISES. On September 9, 1998, Madera Disposal Systems, Inc., a wholly-owned subsidiary of Waste Connections, 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 6,510 restricted shares of our common stock. TRANSACTIONS WITH FIBRES INTERNATIONAL. Waste Connections has entered into certain transactions with Continental Paper, LLC, an Oregon limited liability company doing business as Fibres International ("Fibres"). J. Bradford 56 58 Bishop and James N. Cutler, Jr. own 60% of the membership interests in Fibres, were directors of Waste Connections when some of these transactions occurred and may be deemed promoters of Waste Connections. In markets where Fibres has processing facilities (which include three of our current markets), we deliver to Fibres' processing facilities all of our collected recyclable materials for which Fibres pays the market rate (adjusted to reflect our costs of transporting the materials to Fibres or another processor) that we could otherwise obtain for such materials. We received approximately $222,701 in gross revenues from Fibres from Waste Connections' inception through December 31, 1997. After deducting the fees we paid to Fibres for the right to collect the recyclables, we retained approximately $10,860. We made net payments of $87,506 to Fibres for the nine-month period ending September 30, 1998. 57 59 PRINCIPAL STOCKHOLDERS The following table shows the amount of Waste Connections' common stock beneficially owned, as of January 6, 1999, by: (i) each person or entity that we know owns more than 5% of our common stock; (ii) Mr. Mittelstaedt and each director of Waste Connections; and (iii) all current directors and executive officers of Waste Connections as a group.
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENTAGE --------------------------- --------- ---------- Ronald J. Mittelstaedt(2)(3)................................ 1,058,376 11.2% James N. Cutler, Jr.(2)(4).................................. 977,322 10.2 J. Bradford Bishop(2)(4).................................... 916,607 9.6 Eugene K. Polk(2)(5)........................................ 749,470 8.1 Frank W. Cutler(2)(4)....................................... 672,246 7.0 Kieckhefer Partnership 84-1(2).............................. 562,104 6.0 Eugene V. Dupreau(2)(6)..................................... 402,000 4.3 Michael W. Harlan(2)(7)..................................... 20,000 0.2 William J. Razzouk(2)(8).................................... 15,000 0.2 All executive officers and directors as a group (10 persons).................................................. 2,235,603 22.8
- --------------- (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, we believe that the persons named in this table have sole voting and investment power with respect to the shares of common stock shown. (2) The address of Mr. Mittelstaedt is 2260 Douglas Boulevard, Suite 280, Roseville, California 95661. The address of J. Bradford Bishop and James N. Cutler, Jr. is 6950 S.W. Hampton Street, Suite 200, Portland, Oregon 97223. The address of Kieckhefer Partnership 84-1 and Eugene P. Polk is P.O. Box 1151, Prescott, Arizona 86302. The address of Frank W. Cutler is 711 North Bayfront, Newport Beach, California 92662. The address of Eugene V. Dupreau is Madera Disposal Systems, Inc., 21739 Road 19, Chowchilla, California 93610. The address of Michael W. Harlan is 2777 Allen Parkway, Suite 700, Houston, Texas 77019. The address of William J. Razzouk is 5915 River Oaks Road, Memphis, Tennessee 38120. The address of Donald J. Hawkins is 4622 70 Avenue East, Fife, Washington 98731. (3) 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. (4) Includes 247,000 shares purchasable under currently exercisable warrants. (5) 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. (6) Includes 66,667 shares purchasable under immediately exercisable warrants and 5,000 shares purchasable under immediately exercisable options. (7) Includes 5,000 shares purchasable under immediately exercisable warrants and 15,000 shares purchasable under immediately exercisable options. (8) Includes 15,000 shares purchasable under immediately exercisable options. 58 60 DESCRIPTION OF CAPITAL STOCK GENERAL The authorized capital stock of Waste Connections 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 January 6, 1999, there were 9,314,290 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 Waste Connections liquidates, dissolves or winds up, the holders of shares of common stock are entitled to receive pro rata all assets of Waste Connections 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, are fully paid and nonassessable. PREFERRED STOCK Waste Connections is authorized by the 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 we have no current plans to issue Preferred Stock. One effect of having Preferred Stock authorized is that the 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 Waste Connections by a tender offer, proxy contest, merger or otherwise, and thereby protect the continuity of Waste Connections' 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. Waste Connections' 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 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 Waste Connections' 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 59 61 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 Waste Connections, even though such an attempt might benefit Waste Connections and our 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 Waste Connections, or attempting to change the composition or policies of the Board, even though such attempts might benefit Waste Connections or our 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. 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 Waste Connections (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 Waste Connections, 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 Waste Connections, 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 Waste Connections 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). 60 62 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 Waste Connections and our 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 Waste Connections. 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 Waste Connections, our business, assets, properties or stockholders. The Board or any Board committee may adopt plans or to issue securities of Waste Connections, 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, 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 Waste Connections or our 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 Waste Connections 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 Waste Connections, and limitation of the liability of directors) or to amend any provision of the Restated By-laws by action of stockholders. These 61 63 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 Waste Connections. Business Combination Provisions of Delaware Law. Waste Connections 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 On completing this offering, we will have 12,564,290 shares of common stock outstanding. All of the shares offered by this prospectus will be freely saleable in the public market after this offering is completed, unless acquired by affiliates of Waste Connections. The shares outstanding before completion of this offering are saleable in the public market as follows: 2,300,000 shares sold in Waste Currently freely saleable in the public Connections' initial public offering market, unless acquired by affiliates 521,143 shares Currently eligible for resale in the public market 6,313,206 shares* Eligible for resale in the public market in 1999 (including 1,000,000 shares eligible for resale in February 1999) 179,941 shares* Will be eligible for resale in the public market after 1999
- --------------- * Subject to the restrictions of Rule 144. Shares of common stock held by Waste Connections' affiliates are subject to certain volume and other limitations discussed below under Rule 144. We have agreed not to offer, sell, sell short, transfer, hypothecate, pledge or otherwise dispose of any shares of our common stock or other securities convertible into or exchangeable or exercisable for shares of our common stock or derivative of our common stock (or agreement for such) for a period of 90 days after the date of this prospectus, directly or indirectly, by us or otherwise, except as consideration for business acquisitions, on exercise of certain of the currently outstanding stock options or warrants or on the issuance of options to employees, consultants and directors under our 1997 Stock Option Plan, and the exercise of such options, without the prior written consent of BT Alex. Brown Incorporated. Our directors, executive officers and certain of our stockholders have agreed not to offer, sell, sell short, transfer, hypothecate, pledge or otherwise dispose of any shares of our common stock or other capital stock of Waste Connections, or any other securities convertible into or exchangeable or exercisable for shares of our common stock or derivative of our common stock owned by these persons or request the registration for the offer or sale of any of the foregoing (or as to which such person has the right to direct the disposition of) for a period of 60 days 62 64 after the date of this prospectus, directly or indirectly, except with the prior written consent of BT Alex. Brown Incorporated. In general, under Rule 144, a person (or persons whose shares are aggregated), including persons who may be deemed affiliates of Waste Connections, 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 (93,143 shares as of January 6, 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 Waste Connections. Under Rule 144(k), a person (or persons whose shares are aggregated) who is not or has not been deemed an "affiliate" of Waste Connections 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 our ability to raise capital or fund acquisitions by issuing common stock. In July 1998, Waste Connections 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 our acquisitions of solid waste services businesses. In October 1998, we 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, we filed a third 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 our acquisitions of solid waste services businesses. As of January 6, 1999, Waste Connections had issued 521,143 shares under the original registration statement on Form S-4, and an additional 6,123,022 shares were issuable under the three Form S-4 registration statements. In September 1998, we 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 our Stock Option Plan. Subject to certain restrictions under Rule 144, those shares will be freely saleable in the public market immediately following exercise of such options. 63 65 PLAN OF DISTRIBUTION We have entered into an underwriting agreement with the underwriters named below in which they have severally agreed to purchase from us the number of shares of common stock set forth beside their names below. BT Alex. Brown Incorporated, CIBC Oppenheimer Corp. and First Analysis Securities Corporation are the representatives of the underwriters.
NUMBER OF UNDERWRITER SHARES ----------- --------- BT Alex. Brown Incorporated................................. CIBC Oppenheimer Corp. ..................................... First Analysis Securities Corporation....................... --------- Total............................................. 3,250,000 =========
The obligation of the underwriters to purchase the common stock is subject to the terms and conditions set forth in the underwriting agreement. The underwriting agreement requires the underwriters to purchase all of the shares of the common stock offered by this prospectus, if any are purchased. The shares of common stock offered by the underwriters pursuant to this prospectus are subject to prior sale, when, as and if delivered to and accepted by the underwriters, and subject to the underwriters' right to reject any order in whole or in part. The underwriters have advised us that they propose to offer the shares of common stock to the public at the public offering price of $ per share. Any shares sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the public offering price. Any such securities dealers may resell any shares purchased from the underwriters to certain other brokers or dealers at a discount of up to $0.10 per share from the public offering price. The underwriters may change the public offering price after the common stock is released for sale to the public. The following table sets forth the public offering price and all discounts and commissions to be allowed to the underwriters.
UNDERWRITING PROCEEDS TO PRICE TO PUBLIC DISCOUNT/COMMISSION WASTE CONNECTIONS --------------- ------------------- ----------------- Per share................... $ $ $ Total....................... $ $ $
The underwriters may sell more shares than the total number set forth in the table above. To cover these sales, the underwriters have an option to purchase up to 487,500 additional shares of common stock from Waste Connections and certain of our non-employee stockholders at the public offering price less the underwriting discounts and commissions set forth in the table above. The underwriters may exercise this option for 30 days after the date of this prospectus only to cover these sales. To the extent that the underwriters purchase shares pursuant to this option, each of the underwriters will purchase shares in approximately the same proportion as the number of shares of common stock to be purchased by it shown in the above table bears to 64 66 3,250,000, and we and those non-employee stockholders will be obligated, pursuant to the option, to sell such shares to the underwriters. If purchased, the underwriters will offer such additional shares on the same terms as those on which the 3,250,000 shares are being offered. We have agreed to indemnify the underwriters with respect to certain liabilities, including liabilities under the Securities Act of 1933, as amended. To facilitate the offering of the common stock, the underwriters may engage in transactions that stabilize, maintain or otherwise affect the market price of the common stock. Specifically, the underwriters may overallot shares of the common stock in connection with this offering, thereby creating a short position in the underwriters' account. A short position results when an underwriter sells more shares of common stock than such underwriter is committed to purchase. Additionally, to cover such overallotments or to stabilize the market price of the common stock, the underwriters may bid for, and purchase, shares of the common stock at a level above that which might otherwise prevail in the open market. The underwriters are not required to engage in these activities, and, if commenced, any such activities may be discontinued at any time. The underwriters also may reclaim selling concessions allowed to an underwriter or dealer, if the underwriters repurchase shares distributed by that underwriter or dealer. We have agreed not to offer, sell, sell short, transfer, hypothecate, pledge or otherwise dispose of any shares of our common stock or other securities convertible into or exchangeable or exercisable for shares of our common stock or derivative of our common stock (or agreement for such) for a period of 90 days after the date of this prospectus, directly or indirectly, by us or otherwise, except as consideration for business acquisitions, on exercise of certain of the currently outstanding stock options or warrants or on the issuance of options to employees, consultants and directors under our 1997 Stock Option Plan, and the exercise of such options, without the prior written consent of BT Alex. Brown Incorporated. Our directors, executive officers and certain of our stockholders have agreed not to offer, sell, sell short, transfer, hypothecate, pledge or otherwise dispose of any shares of our common stock or other capital stock of Waste Connections, or any other securities convertible into or exchangeable or exercisable for shares of our common stock or derivative of our common stock owned by these persons or request the registration for the offer or sale of any of the foregoing (or as to which such person has the right to direct the disposition of) for a period of 60 days after the date of this prospectus, directly or indirectly, except with the prior written consent of BT Alex. Brown Incorporated. In connection with this offering, certain underwriters and selling group members (if any) who are qualified market makers on the Nasdaq National Market may engage in passive market making transactions in the common stock on the Nasdaq National Market in accordance with Rule 103 of Regulation M under the Securities Exchange Act of 1934, as amended, during the business day prior to the pricing of the offering before the commencement of offers or sales of the common stock. Passive market makers must comply with applicable volume and price limitations and must be identified as such. In general, a passive market maker must display its bid at a price not in excess of the highest independent bid of such security; if all independent bids are lowered below the passive market makers' bid, however, such bid must then be lowered when certain purchase limits are exceeded. The underwriters and their respective affiliates may be customers of, lenders to, engage in transactions with, and perform services for us and our subsidiaries in the ordinary course of business. 65 67 LEGAL MATTERS The validity of the issuance of the shares of common stock offered hereby will be passed upon for Waste Connections by Shartsis, Friese & Ginsburg LLP, San Francisco, California. Certain partners and associate attorneys of Shartsis, Friese & Ginsburg LLP own an aggregate of 3,400 shares of Waste Connections' common stock. Certain legal matters related to this offering will be passed upon for the underwriters by Piper & Marbury L.L.P., Baltimore, Maryland. The statements pertaining to Waste Connections' 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 Waste Connections 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, 1996 and 1997, and for each of the three years in the period ended December 31, 1997; (b) combined financial statements of The Murrey Companies (which consist of Murrey's Disposal Company, Inc., American Disposal Company, Inc., D.M. Disposal Co., Inc. and Tacoma Recycling Company, Inc.) as of December 31, 1996 and 1997, and for each of the three years in the period ended December 31, 1997; (c) financial statements of Madera Disposal Systems, Inc. as of December 31, 1996 and 1997, and for each of the three years in the period ended December 31, 1997; (d) financial statements of Arrow Sanitary Service, Inc. as of September 30, 1997, and for the year then ended; (e) financial statements of Contractors Waste Removal, L.C. as of December 31, 1997, and for the year then ended; (f) consolidated financial statements of Curry Transfer and Recycling, Inc. as of December 31, 1997 and for the year then ended; and (g) combined financial statements of Butler County Landfill, Inc. and Kobus Construction, Inc. as of December 31, 1997, and for the year then ended. Such financial statements have been included in this prospectus and Registration Statement in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. The following financial statements appearing in this prospectus and Registration Statement have been audited by Grant Thornton LLP, independent auditors, as set forth in their reports thereon appearing elsewhere in this prospectus and Registration Statement: (a) financial statements of Shrader Refuse and Recycling Service Company as of September 30, 1996 and 1997, and for the years then ended; (b) combined financial statements of B&B Sanitation (consisting of B&B Sanitation, Inc., Red Carpet Landfill, Inc. and Darlin Equipment, Inc.) as of December 31, 1997, and for the year then ended; and 66 68 (c) combined financial statements of J&J Sanitation (consisting of J&J Sanitation, Inc., Big Red Roll Off, Inc., and J&J Sanitation of South Dakota) as of December 31, 1997, and for the year then ended. 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 Amador Disposal Service, Inc. and Mother Lode Sani-Hut, Inc. at June 30, 1998 and for the year then ended appearing in this prospectus and Registration Statement have been audited by PricewaterhouseCoopers LLP, independent auditors, as set forth in their reports thereon appearing elsewhere in this prospectus and Registration Statement. Such financial statements have been included in this prospectus and Registration Statement in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. AVAILABLE INFORMATION Waste Connections has filed with the Commission a registration statement on Form S-1. 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. Waste Connections 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. Our 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." Our common stock is listed on the Nasdaq National Market, and you may also inspect and copy our Commission filings at the offices of the National Association of Securities Dealers, Inc., located at 1735 K Street, N.W., Washington, D.C. 20549. 67 69 INDEX TO FINANCIAL STATEMENTS
PAGE ----- WASTE CONNECTIONS, INC. UNAUDITED PRO FORMA FINANCIAL STATEMENTS Introduction to Unaudited Pro Forma Financial Statements............................................. F-5 Unaudited Pro Forma Statement of Operations for the year ended December 31, 1997................................ F-6 Unaudited Pro Forma Statement of Operations for the nine months ended September 30, 1998........................ F-7 Notes to Unaudited Pro Forma Statements of Operations..... F-8 Unaudited Pro Forma Balance Sheet as of September 30, 1998................................................... F-13 Notes to Unaudited Pro Forma Balance Sheet................ F-14 WASTE CONNECTIONS, INC. AND PREDECESSORS Report of Ernst & Young LLP, Independent Auditors......... F-15 Combined Balance Sheet of Predecessors as of December 31, 1996................................................... F-16 Consolidated Balance Sheet of Waste Connections, Inc. as of December 31, 1997 (Audited) and September 30, 1998 (Unaudited)............................................ F-16 Combined Statement of Operations of Predecessors for the nine months ended September 30, 1997................... F-17 Consolidated Statement of Operations of Waste Connections, Inc. for the period from inception (September 9, 1997) through December 31, 1997 (Audited) and the nine months ended September 30, 1998 (Unaudited)................... F-17 Combined Statement of Operations of The Disposal Group for the period from January 1, 1996 through July 31, 1996................................................... F-18 Combined Statement of Operations of Predecessors for the period ended December 31, 1996......................... F-18 Combined Statement of Operations of The Disposal Group for the year ended December 31, 1995....................... F-19 Statement of Operations of Fibres International, Inc. for the period from January 1, 1995 through November 30, 1995................................................... F-19 Statement of Operations of Predecessors for the one month ended December 31, 1995................................ F-19 Consolidated Statement of Redeemable Stock and Stockholders' Equity (Deficit) of Waste Connections, Inc. for the period from inception (September 9, 1997) through December 31, 1997 (Audited) and the nine months ended September 30, 1998 (Unaudited)................... F-20 Combined Statement of Cash Flows of Predecessors for the nine months ended September 30, 1997................... F-21 Consolidated Statement of Cash Flows of Waste Connections, Inc. for the period from inception (September 9, 1997) through December 31, 1997 (Audited) and the nine months ended September 30, 1998 (Unaudited)................... F-21 Combined Statement of Cash Flows of The Disposal Group for the period from January 1, 1996 through July 31, 1996................................................... F-22 Combined Statement of Cash Flows of Predecessors for the period ended December 31, 1996......................... F-22 Combined Statement of Cash Flows of The Disposal Group for the year ended December 31, 1995....................... F-23 Statement of Cash Flows of Fibres International, Inc. for the period from January 1, 1995 through November 30, 1995................................................... F-23 Statement of Cash Flows of Predecessors for the one month ended December 31, 1995................................ F-23 Notes to Financial Statements............................. F-24
F-1 70
PAGE ----- THE MURREY COMPANIES Report of Ernst & Young LLP, Independent Auditors......... F-46 Combined Balance Sheets as of December 31, 1996 and 1997 (Audited) and September 30, 1998 (Unaudited)........... F-47 Combined Statements of Income and Retained Earnings for the years ended December 31, 1995, 1996 and 1997 (Audited) and for the nine months ended September 30, 1997 and 1998 (Unaudited).............................. F-48 Combined Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997 (Audited) and for the nine months ended September 30, 1997 and 1998 (Unaudited)............................................ F-49 Notes to Combined Financial Statements.................... F-50 MADERA DISPOSAL SYSTEMS, INC. Report of Ernst & Young LLP, Independent Auditors......... F-60 Balance Sheets as of December 31, 1996 and 1997........... F-61 Statements of Income and Retained Earnings for the years ended December 31, 1995, 1996 and 1997................. F-62 Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997.................................... F-63 Notes to Financial Statements............................. F-64 ARROW SANITARY SERVICE, INC. Report of Ernst & Young LLP, Independent Auditors......... F-70 Balance Sheets as of September 30, 1997 (Audited) and March 31, 1998 (Unaudited)............................. F-71 Statements of Income and Retained Earnings for the year ended September 30, 1997 (Audited) and the six months ended March 31, 1997 and 1998 (Unaudited).............. F-72 Statements of Cash Flows for the year ended September 30, 1997 (Audited) and the six months ended March 31, 1997 and 1998 (Unaudited)................................... F-73 Notes to Financial Statements............................. F-74 SHRADER REFUSE AND RECYCLING SERVICE COMPANY Report of Independent Certified Public Accountants........ F-80 Balance Sheets as of September 30, 1996 and 1997 (Audited) and June 30, 1998 (Unaudited).......................... F-81 Statements of Income for the years ended September 30, 1996 and 1997 (Audited) and the nine months ended June 30, 1997 and 1998 (Unaudited).......................... F-82 Statement of Stockholders Equity for the years ended September 30, 1996 and 1997 (Audited) and the nine months ended June 30, 1998 (Unaudited)................. F-83 Statements of Cash Flows for the years ended September 30, 1996 and 1997 (Audited) and the nine months ended June 30, 1997 and 1998 (Unaudited).......................... F-84 Notes to Financial Statements............................. F-85 CONTRACTOR'S WASTE REMOVAL, L.C. Report of Ernst & Young LLP, Independent Auditors......... F-93 Balance Sheets as of December 31, 1997 (Audited) and March 31, 1998 (Unaudited)................................... F-94 Statements of Operations and Change in Members' Deficit for the year ended December 31, 1997 (Audited) and the three months ended March 31, 1997 and 1998 (Unaudited)............................................ F-95 Statements of Cash Flows for the year ended December 31, 1997 (Audited) and the three months ended March 31, 1997 and 1998 (Unaudited).............................. F-96 Notes to Financial Statements............................. F-97
F-2 71
PAGE ----- CURRY TRANSFER AND RECYCLING, INC. Report of Ernst & Young LLP, Independent Auditors......... F-101 Consolidated Balance Sheets as of December 31, 1997 (Audited) and March 31, 1998 (Unaudited)............... F-102 Consolidated Statements of Income and Retained Earnings for the year ended December 31, 1997 (Audited) and the three months ended March 31, 1997 and 1998 (Unaudited)............................................ F-103 Consolidated Statements of Cash Flows for the year ended December 31, 1997 (Audited) and the three months ended March 31, 1997 and 1998 (Unaudited).................... F-104 Notes to Consolidated Financial Statements................ F-105 B&B SANITATION Report of Independent Certified Public Accountants........ F-112 Combined Balance Sheets as of December 31, 1997 (Audited) and March 31, 1998 (Unaudited)......................... F-113 Combined Statements of Earnings for the year ended December 31, 1997 (Audited) and the three months ended March 31, 1997 and 1998 (Unaudited).................... F-114 Combined Statement of Stockholders' Deficit for the year ended December 31, 1997 (Audited) and the three months ended March 31, 1998 (Unaudited)....................... F-115 Combined Statements of Cash Flows for the year ended December 31, 1997 (Audited) and the three months ended March 31, 1997 and 1998 (Unaudited).................... F-116 Notes to Combined Financial Statements.................... F-117 J & J SANITATION Report of Independent Certified Public Accountants........ F-121 Combined Balance Sheets as of December 31, 1997 (Audited) and June 30, 1998 (Unaudited).......................... F-122 Combined Statements of Operations for the year ended December 31, 1997 (Audited) and the six months ended June 30, 1997 and 1998 (Unaudited)..................... F-123 Combined Statement of Stockholders' and Partners' Equity for the year ended December 31, 1997 (Audited) and the six months ended June 30, 1998 (Unaudited)............. F-124 Combined Statements of Cash Flows for the year ended December 31, 1997 (Audited) and the six months ended June 30, 1997 and 1998 (Unaudited)..................... F-125 Notes to Combined Financial Statements.................... F-126 AMADOR DISPOSAL SERVICES, INC. AND MOTHER LODE SANI-HUT, INC. Report of PricewaterhouseCoopers LLP, Independent Auditors............................................... F-132 Combined Balance Sheets as of June 30, 1998, (Audited) and September 30, 1998 (Unaudited)......................... F-133 Combined Statements of Operations and Retained Earnings for the year ended June 30, 1998 (Audited) and the three months ended September 30, 1997 and 1998 (Unaudited)............................................ F-134 Combined Statements of Cash Flows for the year ended June 30, 1998 (Audited) and the three months ended September 30, 1997 and 1998 (Unaudited).......................... F-135 Notes to Combined Financial Statements.................... F-136
F-3 72
PAGE ----- BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC. Report of Ernst & Young LLP, Independent Auditors......... F-141 Combined Balance Sheets as of December 31, 1997 (Audited) and September 30, 1998 (Unaudited)..................... F-142 Combined Statements of Income and Retained Earnings for the year ended December 31, 1997 (Audited) and the nine months ended September 30, 1997 and 1998 (Unaudited)... F-143 Combined Statements of Cash Flows for the year ended December 31, 1997 (Audited) and the nine months ended September 30, 1997 and 1998 (Unaudited)................ F-144 Notes to Combined Financial Statements.................... F-145
F-4 73 WASTE CONNECTIONS, INC. INTRODUCTION TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The Unaudited Pro Forma Statements of Operations for the year ended December 31, 1997 and the nine months ended September 30, 1998, give effect to the business combinations involving WCI, its predecessors, Madera Disposal Systems, Inc. ("Madera"), Arrow Sanitary Service, Inc. ("Arrow"), Shrader Refuse and Recycling Service Company ("Shrader"), Curry Transfer and Recycling, Inc. ("Curry"), Contractors Waste Removal L.C. ("Contractors"), J & J Sanitation ("J & J"), B&B Sanitation ("B&B"), Amador Disposal Service, Inc./Mother Lode Sani-Hut, Inc. ("Amador"), and Butler County Landfill, Inc./Kobus Construction, Inc. ("Butler") as if such business combinations occurred on January 1, 1997 and were accounted for using the purchase method of accounting. In addition to reflecting the business combinations involving WCI, its predecessors, Madera, Arrow, Shrader, Curry, Contractors, J & J, B & B, Amador and Butler, the following Unaudited WCI and the Murrey Companies Pro Forma Combined Statements of Operations for the year ended December 31, 1997 and the nine months ended September 30, 1998 reflect the merger with the Murrey Companies as poolings-of-interests. The following Unaudited Pro Forma Balance Sheet as of September 30, 1998 assumes WCI's acquisition of Amador and Butler occurred on September 30, 1998. In addition to reflecting the business combinations involving WCI, Amador and Butler, the following Unaudited Pro Forma Combined Balance Sheet as of September 30, 1998 reflects the mergers with the Murrey Companies as poolings-of-interests. The accompanying pro forma financial statements have also been adjusted to reflect the sale of the Common Stock offered by the Company hereby and the application of the estimated net proceeds therefrom, as described in "Use of Proceeds." WCI has preliminarily analyzed the savings that it expects to be realized by consolidating certain operational and general and administrative functions. WCI has not and cannot quantify all of these savings due to the short period of time since the predecessor, Madera, Arrow, Shrader, Curry, Contractors, J & J, B&B, Amador and Butler acquisitions occurred. It is anticipated that these savings will be partially offset by the costs of being a publicly held company and the incremental increase in costs related to WCI's corporate management. However, these costs, like the savings they offset, cannot be quantified accurately. Neither the anticipated savings nor the anticipated costs have been included in the Unaudited Pro Forma Financial Statements. The Unaudited Pro Forma Financial Statements include certain adjustments to the historical financial statements, including adjusting depreciation expense to reflect purchase price allocations of the entities acquired by WCI, adjusting interest expense to reflect acquisition-related debt and the related income tax effects of these adjustments. The pro forma adjustments are based on preliminary estimates, available information and certain assumptions and may be revised as additional information becomes available. The Unaudited Pro Forma Financial Statements do not purport to represent what WCI's financial position or results of operations would actually have been if such transactions in fact had occurred on those dates or to project WCI's financial position or results of operations for any future period. Because WCI, its predecessors, the Murrey Companies, Madera, Arrow, Shrader, Curry, Contractors, J & J, B&B, Amador and Butler were not under common control or management for all periods, historical combined results may not be comparable to, or indicative of, future performance. The Unaudited Pro Forma Financial Statements should be read in conjunction with the other financial statements and notes thereto included elsewhere herein, as well as information included under the headings "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" included elsewhere herein. F-5 74 WASTE CONNECTIONS, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
WASTE CONNECTIONS, INC. ARROW PERIOD FROM MADERA SANITARY INCEPTION PREDECESSORS DISPOSAL SERVICE, INC. (SEPTEMBER 9, COMBINED NINE SYSTEMS, INC. YEAR 1997) TO MONTHS ENDED YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, 1997 1997 1997 1997 ------------- ------------- ------------- ------------- Revenues.................................................... $ 6,237 $18,114 $ 7,845 $6,209 Operating expenses: Cost of operations......................................... 4,703 14,753 5,289 4,970 Selling, general and administrative........................ 619 3,009 1,041 776 Depreciation and amortization.............................. 354 1,083 627 143 Start-up and integration................................... 493 -- -- -- Stock compensation......................................... 4,395 -- -- -- --------- ------- ------- ------ Income (loss) from operations............................... (4,327) (731) 888 320 Interest expense............................................ (1,035) (456) (280) (72) Other income (expense), net................................. (36) 14 173 (2) --------- ------- ------- ------ Income (loss) before (provision) benefit for income taxes... (5,398) (1,173) 781 246 (Provision) benefit for income taxes........................ 332 -- -- (117) --------- ------- ------- ------ Net income (loss)........................................... $ (5,066) $(1,173) $ 781 $ 129 ========= ======= ======= ====== Redeemable convertible preferred stock accretion............ $ (531) --------- Net loss applicable to common stockholders............................................... $ (5,597) ========= Basic and diluted net loss per common share................. $ (2.99) ========= Shares used in the per share calculation.................... 1,872,567 ========= SHRADER CURRY REFUSE AND TRANSFER RECYCLING AND CONTRACTORS J & J SERVICE RECYCLING, WASTE SANITATION COMPANY INC. REMOVAL, L.C. COMBINED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1997 1997 1997 1997 ------------- ------------ ------------- ------------ Revenues.................................................... $6,896 $3,617 $1,903 $2,346 Operating expenses: Cost of operations......................................... 4,601 2,259 1,234 1,789 Selling, general and administrative........................ 567 655 359 319 Depreciation and amortization.............................. 770 260 202 197 Start-up and integration................................... -- Stock compensation......................................... -- ------ ------ ------ ------ Income (loss) from operations............................... 958 443 108 41 Interest expense............................................ (292) (50) (178) (108) Other income (expense), net................................. 59 64 -- -- ------ ------ ------ ------ Income (loss) before (provision) benefit for income taxes... 725 457 (70) (67) (Provision) benefit for income taxes........................ (183) -- -- ------ ------ ------ ------ Net income (loss)........................................... $ 725 $ 274 $ (70) $ (67) ====== ====== ====== ====== Redeemable convertible preferred stock accretion............ Net loss applicable to common stockholders............................................... Basic and diluted net loss per common share................. Shares used in the per share calculation.................... AMADOR BUTLER B&B DISPOSAL COUNTY SANITATION SERVICE, INC. LANDFILL, INC. COMBINED COMBINED COMBINED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, PRO FORMA 1997 1997 1997 ADJUSTMENTS ------------ ------------- -------------- ----------- Revenues.................................................... $1,965 $3,205 $3,010 $ -- Operating expenses: Cost of operations......................................... 1,074 2,432 1,898 (146)(a) (195)(b) (100)(c) Selling, general and administrative........................ 480 236 (570)(d) (132)(e) (267)(j) Depreciation and amortization.............................. 259 317 631 (102)(f) (2,022)(k) 1,620(l) Start-up and integration................................... -- -- -- Stock compensation......................................... -- -- -- ------ ------ ------ ------- Income (loss) from operations............................... 312 (24) 245 1,914 Interest expense............................................ (108) (77) (180) 456(g) (218)(g) 1,345(m) (4,796)(n) Other income (expense), net................................. 1 (3) 43 -- ------ ------ ------ ------- Income (loss) before (provision) benefit for income taxes... 205 (104) 108 (1,299) (Provision) benefit for income taxes........................ -- (2) -- (92)(h) (618)(o) 1,082(l) ------ ------ ------ ------- Net income (loss)........................................... $ 205 $ (106) $ 108 $ (927) ====== ====== ====== ======= Redeemable convertible preferred stock accretion............ Net loss applicable to common stockholders............................................... Basic and diluted net loss per common share................. Shares used in the per share calculation.................... THE MURREY PRO FORMA PRO FORMA COMPANIES COMBINED YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, PRO FORMA 1997 1997 1997 ADJUSTMENTS ------------ ------------ ------------ ----------- Revenues.................................................... $ 61,347 $28,874 $ 90,221 $ -- Operating expenses: Cost of operations......................................... 44,561 23,133 67,694 -- Selling, general and administrative........................ 7,412 2,323 9,735 -- Depreciation and amortization.............................. 4,339 1,371 5,710 -- Start-up and integration................................... 493 -- 493 -- Stock compensation......................................... 4,395 -- 4,395 -- ---------- ------- ---------- ------ Income (loss) from operations............................... 147 2,047 2,194 -- Interest expense............................................ (6,049) (380) (6,429) 3,857(p) Other income (expense), net................................. 313 283 596 -- ---------- ------- ---------- ------ Income (loss) before (provision) benefit for income taxes... (5,589) 1,950 (3,639) 3,857 (Provision) benefit for income taxes........................ 402 (634) (232) (1,543)(q) ---------- ------- ---------- ------ Net income (loss)........................................... $ (5,187) $ 1,316 $ (3,871) $2,314 ========== ======= ========== ====== Redeemable convertible preferred stock accretion............ (531) (531) ---------- ---------- Net loss applicable to common stockholders............................................... $ (5,718) $ (4,402) ========== ========== Basic and diluted net loss per common share................. $ (2.12) $ (0.81) ========== ========== Shares used in the per share calculation.................... 2,700,306 5,450,306 ========== ========== PRO FORMA COMBINED AS ADJUSTED YEAR ENDED DECEMBER 31, 1997 ------------ Revenues.................................................... $ 90,221 Operating expenses: Cost of operations......................................... 67,694 Selling, general and administrative........................ 9,735 Depreciation and amortization.............................. 5,710 Start-up and integration................................... 493 Stock compensation......................................... 4,395 ---------- Income (loss) from operations............................... 2,194 Interest expense............................................ (2,572) Other income (expense), net................................. 596 ---------- Income (loss) before (provision) benefit for income taxes... 218 (Provision) benefit for income taxes........................ (1,775) ---------- Net income (loss)........................................... $ (1,557) ========== Redeemable convertible preferred stock accretion............ (531) ========== Net loss applicable to common stockholders............................................... $ (2,088) ========== Basic and diluted net loss per common share................. $ (0.24) ========== Shares used in the per share calculation.................... 8,700,306 ==========
See accompanying notes. F-6 75 WASTE CONNECTIONS, INC. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1998 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CURRY TRANSFER CONTRACTORS WASTE MADERA ARROW SHRADER REFUSE AND WASTE CONNECTIONS, DISPOSAL SANITARY AND RECYCLING RECYCLING, REMOVAL INC. CONSOLIDATED SYSTEMS, INC. SERVICE, INC. SERVICE INC. L.C. NINE MONTHS ONE MONTH FIVE MONTHS COMPANY FIVE MONTHS FIVE MONTHS ENDED ENDED ENDED SIX MONTHS ENDED ENDED SEPTEMBER 30, JANUARY 31, MAY 31, ENDED MAY 31, MAY 31, 1998 1998 1998 JUNE 30, 1998 1998 1998 ----------------- ------------- ------------- -------------- ----------- ----------- Revenues........................ $ 35,336 $ 611 $2,508 $3,505 $1,408 $ 791 Operating expenses: Cost of operations............. 24,007 412 1,836 2,264 837 543 Selling, general and administrative............... 3,518 112 385 310 270 182 Depreciation and amortization.. 2,693 69 67 471 124 94 Stock compensation............. 561 -- -- -- -- -- --------- ----- ------ ------ ------ ----- Income (loss) from operations... 4,557 18 220 460 177 (28) Interest expense................ (1,427) (289) (14) (191) (33) (90) Other income, net............... -- 16 2 11 41 -- --------- ----- ------ ------ ------ ----- Income (loss) before (provision) benefit for income taxes....... 3,130 (255) 208 280 185 (118) (Provision) benefit for income taxes.......................... (1,513) -- (89) -- -- -- --------- ----- ------ ------ ------ ----- Income (loss) before extraordinary item............. 1,617 $(255) $ 119 $ 280 $ 185 $(118) ===== ====== ====== ====== ===== Extraordinary Item -- early extinguishment of debt, net of tax benefit of $165............ (815) --------- Net income (loss)............... $ 802 ========= Redeemable convertible preferred stock accretion................ $ (917) --------- Net income (loss) applicable to common stockholders............ $ (115) ========= Basic earnings (loss) per common share: Income (loss) before extraordinary item............. $ 0.13 ========= Extraordinary item.............. (0.15) ========= Basic net income (loss) per common share................... $ (0.02) ========= Diluted earnings (loss) per common share: Income (loss) before extraordinary item............. $ 0.09 ========= Extraordinary item.............. (0.11) --------- Diluted net loss per common share.......................... $ (0.02) ========= Shares used in the per share calculations: Basic.......................... 5,476,532 ========= Diluted........................ 7,438,658 ========= AMADOR BUTLER J & J B&B DISPOSAL COUNTY SANITATION SANITATION SERVICE, INC LANDFILL, INC. COMBINED COMBINED COMBINED COMBINED PRO FORMA SIX MONTHS FIVE MONTHS NINE MONTHS NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED ENDED JUNE 30, MAY 31, SEPTEMBER 30, SEPTEMBER 30, PRO FORMA SEPTEMBER 30, 1998 1998 1998 1998 ADJUSTMENTS 1998 ----------- ----------- ------------- -------------- ----------- ------------- Revenues........................ $1,210 $876 $2,355 $2,419 $ -- $ 51,019 Operating expenses: Cost of operations............. 854 464 1,642 1,659 -- 34,518 Selling, general and administrative............... 213 136 400 130 (111)(j) 5,545 Depreciation and amortization.. 107 110 229 408 (334)(l) 4,038 Stock compensation............. -- -- -- -- -- 561 ------ ---- ------ ------ ------- ---------- Income (loss) from operations... 36 166 84 222 445 6,357 Interest expense................ (53) (46) (88) (109) 624(m) (3,862) (2,146)(n) Other income, net............... -- -- (22) 109 -- 157 ------ ---- ------ ------ ------- ---------- Income (loss) before (provision) benefit for income taxes....... (17) 120 (26) 222 (1,077) 2,652 (Provision) benefit for income taxes.......................... -- -- (1) 358(o) (1,245) ------ ---- ------ ------ ------- ---------- Income (loss) before extraordinary item............. $ (17) $120 $ (27) $ 222 $ (719) 1,407 ====== ==== ====== ====== ======= Extraordinary Item -- early extinguishment of debt, net of tax benefit of $165............ (815) ---------- Net income (loss)............... $ 592 ========== Redeemable convertible preferred stock accretion................ $ (917) ---------- Net income (loss) applicable to common stockholders............ $ (325) ========== Basic earnings (loss) per common share: Income (loss) before extraordinary item............. $ 0.08 ========== Extraordinary item.............. Basic net income (loss) per common share................... Diluted earnings (loss) per common share: Income (loss) before extraordinary item............. $ 0.06 ========== Extraordinary item.............. Diluted net loss per common share.......................... Shares used in the per share calculations: Basic.......................... 6,069,350 ========== Diluted........................ 7,654,186 ========== THE MURREY PRO FORMA COMPANIES COMBINED NINE MONTHS NINE MONTHS ENDED ENDED PRO FORMA SEPTEMBER 30, SEPTEMBER 30, PRO FORMA COMBINED 1998 1998 ADJUSTMENTS AS ADJUSTED ------------- ------------- ----------- ----------- Revenues........................ $24,532 $ 75,551 $ -- $ 75,551 Operating expenses: Cost of operations............. 19,337 53,855 -- 53,855 Selling, general and administrative............... 1,870 7,415 -- 7,415 Depreciation and amortization.. 1,640 5,678 -- 5,678 Stock compensation............. -- 561 -- 561 ------- ----------- ----------- ----------- Income (loss) from operations... 1,685 8,042 -- 8,042 Interest expense................ (423) (4,285) $ 2,893(p) (1,392) Other income, net............... (97) 60 -- 60 ------- ----------- ----------- ----------- Income (loss) before (provision) benefit for income taxes....... 1,165 3,817 2,893 6,710 (Provision) benefit for income taxes.......................... (414) (1,659) (1,157)(q) (2,816) ------- ----------- ----------- ----------- Income (loss) before extraordinary item............. $ 751 2,158 $ 1,736 3,894 ======= =========== Extraordinary Item -- early extinguishment of debt, net of tax benefit of $165............ (815) (815) ----------- ----------- Net income (loss)............... $ 1,343 $ 3,079 =========== =========== Redeemable convertible preferred stock accretion................ $ (917) $ (917) ----------- ----------- Net income (loss) applicable to common stockholders............ $ 426 $ 2,162 =========== =========== Basic earnings (loss) per common share: Income (loss) before extraordinary item............. $ 0.14 $ 0.25 =========== =========== Extraordinary item.............. Basic net income (loss) per common share................... Diluted earnings (loss) per common share: Income (loss) before extraordinary item............. $ 0.12 $ 0.22 =========== =========== Extraordinary item.............. Diluted net loss per common share.......................... Shares used in the per share calculations: Basic.......................... 8,819,350 12,069,350 =========== =========== Diluted........................ 10,404,186 13,654,186 =========== ===========
See accompanying notes. F-7 76 WASTE CONNECTIONS, INC. NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) ASSUMPTIONS. The unaudited pro forma statements of operations for the year ended December 31, 1997 and for the nine months ended September 30, 1998 are presented as if the acquisitions of the Company's predecessors, Madera, Arrow, Shrader, Curry, Contractors, J & J, B&B, Amador and Butler had occurred on January 1, 1997. In addition, the unaudited pro forma combined statements of operations for the year ended December 31, 1997 and for the nine months ended September 30, 1998 combine the pro forma statements of operations for those respective periods with the historical statements of operations for the Murrey Companies for the year ended December 31, 1997 and for the nine months ended September 30, 1998, respectively. BUSINESS COMBINATIONS. The acquisitions of Madera, Arrow, Shrader, Curry, Contractors, J & J, B&B, Amador and Butler are being accounted for under the purchase method of accounting for business combinations. Certain items affecting the purchase prices and their allocations are preliminary. The preliminary purchase prices consist of the following:
MADERA ARROW SHRADER CURRY CONTRACTORS J & J B&B AMADOR BUTLER ------- ------- ------- ------- ----------- ------- ------- ------- ------- Cash paid to shareholders....... $6,949 $ 7,537 $ 8,106 $ 6,347 $ 2,442 $ 2,074 $ 3,321 $ 5,581 $ 7,013 Common stock issued............. 7,500 3,045 9,997 -- 1,000 -- -- -- -- Liabilities assumed.. 4,256 769 2,102 1,298 2,561 1,372 1,723 1,428 2,219 Sellers notes........ -- -- 378 25 166 93 24 -- 172 Acquisition costs.... 180 125 225 90 73 80 170 100 132 Common stock warrants issued............. 954 -- -- -- -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- $19,839 $11,476 $20,808 $ 7,760 $ 6,242 $ 3,619 $ 5,238 $ 7,109 $ 9,536 ======= ======= ======= ======= ======= ======= ======= ======= =======
The Company has preliminarily allocated the purchase prices as follows:
MADERA ARROW SHRADER CURRY CONTRACTORS J & J B&B AMADOR BUTLER ------- ------- ------- ------- ----------- ------- ------- ------- ------- Tangible assets purchased.......... $4,534 $ 898 $ 4,378 $ 2,877 $ 1,506 $ 687 $ 2,611 $ 1,935 $ 9,265 Goodwill............. 14,580 10,528 16,300 4,583 4,686 2,892 2,577 5,144 251 Covenants not to compete............ -- 50 130 100 50 40 50 30 20 Long-term franchise agreements and contracts.......... 725 -- -- 200 -- -- -- -- -- ------- ------- ------- ------- ------- ------- ------- ------- ------- $19,839 $11,476 $20,808 $ 7,760 $ 6,242 $ 3,619 $ 5,238 $ 7,109 $ 9,536 ======= ======= ======= ======= ======= ======= ======= ======= =======
The valuation of the Company's common stock issued in connection with the acquisitions was determined based on the market price of the securities over a reasonable period of time before and after the two companies reached agreement on the purchase price and, if applicable, after the proposed transaction is announced. The valuation of common stock issued with contractual trading restrictions is discounted to reflect the specific features of the stock issued. WCI's mergers with the Murrey Companies are assumed to be accounted for under the pooling of interests method of accounting for business combinations. The pro forma financial statements assume the issuance of 2,750,000 shares, which represents the expected number of shares to be exchanged. The actual number of shares of WCI's common stock to be exchanged for all of the outstanding stock of the Murrey Companies will be determined at the closing date. F-8 77 WASTE CONNECTIONS, INC. NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) PRO FORMA ADJUSTMENTS. The unaudited pro forma statements of operations do not reflect non-recurring costs resulting directly from the merger between the Company and the Murrey Companies. The management of the Company estimates that these costs will approximate $6,500 and will be charged to operations in the quarter that the merger is consummated. The amount includes costs to merge the companies, signing bonuses to be paid to Murrey Company officers, and professional fees. The following adjustments have been made to the unaudited pro forma statements of operations: (a) To eliminate BFI corporate environmental expense allocation related to BFI landfill closure costs which do not exist for the Company. (b) To record amortization of the loss contract accrual that was recorded in connection with the acquisitions of the predecessor operations. The loss contract accrual is being amortized to operating expenses over the related terms of the loss contracts which range from 6 to 65 months. The loss contract accrual represents the estimated incremental losses to the Company related to certain unfavorable contracts the Company acquired in connection with the acquisition of the predecessor operations. (c) To reduce facilities lease expense to the amounts provided for in the sublease agreement entered into with BFI in connection with the acquisitions of the predecessor operations. The sublease agreement was directly attributable to, a required element of, and a condition to the closing of the acquisition. (d) To reduce BFI corporate overhead expense allocations to the amount of corporate overhead currently being incurred by the Company. (e) To eliminate consulting expenses incurred by BFI related to the acquisition of The Disposal Group which the Company did not assume in connection with the acquisitions of the predecessors. The non-assumption of the consulting agreement was directly attributable to, a required element of, and a condition to the closing of the acquisition. (f) To decrease goodwill amortization for the lower goodwill amount recorded by the Company in connection with its acquisition of the predecessor operations. (g) To eliminate the predecessor's interest expense and record interest expense on the debt obligations incurred by the Company in connection with the acquisitions of the predecessors. (h) To record the estimated tax provision associated with the proforma adjustments for the Company's predecessors net of the tax benefit for the net operating loss for the nine months ended September 30, 1997 using the Company's effective tax rate. (i) To record the estimated tax benefit for the year ended December 31, 1997 associated with the pro forma adjustments for the Madera $198, Arrow $226, Shrader $60, Curry $177, Contractors $96, J&J $76, B&B $93, Amador $144 and Butler $12 acquisitions using the Company's estimated effective tax rates. (j) To reduce officers' salaries to levels provided for in the new employment agreements which were directly attributable to, required elements of, and a condition to the closing of the Madera acquisition $83 and the Shrader acquisition $184 for the year ended 1997 and Madera $19 and Shrader $92 for the nine months ended September 30, 1998. (k) To reduce depreciation for the reduction in the property and equipment's carrying value to fair value related to the acquisition of Madera $377, Arrow $78, Shrader $585, Curry F-9 78 WASTE CONNECTIONS, INC. NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS) $130, Contractors $48, J&J $130, B&B $82, Amador $180 and Butler $412 for the year ended December 31, 1997. (l) To increase amortization for the increase in goodwill and other intangibles resulting from the acquisition of Madera $364, Arrow $265, Shrader $439, Curry $130, Contractors $128, J&J $80, B&B $69, Amador $135 and Butler $10 for the year ended December 31, 1997. To increase (decrease) depreciation and amortization for effects of the purchase for Madera ($19), Arrow $90, Shrader ($160), Curry ($4), Contractors $47, J&J ($33), B&B ($2), Amador ($25) and Butler ($228) for the nine months ended September 30, 1998. Goodwill is amortized over a term of 40 years and the covenant not to compete is amortized over a term of five years. (m) To eliminate interest expense associated with the outstanding debt obligations of Madera $280, Arrow $72, Shrader $292, Curry $50, Contractors $178, J&J $108, B&B $108, Amador $77 and Butler $180 which were paid-off in connection with the acquisitions for the year ended December 31, 1997 and Arrow $14, Shrader $191, Curry $33, Contractors $90, J&J $53, B&B $46, Amador $88 and Butler $109 for the nine months ended September 30, 1998. (n) To record interest expense on the additional long-term debt obligations incurred by the Company in connection with the acquisition of Madera $897, Arrow $606, Shrader $771, Curry $493, Contractors $338, J&J $244, B&B $354, Amador $481 and Butler $612 for the year ended 1997 and Arrow $239, Shrader $372, Curry $247, Contractors $169, J&J $122, B&B $177, Amador $361 and Butler $459 for the nine months ended September 30, 1998. In the aggregate the Company incurred or refinanced long-term debt obligations of approximately $64,469 related to these acquisitions; with a weighted average interest rate of 7.4%. (o) To record C corporation income tax (provision) benefit for the year ended December 31, 1997 for Madera ($297), Shrader ($290), Contractors $28, J&J $27, B&B ($82), Amador $41 and Butler $(45), which were subchapter S corporations LLC or partnerships for income tax purposes for all periods prior to their acquisition by the Company. To record the estimated C corporation tax (provision) benefit and tax effect of pro forma adjustments for Madera $83, Arrow $118, Shrader ($64), Curry $10, Contractors $97, J&J $42, B&B $4, Amador $110 and Butler ($42) for the nine months ended September 30, 1998. (p) To eliminate interest expense for a reduction in the pro-forma combined debt, as the offering proceeds will be used to pay off outstanding debt obligations of the Company. (q) To record income tax expense associated with the reduction in interest expense associated with pro form adjustment(p). F-10 79 WASTE CONNECTIONS, INC. NOTES TO UNAUDITED PRO FORMA STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) PRO FORMA PER SHARE DATA. The shares used in computing the unaudited pro forma net loss per share for the periods ended December 31, 1997, and the nine months ended September 30, 1998 are based upon the pro forma number of common shares as summarized in the table below. See Note 1 of the Company's notes to financial statements included elsewhere herein for information concerning the computation of basic and diluted net income (loss) per share.
NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1997 1998 ------------ ------------------ Basic Share Count: Company weighted average shares outstanding.............. 1,872,567 5,476,532 Shares issued in connection with the acquisition of Arrow................................................. 213,750 131,538(1) Shares issued in connection with the acquisition of Contractors........................................... 76,423 43,829(2) Shares issued in connection with the acquisition of Shrader............................................... 537,566 417,451(3) ---------- ---------- Shares used in calculating proforma basic income (loss) per share............................................. 2,700,306 6,069,350 Shares to be issued in exchange for the Murrey Companies' stock(4).............................................. 2,750,000 2,750,000 ---------- ---------- Shares used in calculating pro forma combined basic net income (loss) per share............................... 5,450,306 8,819,350 Shares issued in connection with this offering........... 3,250,000 3,250,000 ---------- ---------- Shares used in calculating pro forma combined, as adjusted, basic net income (loss) per share........... 8,700,306 12,069,350 ========== ========== Diluted Share Count: Shares used in calculating pro forma basic income (loss) per share............................................. 2,700,306 6,069,350 Dilutive effect of stock options and warrants outstanding........................................... -- 1,584,836 ---------- ---------- Shares used in calculating pro forma dilutive income (loss)................................................ 2,700,306 7,654,186 Shares to be issued in exchange for the Murrey Companies' stock(4).............................................. 2,750,000 2,750,000 ---------- ---------- Shares used in calculating pro forma combined diluted net income (loss) per share............................... 5,450,306 10,404,186 Shares issued in connection with this offering........... 3,250,000 3,250,000 ---------- ---------- Shares used in calculating pro forma combined, as adjusted, diluted net income (loss) per share......... 8,700,306 13,654,186 ========== ==========
- --------------- (1) Includes only incremental shares issued for acquisition of Arrow because 82,212 shares are already included in the Company's weighted average shares outstanding for the nine months ended September 30, 1998. (2) Includes only incremental shares issued for acquisition of Contractors because 39,094 shares are already in the Company's weighted average shares outstanding for the nine months ended September 30, 1998. (3) Includes only incremental shares issued for acquisition of Shrader because 120,115 shares are already in the Company's weighted average for the nine months ended September 30, 1998. (4) The shares of the Company's common stock to be issued in exchange for the Murrey Companies stock included in the above table represents the expected number of shares to be exchanged. F-11 80 The actual number of shares of the Company's common stock to be exchanged for all of the outstanding stock of the Murrey Companies will be determined at the closing date. In the event that the Company is required to exchange an additional 500,000 shares of its common stock to consummate the merger with the Murrey Companies the effect on pro forma net loss per share amounts are as follows:
PRO FORMA COMBINED NINE MONTHS YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, 1997 1998 ------------ ------------- Basic earnings per common share: Income (loss) before extraordinary item................... $(0.74) $ 0.13 Diluted earnings per common share: Income (loss) before extraordinary item................... $(0.74) $ 0.11
ACQUISITION COSTS. The Company incurred costs of $180, $125, $225, $90, $73, $80, $170, $100 and $132 related to the Madera, Arrow, Shrader, Curry, Contractors, J&J, B&B, Amador and Butler acquisitions, respectively, which have been factored into the respective purchase agreements. Costs incurred by Madera, Arrow, Shrader, Curry, Contractors, J&J, B&B, Amador and Butler were expensed as incurred. No adjustments have been made in these pro forma statements of operations to conform accounting policies of the Murrey Companies with those of the Company. The nature and extent of such adjustments, if any, are not expected to be significant. CONTINGENT PAYMENTS. In connection with the Madera, Shrader, J & J and Butler acquisitions the Company is required to pay contingent consideration to certain former shareholders of the respective companies, subject to their involvement in specified events that give rise to the consideration. No amounts related to these contingent payments have been included in the pro forma financial statements as the events which would give rise to such payments have not yet occurred nor are probable. Contingent payments relating to these acquisitions total $6.8 million, are payable primarily in cash, and are earned based upon the achievement of certain milestones. Of the total contingent payments, $4.8 million relates to the achievement of certain operational and financial performance goals, and $2 million relates to the consummation of future acquisitions. OTHER. The Professional Cleaning business of Madera ceased operations in July 1997. This business had revenues of $193 and an operating loss of $215 during the year ended December 31, 1997. Shortly before the acquisition of the predecessor operations by the Company, BFI amended a franchise agreement with a municipality which provided for a reduction in the franchise fees. Had this amended franchise agreement been in effect as of January 1, 1997, pro forma cost of operations would have been approximately $135 lower during the year ended December 31, 1997. F-12 81 WASTE CONNECTIONS, INC. UNAUDITED PRO FORMA BALANCE SHEET SEPTEMBER 30, 1998 (IN THOUSANDS)
AMADOR BUTLER WASTE DISPOSAL COUNTY CONNECTIONS, INC. SERVICE, INC. LANDFILL, INC. PRO FORMA THE MURREY CONSOLIDATED COMBINED COMBINED ADJUSTMENTS PRO FORMA COMPANIES ----------------- ------------- -------------- ----------- --------- ---------- ASSETS Current assets: Cash.................... $ 1,090 $ 239 $ 47 $ --(2)(5)(6) $ 1,376 $ 405 Accounts receivable, net................... 9,046 190 428 -- 9,664 3,364 Prepaid expenses and other current assets................ 773 76 154 -- 1,003 10 -------- ------ ------ ------- -------- ------- Total current assets........... 10,909 505 629 -- 12,043 3,779 Property and equipment, net..................... 18,438 2,107 3,124 4,454(3) 28,123 14,371 Goodwill, net............ 81,294 -- -- 5,395(4) 86,689 1,758 Other assets............. 3,854 30 351 50(4) 4,285 -- -------- ------ ------ ------- -------- ------- $114,495 $2,642 $4,104 $ 9,899 $131,140 $19,908 ======== ====== ====== ======= ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings... $ -- $ -- $ -- $ -- $ -- $ 620 Accounts payable........ 6,123 87 107 -- 6,317 2,217 Advance from a related party................. -- -- -- -- -- 543 Deferred revenue........ 1,501 -- -- -- 1,501 1,432 Accrued liabilities..... 3,165 145 214 -- 3,524 1,288 Income taxes payable.... -- -- -- -- -- 277 Current portion of notes payable............... 1,256 38 608 (474)(5)(8) 1,428 751 Other current liabilities........... 346 -- -- -- 346 -- Accrued merger related expenses.............. -- -- -- -- -- -- -------- ------ ------ ------- -------- ------- 12,391 270 929 (474) 13,116 7,128 Other long-term liabilities............. 1,499 -- 474 -- 1,973 -- Long-term debt, net...... 40,404 1,158 816 13,472(5)(6) 55,850 4,047 Deferred income taxes.... 379 -- -- -- 379 658 Stockholders' equity: Common stock............ 92 188 10 (198)(7) 92 45 Additional paid-in capital............... 65,944 118 2 (120)(7) 65,944 455 Deferred stock compensation.......... (499) -- -- -- (499) -- Retained earnings (deficit)............. (5,715) 908 1,873 (2,781)(7) (5,715) 7,575 -------- ------ ------ ------- -------- ------- Total stockholders' equity........... 59,822 1,214 1,885 (3,099) 59,822 8,075 -------- ------ ------ ------- -------- ------- $114,495 $2,642 $4,104 $ 9,899 $131,140 $19,908 ======== ====== ====== ======= ======== ======= PRO FORMA PRO FORMA PRO FORMA PRO FORMA COMBINED ADJUSTMENTS COMBINED ADJUSTMENTS AS ADJUSTED ----------- --------- ----------- ----------- ASSETS Current assets: Cash.................... $ -- $ 1,781 $ 55,099(9) $ 1,781 (55,099)(10) Accounts receivable, net................... -- 13,028 -- $ 13,028 Prepaid expenses and other current assets................ -- 1,013 -- $ 1,013 ------- -------- -------- -------- Total current assets........... -- 15,822 -- 15,822 Property and equipment, net..................... -- 42,494 -- 42,494 Goodwill, net............ -- 88,447 -- 88,447 Other assets............. -- 4,285 -- 4,285 ------- -------- -------- -------- $ -- $151,048 $ -- $151,048 ======= ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term borrowings... $ -- $ 620 $ -- $ 620 Accounts payable........ -- 8,534 -- 8,534 Advance from a related party................. -- 543 -- 543 Deferred revenue........ -- 2,933 -- 2,933 Accrued liabilities..... -- 4,812 -- 4,812 Income taxes payable.... -- 277 -- 277 Current portion of notes payable............... -- 2,179 -- 2,179 Other current liabilities........... -- 346 -- 346 Accrued merger related expenses.............. 6,500(1) 6,500 -- 6,500 ------- -------- -------- -------- 6,500 26,744 -- 26,744 Other long-term liabilities............. -- 1,973 -- 1,973 Long-term debt, net...... -- 59,897 (55,099)(10) 4,798 Deferred income taxes.... -- 1,037 -- 1,037 Stockholders' equity: Common stock............ (17)(1) 120 33(9) 153 Additional paid-in capital............... 17(1) 66,416 55,066(9) 121,482 Deferred stock compensation.......... -- (499) -- (499) Retained earnings (deficit)............. (6,500)(1) (4,640) -- (4,640) ------- -------- -------- -------- Total stockholders' equity........... (6,500) 61,397 55,099 116,496 ------- -------- -------- -------- $ -- $151,048 $ -- $151,048 ======= ======== ======== ========
See accompanying notes. F-13 82 WASTE CONNECTIONS, INC. NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSUMPTIONS. The unaudited pro forma balance sheet as of September 30, 1998 combines the historical balance sheet of Waste Connections, Inc. with the historical balance sheets of Amador and Butler to be accounted for as purchases, and the historical balance sheet of the Murrey Companies to be accounted for as poolings-of-interests as of September 30, 1998. PRO FORMA ADJUSTMENTS. The following adjustments have been made to the unaudited pro forma consolidated balance sheet. (1) To record Merger related entries consisting of estimated non-recurring costs of the Merger with the Murrey Companies and the issuance of 2,750,000 shares of the Company's common stock. The management of the Company estimates that the non-recurring costs will approximate $6,500 and will be charged to operations in the quarter the merger is consummated. This estimated expense, has been charged to retained earnings on the accompanying unaudited pro forma balance sheet. (2) Cash payments to former shareholders of Amador ($5,581) and payment of acquisition costs ($100). Cash payments to the former shareholders of Butler ($7,013) and payment of acquisition cost of ($132). (3) To increase (reduce) property, plant and equipment ($707) and $5,161 of Amador and Butler, respectively to its estimated fair market value. (4) To increase goodwill and other intangible assets for excess of the purchase prices over the net assets acquired from Amador of $5,144 and $30 and Butler of $251 and $20, respectively. (5) Pay off outstanding debt obligations ($1,196) of Amador and debt obligations ($1,424) of Butler. (6) To record additional long term debt associated with the acquisition of Amador and Butler of $6,877 and $8,569 respectively. (7) To eliminate the equity accounts of Amador and Butler. (8) To record Seller Notes Payable issued in connection with the acquisition of Butler of $172. (9) Issuance of 3,250,000 shares of common stock with estimated net proceeds of $55,099. (10) Pay-off of outstanding debt obligations of the Company with estimated net proceeds. 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-14 83 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Stockholders Waste Connections, Inc. We have audited the accompanying financial statements of Waste Connections, Inc. and Predecessors as of December 31, 1996 and 1997, and for each of the three years in the period ended December 31, 1997 which appear on pages F-16 through F-23 herein as listed in the accompanying Index to Financial Statements. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Waste Connections, Inc. and Predecessors at December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Sacramento, California March 6, 1998 F-15 84 WASTE CONNECTIONS, INC. AND PREDECESSORS BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
WASTE CONNECTIONS, INC. CONSOLIDATED PREDECESSORS ---------------------------- COMBINED DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1996 (NOTE 1) 1997 1998 ------------- ------------ ------------- (UNAUDITED) ASSETS Current assets: Cash...................................................... $ 102 $ 820 $ 1,090 Accounts receivable, less allowance for doubtful accounts of $390 at September 30, 1998 and $19 at December 31, 1997 ($81 in 1996)...................................... 2,650 3,940 9,046 Prepaid expenses and other current assets................. 339 358 773 ------- ------- -------- Total current assets................................ 3,091 5,118 10,909 Property and equipment, net................................. 5,069 4,185 18,438 Goodwill, net............................................... 6,762 9,408 81,294 Other assets................................................ 369 169 3,854 ------- ------- -------- $15,291 $18,880 $114,495 ======= ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.......................................... $ 1,025 $ 2,609 $ 6,123 Deferred revenue.......................................... 564 597 1,501 Accrued liabilities....................................... 634 825 3,165 Current portion of notes payable.......................... -- -- 1,256 Current portion of long-term debt......................... 54 -- -- Other current liabilities................................. 119 251 346 ------- ------- -------- Total current liabilities........................... 2,396 4,282 12,391 Other long term liabilities................................. -- 702 1,499 Long-term debt.............................................. 89 6,762 40,404 Deferred income taxes....................................... -- 162 379 Commitments and contingencies (Note 7) Redeemable convertible preferred stock: $.01 par value; 2,500,000 shares authorized; 2,499,998 shares issued and outstanding at December 31, 1997; no shares issued and outstanding at September 30, 1998 (aggregate liquidation preference of $10,500 at December 31, 1997)............... -- 7,523 -- Net intercompany balance.................................... 12,806 -- -- Stockholders' equity (deficit): Preferred stock: $.01 par value; 7,500,000 shares authorized; none issued and outstanding................. -- -- -- Common stock: $.01 par value; 50,000,000 shares authorized; 2,300,000 shares issued and outstanding at December 31, 1997; 9,204,632 shares issued and outstanding at September 30, 1998....................... -- 23 92 Additional paid-in capital................................ -- 5,105 65,944 Stockholder notes receivable.............................. -- (82) -- Deferred stock compensation............................... -- -- (499) Accumulated deficit....................................... -- (5,597) (5,715) ------- ------- -------- Total stockholders' equity (deficit)................ -- (551) 59,822 ------- ------- -------- $15,291 $18,880 $114,495 ======= ======= ========
See accompanying notes. F-16 85 WASTE CONNECTIONS, INC. AND PREDECESSORS STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (AUDITED) AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
WASTE PREDECESSORS CONNECTIONS, INC. COMBINED CONSOLIDATED PERIOD WASTE NINE MONTHS FROM INCEPTION CONNECTIONS, INC. ENDED (SEPTEMBER 9, 1997) CONSOLIDATED NINE SEPTEMBER 30, THROUGH MONTHS ENDED 1997 (NOTE 1) DECEMBER 31, 1997 SEPTEMBER 30, 1998 ------------- ------------------- ------------------ (UNAUDITED) - -------------------------------------------------- Revenues.......................................... $18,114 $ 6,237 $ 35,336 Operating expenses: Cost of operations.............................. 14,753 4,703 24,007 Selling, general and administrative............. 3,009 619 3,518 Depreciation and amortization................... 1,083 354 2,693 Start-up and integration........................ -- 493 -- Stock compensation.............................. -- 4,395 561 ------- ---------- ---------- Income (loss) from operations..................... (731) (4,327) 4,557 Interest expense.................................. (456) (1,035) (1,427) Other income (expense), net....................... 14 (36) -- ------- ---------- ---------- Income (loss) before income taxes................. (1,173) (5,398) 3,130 Income tax (provision) benefit.................... -- 332 (1,513) ------- ---------- ---------- Income (loss) before extraordinary item........... $(1,173) (5,066) 1,617 ======= Extraordinary item -- early extinguishment of debt, net of tax benefit of $165............. -- (815) ---------- ---------- Net income (loss)................................. $ (5,066) $ 802 ========== ========== Redeemable convertible preferred stock accretion....................................... (531) (917) ---------- ---------- Net loss applicable to common stockholders........ $ (5,597) $ (115) ========== ========== Basic loss per common share: Income (loss) before extraordinary item......... $ (2.99) $ 0.13 Extraordinary item.............................. -- (0.15) ---------- ---------- Net loss per common share....................... $ (2.99) $ (0.02) ========== ========== Diluted earnings per common share: Income before extraordinary item................ $ (2.99) $ 0.09 Extraordinary item.............................. -- (0.11) ---------- ---------- Net loss per common share....................... $ (2.99) $ (0.02) ========== ========== Shares used in calculating basic net loss per share........................................... 1,872,567 5,476,532 ========== ========== Shares used in calculating diluted net loss per share........................................... 1,872,567 7,438,658 ========== ========== Pro forma basic net income (loss) per share....... $ (1.16) $ 0.11 ========== ========== Shares used in calculating pro forma basic net income (loss) per share......................... 4,372,565 7,117,557 ========== ========== Pro forma diluted net income (loss) per share..... $ 0.09 ========== Shares used in calculating pro forma diluted net income (loss) per share......................... 8,702,393 - -------------------------------------------------- ==========
See accompanying notes. F-17 86 WASTE CONNECTIONS, INC. AND PREDECESSORS STATEMENTS OF OPERATIONS (CONTINUED) YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
PREDECESSORS ------------------------------------ THE DISPOSAL GROUP COMBINED PREDECESSORS PERIOD FROM COMBINED PERIOD JANUARY 1, 1996 ENDED THROUGH DECEMBER 31, 1996 JULY 31, 1996 (NOTE 1) --------------- ----------------- 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) ====== =======
See accompanying notes. F-18 87 WASTE CONNECTIONS, INC. AND PREDECESSORS STATEMENTS OF OPERATIONS (CONTINUED) YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS)
PREDECESSORS ---------------------------------------------------- THE DISPOSAL FIBRES GROUP INTERNATIONAL, INC. PREDECESSORS COMBINED PERIOD FROM ONE MONTH YEAR ENDED JANUARY 1, 1995 ENDED DECEMBER 31, THROUGH DECEMBER 31, 1995 NOVEMBER 30, 1995 1995(NOTE 1) ------------ -------------------- ------------ Revenues.............................. $19,660 $7,340 $595 Operating expenses: Cost of operations.................. 16,393 5,653 527 Selling, general and administrative................... 3,312 823 72 Depreciation and amortization....... 628 715 74 ------- ------ ---- Income (loss) from operations......... (673) 149 (78) Interest expense...................... (206) (162) (1) Other income, net..................... -- 98 5 ------- ------ ---- Income (loss) before income taxes..... (879) 85 (74) Income tax (provision) benefit........ 298 (29) -- ------- ------ ---- Net income (loss)..................... $ (581) $ 56 $(74) ======= ====== ====
See accompanying notes. F-19 88 WASTE CONNECTIONS, INC. AND PREDECESSORS CONSOLIDATED STATEMENT OF REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) PERIOD FROM INCEPTION (SEPTEMBER 9, 1997) THROUGH DECEMBER 31, 1997 (AUDITED) AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
WASTE CONNECTIONS, INC. CONSOLIDATED --------------------------------------------- REDEEMABLE STOCKHOLDERS' EQUITY (DEFICIT) CONVERTIBLE REDEEMABLE --------------------------------------------- PREFERRED STOCK COMMON STOCK COMMON STOCK ADDITIONAL STOCKHOLDER -------------------- -------------------- ------------------ PAID-IN NOTES SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE ---------- ------- ---------- ------- --------- ------ ---------- ----------- Balances at inception........ -- $ -- -- $ -- -- -- $ -- $ -- Sale of redeemable convertible preferred stock....................... 2,499,998 6,992 -- -- -- -- -- -- Sale of common stock......... -- -- -- -- 2,300,000 23 4,395 -- Issuance of common stock warrants.................... -- -- -- -- -- -- 710 -- Issuance of stockholder notes receivable.................. -- -- -- -- -- -- -- (82) Accretion of redeemable convertible preferred stock....................... -- 531 -- -- -- -- -- -- Net loss..................... -- -- -- -- -- -- -- -- ---------- ------- ---------- ------- --------- --- ------- ---- Balances at December 31, 1997........................ 2,499,998 7,523 -- -- 2,300,000 23 5,105 (82) Exercise of warrants (unaudited)................. -- -- -- -- 50,000 -- 140 -- Payment of stockholder notes receivable.................. -- -- -- -- -- -- -- 82 Issuance of redeemable common stock (unaudited)........... -- -- 1,000,000 7,500 -- -- -- -- Issuance of common stock warrants (unaudited)........ -- -- -- -- -- -- 2,388 -- Accretion of redeemable convertible preferred stock (unaudited)................. -- 917 -- -- -- -- -- -- Deferred stock compensation associated with stock options (unaudited)......... -- -- -- -- -- -- 821 -- Amortization of deferred stock compensation (unaudited)................. -- -- -- -- -- -- -- -- Common stock sold in connection with IPO (unaudited)................. -- -- -- -- 2,300,000 23 23,963 -- Issuance of common stock (unaudited)................. -- -- -- -- 1,054,634 11 17,783 -- Preferred stock dividend (unaudited)................. -- (161) -- -- -- -- -- -- Conversion of redeemable preferred stock (unaudited)................. (2,499,998) (8,279) -- -- 2,499,998 25 8,254 -- Conversion of redeemable common stock (unaudited).... (1,000,000) (7,500) 1,000,000 10 7,490 -- Net income (unaudited)....... -- -- -- -- -- -- -- -- ---------- ------- ---------- ------- --------- --- ------- ---- Balances at September 30, 1998 (unaudited)............ -- $ -- -- $ -- 9,204,632 $92 $65,944 $ -- ========== ======= ========== ======= ========= === ======= ==== WASTE CONNECTIONS, INC. CONSOLIDATED ------------------------------------ STOCKHOLDERS' EQUITY (DEFICIT) ------------------------------------ DEFERRED STOCK ACCUMULATED COMPENSATION DEFICIT TOTAL ------------ ----------- ------- Balances at inception........ $ -- $ -- $ -- Sale of redeemable convertible preferred stock....................... -- -- -- Sale of common stock......... -- -- 4,418 Issuance of common stock warrants.................... -- -- 710 Issuance of stockholder notes receivable.................. -- -- (82) Accretion of redeemable convertible preferred stock....................... -- (531) (531) Net loss..................... -- (5,066) (5,066) ----- ------- ------- Balances at December 31, 1997........................ -- (5,597) (551) Exercise of warrants (unaudited)................. -- -- 140 Payment of stockholder notes receivable.................. -- -- 82 Issuance of redeemable common stock (unaudited)........... -- -- -- Issuance of common stock warrants (unaudited)........ -- -- 2,388 Accretion of redeemable convertible preferred stock (unaudited)................. -- (917) (917) Deferred stock compensation associated with stock options (unaudited)......... (821) -- -- Amortization of deferred stock compensation (unaudited)................. 322 -- 322 Common stock sold in connection with IPO (unaudited)................. -- -- 23,986 Issuance of common stock (unaudited)................. -- -- 17,794 Preferred stock dividend (unaudited)................. -- -- -- Conversion of redeemable preferred stock (unaudited)................. -- -- 8,279 Conversion of redeemable common stock (unaudited).... -- -- 7,500 Net income (unaudited)....... -- 802 802 ----- ------- ------- Balances at September 30, 1998 (unaudited)............ $(499) $(5,715) $59,822 ===== ======= =======
See accompanying notes. F-20 89 WASTE CONNECTIONS, INC. AND PREDECESSORS STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 1997 (AUDITED) AND NINE MONTHS ENDED SEPTEMBER 30, 1998 (UNAUDITED) (IN THOUSANDS)
WASTE CONNECTIONS, INC. PREDECESSORS CONSOLIDATED COMBINED PERIOD FROM NINE MONTHS INCEPTION WASTE CONNECTIONS, INC. ENDED (SEPTEMBER 9, 1997) CONSOLIDATED NINE SEPTEMBER 30, THROUGH MONTHS ENDED 1997 (NOTE 1) DECEMBER 31, 1997 SEPTEMBER 30, 1998 ------------- ----------------------- ----------------------- (UNAUDITED) - ------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $(1,173) $ (5,066) $ 802 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain on sale of assets.................................. (4) -- -- Depreciation and amortization........................... 1,083 354 2,693 Deferred income taxes................................... -- (369) -- Amortization of debt issuance costs, debt guarantee fees and accretion of discount on long-term debt........... -- 860 176 Stock compensation...................................... -- 4,395 562 Extraordinary item -- extinguishment of debt............ -- -- 981 Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable, net.............................. (604) (1,021) (989) Prepaid expenses and other current assets............. (74) (51) (249) Accounts payable...................................... (221) 2,607 492 Deferred revenue...................................... (137) 169 326 Accrued liabilities................................... (450) 801 (178) Accrued losses on acquired contracts.................. -- (65) (241) ------- ---------- -------- Net cash provided by (used in) operating activities....... (1,580) 2,614 4,375 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment.............. 188 -- 58 Payments for acquisitions, net of cash acquired........... -- (11,493) (44,185) Prepaid acquisition costs................................. -- (20) -- Capital expenditures for property and equipment........... (735) (264) (2,068) Decrease (increase) in other assets....................... 22 (19) -- Proceeds from stockholder notes receivable................ -- -- 82 Issuance of stockholder notes receivable.................. -- (82) -- ------- ---------- -------- Net cash used in investing activities....................... (525) (11,878) (46,113) CASH FLOWS FROM FINANCING ACTIVITIES: Net intercompany balance.................................. 2,142 -- -- Proceeds from short-term borrowings....................... -- 600 -- Proceeds from long-term debt.............................. -- 5,500 57,703 Principal payments on notes payable....................... (38) (2,724) (407) Principal payments on long-term debt...................... -- (157) (38,653) Proceeds from sale of redeemable convertible preferred stock................................................... -- 6,992 -- Proceeds from sale of common stock........................ -- 23 24,126 Payment of preferred stock dividend....................... -- -- (161) Debt issuance costs....................................... -- (150) (600) ------- ---------- -------- Net cash provided by financing activities................... 2,104 10,084 42,008 ------- ---------- -------- Net increase (decrease) in cash............................. (1) 820 270 Cash at beginning of period................................. 102 -- 820 ------- ---------- -------- Cash at end of period....................................... $ 101 $ 820 $ 1,090 ======= ========== ======== SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH TRANSACTIONS: Cash paid for income taxes................................ $ -- $ -- $ 887 ======= ========== ======== Cash paid for interest.................................... $ -- $ 183 $ 791 ======= ========== ======== Redeemable convertible preferred stock accretion.......... $ 531 $ 917 ========== ======== In connection with the BFI related acquisitions (Note 2), the Company assumed liabilities as follows: Fair value of assets acquired........................... $ 17,040 $ 91,103 Cash paid for acquisitions (including acquisition costs)................................................ (11,493) (44,185) ---------- -------- Liabilities assumed, stock and notes payable to seller................................................ $ 5,547 $ 46,918 ========== ========
See accompanying notes. F-21 90 WASTE CONNECTIONS, INC. AND PREDECESSORS STATEMENTS OF CASH FLOWS (CONTINUED) YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
PREDECESSORS ------------------------------- THE DISPOSAL GROUP COMBINED PREDECESSORS PERIOD FROM COMBINED JANUARY 1, PERIOD ENDED 1996 THROUGH DECEMBER 31, JULY 31, 1996 1996 (NOTE 1) --------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $2,258 $ (981) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization.......................... 324 962 Deferred income taxes.................................. 298 -- Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable, net............................. 1,201 (1,992) Prepaid expenses and other current assets............ (2) (104) Accounts payable..................................... (45) 713 Deferred revenue..................................... (522) 421 Accrued liabilities.................................. (987) 428 ------ ------ Net cash provided by (used in) operating activities....... 2,525 (553) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment.............. -- 117 Capital expenditures for property and equipment........... (7) (282) Decrease in other assets.................................. -- 33 ------ ------ Net cash used in investing activities....................... (7) (132) CASH FLOWS FROM FINANCING ACTIVITIES: Net intercompany balance.................................. -- 642 Proceeds from long-term debt.............................. 142 -- Principal payments on long-term debt...................... (427) -- Principal payments on notes payable....................... -- (39) ------ ------ Net cash provided by (used in) financing activities......... (285) 603 ------ ------ Net increase (decrease) in cash............................. 2,233 (82) Cash at beginning of period................................. 961 184 ------ ------ Cash at end of period....................................... $3,194 $ 102 ====== ======
See accompanying notes. F-22 91 WASTE CONNECTIONS, INC. AND PREDECESSORS STATEMENTS OF CASH FLOWS (CONTINUED) YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS)
PREDECESSORS ----------------------------------- THE DISPOSAL FIBRES GROUP INTERNATIONAL, INC. PREDECESSORS COMBINED PERIOD FROM ONE MONTH YEAR ENDED JANUARY 1, 1995 ENDED DECEMBER 31, THROUGH DECEMBER 31, 1995 NOVEMBER 30, 1995 1995 (NOTE 1) ------------ ------------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................... $ (581) $ 56 $ (74) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Loss on sale of assets................. 18 -- -- Depreciation and amortization.......... 628 778 74 Deferred income taxes.................. (298) -- -- Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable, net............. 592 59 10 Prepaid expenses and other current assets............................ (18) -- (30) Accounts payable..................... (49) 53 (30) Deferred revenue..................... 65 30 (26) Accrued liabilities.................. 2,218 47 20 ------- ----- ----- Net cash provided by (used in) operating activities............................. 2,575 1,023 (56) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for property and equipment.............................. (87) (827) -- Decrease in other assets.................. -- 3 10 ------- ----- ----- Net cash provided by (used in) investing activities................................ (87) (824) 10 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt.............. 306 -- -- Principal payments on long-term debt...... (2,037) (288) -- Principal payments on notes payable....... -- -- (2) ------- ----- ----- Net cash used in financing activities..... (1,731) (288) (2) ------- ----- ----- Net increase (decrease) in cash............. 757 (89) (48) Cash at beginning of period................. 204 321 232 ------- ----- ----- Cash at end of period....................... $ 961 $ 232 $ 184 ======= ===== =====
See accompanying notes. F-23 92 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Waste Connections, Inc. ("WCI" or "the Company") was incorporated in Delaware on September 9, 1997 and commenced its operations on October 1, 1997 through the purchase of certain solid waste operations in Washington, as more fully described below and in Note 2. The Company is a regional, integrated, non-hazardous solid waste services company that provides collection, transfer, disposal and recycling services to commercial, industrial and residential customers. Basis of Presentation The consolidated financial statements of the Company include the accounts of WCI and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The entities the Company acquired in September 1997 from Browning-Ferris Industries, Inc. ("BFI") are collectively referred to herein as the Company's predecessors. BFI acquired the predecessor operations at various times during 1995 and 1996, and prior to being acquired by BFI, the predecessors operated as separate stand-alone businesses. During the periods in which the Company's predecessors operated as wholly owned subsidiaries of BFI, they maintained intercompany accounts with BFI for recording intercompany charges for costs and expenses, intercompany purchases of equipment and additions under capital leases and intercompany transfers of cash, among other transactions. It is not feasible to ascertain the amount of related interest expense that would have been recorded in the historical financial statements had the predecessors been operated as stand-alone entities. Charges for interest expense were allocated to the Company's predecessors by BFI as disclosed in the accompanying Statement of Operations. The interest expense allocations from BFI are based on formulas that do not necessarily correspond with the balances in the related intercompany accounts. Moreover, the financial position and results of operations of the predecessors during this period may not necessarily be indicative of the financial position or results of operations that would have been realized had the predecessors been operated as stand-alone entities. For the periods in which the predecessors operated as wholly owned subsidiaries of BFI, the statements of operations include amounts allocated by BFI to the predecessors for selling, general and administrative expenses based on certain allocation methodologies which the Company's management believes are reasonable. During the periods prior to their acquisition by BFI, the Company's predecessors operated as separate stand-alone businesses. The acquisitions of the predecessors by BFI were accounted for using the purchase method of accounting, and the respective purchase prices were allocated to the fair values of the assets acquired and liabilities assumed. Similarly, the Company's acquisitions of the predecessors from BFI in September 1997 were accounted for using the purchase method of accounting, and the purchase price was allocated to the fair value of the assets acquired and liabilities assumed. Consequently, the amounts of depreciation and amortization included in the statements of operations for the periods presented reflect the changes in basis of the underlying assets that were made as a result of the changes in ownership that occurred during the periods presented. In addition, because the predecessor companies operated independently and were not under common control or management during these periods, and because different tax strategies F-24 93 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) may have influenced their results of operations, the data may not be comparable to or indicative of their operating results after their acquisition by BFI. Due to the manner in which BFI intercompany transactions were recorded as described above, it is not feasible to present a detailed analysis of transactions reflected in the net intercompany balance with BFI. The change in the predecessors' combined intercompany balance with BFI (net of income (loss) and initial investment in the acquired companies) was $642 and $2,142 during the period ended December 31, 1996 and the nine months ended September 30, 1997, respectively. The accompanying statements of operations and cash flows for the Company and its predecessors for the years ended December 31, 1995, 1996 and 1997 are comprised of the following entities for the periods indicated: YEAR ENDED DECEMBER 31, 1995: The Disposal Group Combined Year ended December 31, 1995 Fibres International, Inc. January 1, 1995 through November 30, 1995 (BFI acquisition date) Predecessors One month ended December 31, 1995 (represents the results of operations of Fibres International, Inc. subsequent to the BFI acquisition date) YEAR ENDED DECEMBER 31, 1996: The Disposal Group Combined January 1, 1996 through July 31, 1996 (BFI acquisition date) Predecessors Combined Period ended December 31, 1996 (represents the combined results of operations of The Disposal Group subsequent to the BFI acquisition date and the operations for the year ended December 31, 1996 of Fibres International, Inc. which was acquired by BFI in 1995) YEAR ENDED DECEMBER 31, 1997: Predecessors Combined Nine months ended September 30, 1997 (represents the combined results of operations for the nine month period of the entities acquired by BFI in 1995 and 1996 described above) Waste Connections, Inc. Period from inception (September 9, 1997) through December 31, 1997
The Disposal Group Combined consists of three entities that were under common control prior to their acquisition by BFI: Diamond Fab and Welding Service, Inc., Buchmann Sanitary Service, Inc., and The Disposal Group. F-25 94 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) Interim Financial Information The unaudited interim consolidated financial statements as of September 30, 1998 and for the nine months ended September 30, 1998 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. \ Common Stock Valuation In connection with the Company's organization and initial capitalization in September 1997, the Company sold 2.3 million shares of common stock for $.01 per share to certain directors, consultants, and management. As a result, the Company recorded a non-recurring, non-cash stock compensation charge of $4,395 in the accompanying consolidated statement of operations, representing the difference between the amount paid for the shares and the estimated fair value of the shares of $1.92 per share on the date of sale. The estimated fair value of the common shares was determined by the Company based on an independent valuation of the common stock. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risks consist primarily of accounts receivable. Credit risk on accounts receivable is minimized as a result of the large and diverse nature of the Company's customer base. The Company maintains an allowance for losses based on the expected collectibility of accounts receivable. Credit losses have been within management's expectations. Property and Equipment Property and equipment are stated at cost. Improvements or betterments which significantly extend the life of an asset are capitalized. Expenditures for maintenance and repair costs are charged to operations as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal. Gains and losses resulting from property disposals are included in other income (expense). Depreciation is computed using the straight-line method over the estimated useful lives of the assets. F-26 95 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) The estimated useful lives are as follows: Machinery and equipment........ 3 - 10 years Rolling stock.................. 10 years Containers..................... 5 - 12 years Furniture and fixtures......... 3 - 6 years
In connection with the BFI acquisitions (Note 2) the Company acquired certain used property and equipment. This used property and equipment is being depreciated using the straight-line method over its estimated remaining useful lives, which range from one to nine years. Capitalized landfill costs include expenditures for land and related airspace, permitting costs and preparation costs. Landfill permitting and preparation costs represent only direct costs related to those activities, including legal, engineering and construction. Interest is capitalized on landfill permitting and construction projects and other projects under development while the assets are undergoing activities to ready them for their intended use. The interest capitalization rate is based on the Company's weighted average cost of indebtedness. No interest was capitalized during the nine months ended September 30, 1998. Landfill permitting, acquisition and preparation costs, excluding the estimated residual value of land, are amortized as permitted airspace of the landfill is consumed. Landfill preparation costs include the costs of construction associated with excavation, liners, site berms and the installation of leak detection and leachate collection systems. In determining the amortization rate for a landfill, preparation costs include the total estimated costs to complete construction of the landfills' permitted capacity. Units-of-production amortization rates are determined annually for the Company's operating landfill. The rates are based on estimates provided by the Company's outside engineers and consider the information provided by surveys which are performed at least annually. Goodwill Goodwill represents the excess of the purchase price over the fair value of the net assets of the acquired entities (Note 2), and is amortized on a straight-line basis over the period of expected benefit of 40 years. Accumulated amortization amounted to $279 and $64 as of December 31, 1996 and 1997, respectively. The Company continually evaluates the value and future benefits of its intangibles. The Company assesses recoverability from future operations using income from operations of the related acquired business as a measure. Under this approach, the carrying value would be reduced if it becomes probable that the Company's best estimate for expected future cash flows of the related business would be less than the carrying amount of the intangible over the remaining amortization period. For the period ending December 31, 1997, there were no adjustments to the carrying amounts of intangibles resulting from these evaluations. Fair Value of Financial Instruments The carrying values of the line of credit (Note 5) and other long-term debt (Note 6) approximate their fair values as of December 31, 1997 and September 30, 1998, based on current incremental borrowing rates for similar types of borrowing arrangements. F-27 96 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) Income Taxes The Company, The Disposal Group, and Fibres International, Inc., use the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. During the periods in which the predecessors were owned by BFI, their operations were included in the consolidated income tax returns of BFI, and no allocations of income taxes were reflected in the historical statements of operations. For purposes of the combined predecessor financial statements, current and deferred income taxes have been provided on a separate income tax return basis. Revenue Recognition Revenues are recognized as services are provided. Certain customers are billed in advance and, accordingly, recognition of the related revenues is deferred until the services are provided. Start-Up and Integration Expenses During the period from inception (September 9, 1997) through December 31, 1997, the Company incurred certain start-up expenses relating to the formation of the Company, primarily for legal and other professional services, and the costs associated with recruiting the Company's initial management team. In addition, the Company incurred certain integration expenses relating to the Acquisitions (Note 2). These start-up and integration expenses have been charged to operations as incurred. As described in Note 9, the Company issued warrants during the period from inception (September 9, 1997) through December 31, 1997 to a bank in connection with a line of credit and term loan payable, and to certain directors and stockholders of the Company in connection with their guarantee of certain of the Company's debt obligations. The fair value of these warrants is being amortized into interest expense. During the period from inception (September 9, 1997) through December 31, 1997, $710 relating to these warrants is included in interest expense in the accompanying statement of operations of the Company. Stock-Based Compensation As permitted under the provisions of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation" ("SFAS 123"), the Company has elected to account for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board's Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). Under the intrinsic value method, compensation cost is the excess, if any, of the quoted market price or fair value of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. None of the predecessor entities awarded stock-based compensation to employees. Consequently, the related disclosures in the accompanying financial statements and notes relate solely to the Company. F-28 97 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) Per Share Information In 1997, the Financial Accounting Standards Board ("FASB")issued Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts have been presented on the basis set forth in Statement 128 (Note 11). Earnings per share data have not been presented for the predecessor operations because such data is not meaningful. Pro-forma basic net income (loss) per share is computed by dividing the net income (loss) by the sum of the weighted average number of shares of common stock outstanding and common shares issuable upon the conversion of all outstanding shares of Redeemable Convertible Preferred Stock (Note 8) as though such conversion occurred at the beginning of the period. Pro-forma diluted net income per share is computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding, common shares issuable upon conversion of all outstanding shares of Redeemable Convertible Preferred Stock (Note 8) as though such conversion occurred at the beginning of the period, and common shares issuable upon the exercise of outstanding common stock options and warrants (calculated using the treasury stock method.) Closure and Post-Closure Costs The Company does not accrue for closure and post-closure costs related to the Fairmead Landfill it operated in Madera County, California. Madera County as required by state law, has established a special fund to pay such liabilities. On June 5, 1998, the Company acquired the stock of Red Carpet Landfill, Inc. in Oklahoma. Red Carpet is engaged in landfilling of municipal solid waste and other acceptable waste streams in the county of Major, Oklahoma. As a result of the acquisition, the Company is required to accrue for closure and post-closure costs related to the landfill. Accrued closure and post-closure costs include the current and non-current portion of accruals associated with obligations for closure and post-closure of the landfill. The Company, based as input from its outside engineers, estimates its future closure and post-closure monitoring and maintenance costs for solid waste landfills based on its interpretation of the technical standards of the U.S. Environmental Protection Agency's Subtitle D regulations and the air emissions standards under the Clean Air Act as they are being applied on a state-by-state basis. Closure and post-closure monitoring and maintenance costs represent the costs related to cash expenditures yet to be incurred when a landfill facility ceases to accept waste and closes. Accruals for closure and post-closure monitoring and maintenance requirements in the U.S. consider final capping of the site, site inspection, groundwater monitoring, leachate management, methane gas control and recovery, and operating and maintenance costs to be incurred during the period after the facility closes. Certain of these environmental costs, principally capping and methane gas control costs, are also incurred during the operating life of the site in accordance with the landfill operation requirements of Subtitle D and the air emissions standards. Reviews of the future requirements for closure and post-closure monitoring and maintenance costs for the Company's operating landfills are performed by the Company's consulting engineers at least annually and are the basis upon which the Company's estimates of F-29 98 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) these future costs and the related accrual rates are revised. The Company provides accruals for these estimated costs as the remaining permitted airspace of such facilities is consumed. As of September 30, 1998, the Company estimates that total closure and post closure costs relating to the Red Carpet Landfill will be approximately $929,000, of which approximately $491,000 has been accrued as of September 30, 1998 and included in other long-term liabilities in the accompanying balance sheet. The states in which the Company operates its landfills require a specified portion of these accrued closure and post-closure obligations to be funded at any point in time. New Accounting Pronouncements In February 1997, the FASB issued Statement No. 129, Disclosure of Information about Capital Structure, which is effective for financial statements for periods ending after December 15, 1997. This statement establishes standards for disclosing information about an entity's capital structure. Adoption of Statement 129 will have no impact on the Company's existing disclosures. In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income. Statement 130 establishes standards for reporting and disclosure of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. Statement 130, which is effective for fiscal years beginning after December 15, 1997, requires reclassification of financial statements for earlier periods to be provided for comparative purposes. The Company anticipates that implementing the provisions of Statement 130 will not have a significant impact on the Company's existing disclosures. In June 1997, the FASB issued Statement No. 131, Disclosure About Segments of an Enterprise and Related Information. Statement 131 establishes standards for the way that public business enterprises report information about operating segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Statement 131 is effective for fiscal years beginning after December 15, 1997. In the initial year of application, comparative information for earlier years must be restated. The Company anticipates that implementing the provisions of Statement 131 will not have a significant impact on the Company's existing disclosures. 2. ACQUISITIONS Browning-Ferris Industries Related On September 29, 1997, the Company purchased all of the outstanding stock of Browning-Ferris Industries of Washington, Inc. and Fibres International, Inc. from BFI (collectively the "Acquisitions"). The total purchase price for the Acquisitions was approximately $15,036, comprised principally of $11,493 in cash and promissory notes payable to BFI totaling $3,543. Of the combined $15,036 purchase price, $9,578 was recorded as goodwill and $150 was assigned to a non- competition agreement. The Acquisitions were accounted for in accordance with the purchase method of accounting and, accordingly, the net assets acquired were included in the Company's consolidated balance sheet based upon their estimated fair values on the date of the Acquisitions. The Company's consolidated statement of operations includes the revenues and expenses of the acquired businesses after the effective date of the transaction. F-30 99 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) Certain items affecting the purchase price and the allocation are preliminary. A summary of the preliminary purchase price allocation as of December 31, 1997 for the Acquisitions is as follows: Acquired assets: Accounts receivable................................... $ 2,919 Prepaid expenses and other current assets............. 287 Property and equipment................................ 4,106 Goodwill.............................................. 9,578 Non-competition agreement............................. 150 Assumed liabilities: Deferred revenue...................................... (428) Accounts payable and accrued liabilities.............. (26) Accrued losses on acquired contracts.................. (1,018) Deferred income taxes................................. (532) ------- $15,036 =======
During the nine months ended September 30, 1998, the Company increased the accrual for losses on acquired contracts and goodwill by approximately $291 to reflect revised estimates of additional losses on the acquired contracts that are expected to be incurred. Madera Disposal Systems, Inc. On February 23, 1998, the Company purchased all of the outstanding stock of Madera Disposal Systems, Inc. ("Madera") effective February 1, 1998, pursuant to a Stock Purchase Agreement (the "Agreement"). The Agreement requires the Company to pay to the shareholders of Madera $9,579 in cash (a portion of which was used to repay Madera outstanding debt on the date of acquisition and which is subject to other adjustments as specified in the Agreement), 1,000,000 shares of the Company's common stock with a fair market value of $7,500 (the "Stock"), warrants to purchase 200,000 shares of the Company's common stock at $4.00 per share with a fair market value of $954 (the "Warrants") and other contingent consideration. The Agreement provides that in the event the Company does not complete an initial public offering ("IPO") of its stock by March 31, 1999, with aggregate gross proceeds of at least $5,000, the Company may be required to repurchase the Stock and the Warrants from the former shareholders of Madera for $2,800 in cash if certain other conditions are also met. The Madera acquisition has been accounted for in accordance with the purchase method of accounting. The total purchase price and the excess of the purchase price over the fair value of the net assets acquired in the Madera acquisition were approximately $18,213 and $14,580, respectively. F-31 100 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) Certain items affecting the purchase price and the allocation are preliminary. A summary of the preliminary purchase price allocation for the Madera acquisition is as follows: Acquired assets: Cash...................................................... $ 1,388 Accounts receivable....................................... 905 Prepaid expenses and other current assets................. 141 Property and equipment.................................... 2,100 Long-term franchise agreements and contracts.............. 725 Goodwill.................................................. 14,580 Assumed liabilities: Accounts payable and accrued liabilities.................. (1,120) Accrued losses on acquired contracts...................... (306) Notes payable............................................. (200) ------- $18,213 =======
Arrow Sanitary Service, Inc. On June 17, 1998, the Company purchased all of the outstanding stock of Arrow Sanitary Service, Inc. ("Arrow") effective June 1, 1998, pursuant to a Stock Purchase Agreement (the "Arrow Agreement"). The Arrow Agreement required the Company to pay the shareholders of Arrow $7,944 in cash (a portion of which was used to repay the Arrow outstanding debt on the date of the acquisition and a portion of which is subject to other adjustments as specified in the Arrow Agreement), 213,750 shares of the Company's common stock with an estimated fair market value of $3,045. The Arrow acquisition has been accounted for in accordance with the purchase method of accounting. The total purchase price and the excess of the purchase price over the fair value of the net assets acquired in the Arrow acquisition were approximately $11,255 and $10,528, respectively. Certain items affecting the purchase price and the allocation are preliminary. A summary of the preliminary purchase price allocation for the Arrow acquisition is as follows: Acquired assets: Accounts receivable....................................... $ 575 Prepaid expenses and other current assets................. 10 Property and equipment.................................... 313 Covenant not to compete................................... 50 Goodwill.................................................. 10,528 Assumed liabilities: Accounts payable and accrued liabilities.................. (221) ------- $11,255 =======
F-32 101 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) Predecessor Acquisitions As described in Note 1, BFI acquired for cash and debt Fibres International, Inc. on November 30, 1995 and The Disposal Group Combined on July 31, 1996 in transactions that were accounted for as purchases. Accordingly, the respective purchase prices were allocated to the fair values of the assets acquired and liabilities assumed. The following presents purchase price information for these acquisitions:
THE FIBRES DISPOSAL INTERNATIONAL, GROUP INC. COMBINED -------------- --------- Tangible assets acquired................... $5,076 $2,076 Goodwill................................... 4,187 2,671 Assumed liabilities........................ (969) (33) ------ ------ $8,294 $4,714 ====== ======
3. PROPERTY AND EQUIPMENT Property and equipment as of December 31, 1996 and 1997 and September 30, 1998 consists of the following:
PREDECESSORS COMPANY COMBINED ---------------------------- DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1996 1997 1998 ------------ ------------ ------------- (UNAUDITED) Land and buildings........... $2,314 $ -- $ 3,737 Machinery and equipment...... 146 60 1,461 Rolling stock................ 2,068 2,353 8,165 Containers................... 1,084 1,995 6,408 Furniture and fixtures....... 137 67 851 ------ ------ ------- 5,749 4,475 20,622 Less accumulated depreciation............... (680) (290) (2,184) ------ ------ ------- $5,069 $4,185 $18,438 ====== ====== =======
Combined depreciation expense for the predecessor operations was $1,304, $1,101, and $789 for the years ended December 31, 1995 and 1996, and the nine months ended September 30, 1997, respectively. The Company's depreciation expense for the period from inception (September 9, 1997) through December 31, 1997 was $290. F-33 102 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) 4. OTHER ASSETS Other assets as of December 31, 1996 and 1997 and September 30, 1998 consist of the following:
PREDECESSORS COMPANY COMBINED ---------------------------- DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1996 1997 1998 ------------ ------------ ------------- (UNAUDITED) Long-term franchise agreements and contracts.......................... $ -- $ -- $1,048 Non-competition agreement, net....... -- 142 585 Restricted Cash...................... -- -- 1,895 Other................................ 369 27 326 ---- ---- ------ $369 $169 $3,854 ==== ==== ======
Related to certain of the Acquisitions (Note 2), the Company acquired certain long-term franchise agreements and contracts and entered into a non-competition agreement. The estimated fair value of the acquired long-term franchise agreements and contracts was determined by management based on the discounted net cash flows associated with the agreements and contracts. The amounts assigned to the franchise agreements and contracts is being amortized on a straight-line method over the remaining term of the related agreements (11 years). Accumulated amortization amounted to $62 as of September 30, 1998. The estimated fair value of the non-competition agreement was determined by management based on the discounted adjusted operating income stream that would have otherwise been subject to competition. The amount assigned to the non- competition agreement is being amortized on a straight-line method over the term of the agreement (five years). Accumulated amortization amounted to $8 as of December 31, 1997 and $36 as of September 30, 1998. 5. LINE OF CREDIT On September 30, 1997, the Company obtained a revolving line of credit (the "Line") from a bank (the "Bank"). The maximum amount available under the terms of the Line was $2,000 and borrowings bore interest based on the prime rate plus 1.5% (aggregating 10.0% at December 31, 1997). Interest was payable monthly and the Line was to expire on September 29, 1998. Borrowings under the Line were secured by substantially all of the Company's assets and were subordinate to the notes payable to BFI (Note 6) with respect to certain specified assets. The Line was personally guaranteed by certain officers and stockholders of the Company (Note 9). As of December 31, 1997, $600 was outstanding under the Line. Management used borrowings from a new credit facility obtained in January 1998 (Note 12) to pay off amounts outstanding under the Line, and as such, these amounts have been included in long-term debt as of December 31, 1997. F-34 103 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) 6. OTHER LONG-TERM DEBT Other long-term debt consists of the following as of December 31, 1997: Term loan payable to the Bank bearing interest at the Bank's prime rate plus 2.0% (aggregating 10.5% as of December 31, 1997); monthly principal payments of $76 plus interest beginning October 1997 through August 2002; all outstanding principal and interest are due September 2002; secured by substantially all of the Company's assets; subordinate to the notes payable to BFI with respect to certain specified assets.................................. $5,343 Note payable to BFI bearing interest at 6.0%; all outstanding principal and interest are due December 1997; secured by substantially all of the Company's accounts receivable................................................ 319 Note payable to BFI bearing interest at 10.0%; quarterly payments of interest beginning December 1997; all outstanding principal and interest are due March 1998; secured by substantially all of WCII's assets............. 500 ------ $6,162 ======
The term loan payable to the Bank and the notes payable to BFI were personally guaranteed by certain officers and stockholders of the Company (Note 9). As of December 31, 1997, aggregate contractual future principal payments by calendar year on long-term debt are due as follows: 1998................................ $1,736 1999................................ 917 2000................................ 917 2001................................ 917 2002................................ 917 Thereafter.......................... 758 ------ $6,162 ======
Management used borrowings from a new credit facility obtained in January 1998 (Note 12) to pay off all amounts outstanding under the term loan payable to the Bank and all notes payable to BFI, and as such, these amounts have been classified as long-term debt as of December 31, 1997. On June 16, 1998, the Company completed a $1.8 million tax-exempt bond financing for its Madera subsidiary. These funds will be used for specified capital expenditures and improvements, including installation of a landfill gas recovery system. The bonds issued mature on May 1, 2016 and bear interest at variable rates based on market conditions for California tax exempt bonds. The bonds are backed by a letter of credit issued by BankBoston under the Credit Facility for $1.8 million. Funds from the bond offering are held by a trustee until the capital expenditures are completed. The unused funds are classified as restricted cash and included in other assets on the accompanying consolidated balance sheet. The capital expenditures funded by the bonds are expected to be substantially completed by December 31, 1998. F-35 104 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) 7. COMMITMENTS AND CONTINGENCIES COMMITMENTS Leases The Company leases its facilities and certain equipment under non-cancelable operating leases for periods ranging from one to five years. Combined rent expense for the predecessor operations was $398, $412, and $441 for the years ended December 31, 1995 and 1996, and the nine months ended September 30, 1997, respectively. The Company's rent expense under operating leases during the period from inception (September 9, 1997) through December 31, 1997 amounted to $52. As of December 31, 1997, future minimum lease payments under these leases, by calendar year, are as follows: 1998................................. $206 1999................................. 196 2000................................. 192 2001................................. 140 2002................................. 10 ---- $744 ====
Performance Bonds and Letters of Credit Municipal solid waste collection contracts may require performance bonds or other means of financial assurance to secure contractual performance. As of December 31, 1997, the Company had provided customers and various regulatory authorities with bonds and letters of credit of approximately $800 to secure its obligations. The Company's new credit facility (Note 12) provides for the issuance of letters of credit in an amount up to $5,000, but any letters of credit issued reduce the availability of borrowings for acquisitions or other general corporate purposes. If the Company were unable to obtain surety bonds or letters of credit in sufficient amounts or at acceptable rates, it could be precluded from entering into additional municipal solid waste collection contracts or obtaining or retaining landfill operating permits. CONTINGENCIES Environmental Risks The Company is subject to liability for any environmental damage that its solid waste facilities may cause to neighboring landowners or residents, particularly as a result of the contamination of soil, groundwater or surface water, and especially drinking water, including damage resulting from conditions existing prior to the acquisition of such facilities by the Company. The Company may also be subject to liability for any off-site environmental contamination caused by pollutants or hazardous substances whose transportation, treatment or disposal was arranged by the Company or its predecessors. Any substantial liability for environmental damage incurred by the Company could have a material adverse effect on the Company's financial condition, results of operations or cash flows. As of December 31, 1997 and September 30, 1998, the Company is not aware of any such environmental liabilities. F-36 105 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) Legal Proceedings In the normal course of its business and as a result of the extensive governmental regulation of the solid waste industry, the Company may periodically become subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines on the Company or to revoke or deny renewal of an operating permit held by the Company. From time to time the Company may also be subject to actions brought by citizens' groups or adjacent landowners or residents in connection with the permitting and licensing of landfills and transfer stations, or alleging environmental damage or violations of the permits and licenses pursuant to which the Company operates. In addition, the Company may become party to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of the waste management business. However, as of December 31, 1997 and September 30, 1998 there is no current proceeding or litigation involving the Company that the Company believes will have a material adverse impact on the Company's business, financial condition, results of operations or cash flows. During the period from January 1, 1996 through July 31, 1996, The Disposal Group won a lawsuit against the city of Vancouver, Washington relating to the city's annexation of certain territories served by The Disposal Group. The Disposal Group received approximately $2.6 million from the lawsuit, which is included in other income in the accompanying statement of operations. Employees Approximately 55 drivers and mechanics at the Company's Vancouver, Washington operation are represented by the Teamsters Union, with which Browning-Ferris Industries of Washington, Inc., the Company's predecessor in Vancouver, entered a four-year collective bargaining agreement in January 1997. Approximately 11 drivers at Arrow Sanitary Services, Inc. ("Arrow"), a wholly owned subsidiary of the Company, are represented by the Teamsters Union, with which Arrow entered into a three-year collective bargaining agreement in March 1998. In addition, in July 1997, the employees at the Company's facility in Issaquah, Washington, adopted a measure to select a union to represent them in labor negotiations with management. The union and management operated under a one-year negotiating agreement, that ended July 27, 1998. Since July 27, 1998, negotiations have continued between the union and the Company, although the union is permitted to call a strike or call for arbitration of the outstanding issues. The employees at Issaquah have filed to decertify the union, and the union has filed a claim with the National Labor Relation Board to attempt to block the decertification. The Company is not aware of any other organizational efforts among its employees and believes that its relations with its employees are good. 8. REDEEMABLE CONVERTIBLE PREFERRED STOCK In September 1997, the Company received net proceeds of $6,992 from the sale of 2,499,998 shares of redeemable convertible preferred stock (the "Preferred Stock"). The Preferred Stock accrues cumulative dividends at the rate of $.098 per share annually. Accumulated and unpaid dividends on Preferred Stock amounted to $61 as of December 31, 1997. The Preferred Stock and F-37 106 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) any accumulated and unpaid dividends are convertible at the holder's option into shares of the Company's common stock at the calculated rate of $2.80 per share divided by the "Conversion Price" subject to certain anti-dilution adjustments. Each share was automatically converted into common stock immediately upon the closing of the Company's initial public offering of common stock at a Conversion Price of $2.80 per share. Each share of Preferred Stock is redeemable, at the holder's option, during the period from April 1, 1999 through October 1, 1999 for $4.20 per share plus any accumulated and unpaid dividends. The difference between the carrying value of the Preferred Stock and the redemption value (including accumulated dividends) is being accreted using the interest method through the earliest redemption date. The redemption of the Preferred Stock is not mandatory if it would cause the Company to incur additional indebtedness or if it is prohibited under any of the Company's then existing debt agreements. The preferred stockholders are entitled to one vote for each share of common stock into which such shares can be converted, and are also entitled to liquidation preferences equal to the greater of the initial purchase price per share ($2.80) plus any accumulated and unpaid dividends, plus the greater of $4.20 per share or an amount which equals an internal rate of return of 50% to the investor. After receiving such preference, the holders of the preferred stock share remaining proceeds with the common stockholders on an as converted basis. 9. STOCKHOLDERS' EQUITY Common Stock Of the 47,700,000 shares of common stock authorized but unissued as of December 31, 1997, the following shares were reserved for issuance: Preferred Stock.................................. 2,521,874 Madera acquisition (Note 2)...................... 1,200,000 Stock option plan................................ 1,200,000 Stock purchase warrants.......................... 1,056,000 --------- 5,977,874 =========
Stockholder Notes Receivable In December 1997, the Company provided loans in the aggregate amount of $82 to certain employees, who are also common stockholders, for the purchase of shares of the Company's Preferred Stock. The notes bear interest at 8%, are due on January 1, 1999 and are secured by the Preferred Stock purchased and common stock owned by the employees. Stock Options In November 1997, the Company's Board of Directors adopted a stock option plan in which all officers, employees, directors and consultants may participate (the "Option Plan"). Options granted under the Option Plan may either be incentive stock options or nonqualified stock options (the "Options") and they will generally have a term of 10 years from the date of grant and will vest over periods determined at the date of grant. The exercise prices of the options are determined by the F-38 107 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) Company's Board of Directors and will be at least 100% or 110% of the fair market value of the Company's common stock on the date of grant as provided for in the Option Plan. In connection with the Option Plan, the Company's Board of Directors approved the reservation of 1,200,000 shares of common stock for issuance thereunder. As of December 31, 1997 and September 30, 1998, 35,000 options to purchase common stock were exercisable under the Option Plan. In addition, as of December 31, 1997 and September 30, 1998, options for 671,500 and 160,450 shares, respectively of common stock were available for future grants under the Option Plan. A summary of the Company's stock option activity and related information during the period from inception (September 9, 1997) through December 31, 1997 and the nine months ended September 30, 1998 is presented below:
NUMBER OF WEIGHTED AVERAGE SHARES (OPTIONS) EXERCISE PRICE ---------------- ---------------- Outstanding at inception.......... -- $ -- Granted........................... 528,500 4.92 Forfeited......................... -- -- Exercised......................... -- -- --------- Outstanding as of December 31, 1997............................ 528,500 4.92 Granted (unaudited)............... 511,050 9.59 Forfeited (unaudited)............. -- -- Exercised (unaudited)............. -- -- --------- Outstanding as of September 30, 1998 (unaudited)................ 1,039,550 7.21 =========
The following table summarizes information about stock options outstanding as of December 31, 1997 and September 30, 1998:
DECEMBER 31, 1997 SEPTEMBER 30, 1998 ------------------- ----------------------- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE RANGE SHARES PRICE SHARES PRICE -------------- ------- -------- ----------- -------- (UNAUDITED) $ 2.80 to 5.00............. 385,500 2.85 589,800 2.91 $ 6.00 to 9.50............. -- -- 72,500 8.54 $10.50 to 12.50............ 143,000 10.50 245,000 11.07 $15.19 to 19.00............ -- -- 95,750 17.24 $21.00 to 22.13............ -- -- 36,500 21.90 ------- ----- --------- ----- 528,500 4.92 1,039,550 7.21 ======= ===== ========= =====
The weighted average remaining contractual life of stock options outstanding as of December 31, 1997, was 9.4 years. Pro Forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the F-39 108 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the period from inception (September 9, 1997) through December 31, 1997: risk-free interest rate of 6%; dividend yield of zero; volatility factor of the expected market price of the Company's common stock of .40; and a weighted-average expected life of the option of 4 years. The Black-Scholes option valuation model was developed for us in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net loss and pro forma basic net loss per share for the period from inception (September 9, 1997) through December 31, 1997 were $(5,070) and $(2.99) per share, respectively. During the nine months ended September 30, 1998, the Company recorded deferred stock compensation of $821 relating to stock options granted during the period with exercise prices less than the estimated fair value of the Company's common stock on the date of grant. The deferred stock compensation is being amortized into expense over the vesting periods of the stock options which generally range from 1 to 3 years. Compensation expense of $322 was recorded during the nine months ended September 30, 1998 relating to these options, and the remaining $499 will be amortized into expense in future periods. Stock Purchase Warrants In September 1997, the Company issued a warrant to purchase 200,000 shares of the Company's common stock to the Bank that provided the Line and term loan payable (Notes 5 and 6). The exercise price of the warrant is $.01 per share. The warrant was valued at $382 on its date of issuance using the Black-Scholes pricing model with an assumed stock price volatility of .40, risk-free interest rate of 6.0%, estimated fair value of the common stock of $1.92 per share and an expected life of 7 years. The value assigned to the warrant was reflected as a discount on long-term debt. The discount was fully accreted to interest expense using the straight-line method over the expected term of the debt agreements (approximately three months). In connection with their guarantee of certain of the Company's debt obligations (Notes 5 and 6), the Company issued warrants to purchase 841,000 shares of the Company's common stock to certain directors and stockholders of the Company. The exercise price of the warrants is $2.80 per share. The warrants were valued at $328 on their date of issuance using the Black-Scholes pricing model with an assumed stock price volatility of .40, risk-free interest rate of 6.0%, estimated fair value of the common stock of $1.92 per share and expected lives of 3 years. The value assigned to these warrants was fully amortized to interest expense over the expected term of the debt agreements (approximately three months). F-40 109 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) In December 1997, the Company issued to consultants warrants to purchase 15,000 shares of the Company's common stock. Warrants to purchase 10,000 and 5,000 shares of common stock had exercise prices of $5.00 per share and $2.80 per share, respectively. In February 1998, the Company granted warrants to an employee to purchase 50,000 shares of the Company's common stock at $2.80 per share. The Company recorded stock compensation expense of approximately $235 relating to these warrants. Initial Public Offering In May 1998, the Company sold in its initial public offering, a total of 2,300,000 shares of common stock at $12.00 per share. The net proceeds after underwriters' commissions and fees and other costs associated with the offering were approximately $23,986. In connection with the offering, the redeemable convertible preferred stock was converted into common stock, and the redemption provisions of the common stock issued in connection with the Madera acquisition (Note 2) expired. 10. INCOME TAXES The provision (benefit) for income taxes for the periods ended December 31, 1995 and 1996, the nine months ended September 30, 1997 and for the period from inception (September 9, 1997) through December 31, 1997 consists of the following:
PREDECESSORS ------------------------------------------------------------- FIBRES THE DISPOSAL GROUP WASTE CONNECTIONS, INC. INTERNATIONAL, INC. COMBINED CONSOLIDATED THE DISPOSAL GROUP PERIOD FROM PERIOD FROM PERIOD FROM INCEPTION COMBINED JANUARY 1, 1995 JANUARY 1, 1996 (SEPTEMBER 9, 1997) YEAR ENDED THROUGH THROUGH THROUGH DECEMBER 31, 1995 NOVEMBER 30, 1995 JULY 31, 1996 DECEMBER 31, 1997 ------------------ ------------------- ------------------ ----------------------- Current: Federal............ $ -- $ 29 $207 $ 38 State.............. -- -- -- -- Deferred: Federal............ (298) -- 298 (370) State.............. -- -- -- -- ----- ---- ---- ----- $(298) $ 29 $505 $(332) ===== ==== ==== =====
F-41 110 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) Significant components of the Company's deferred income tax assets and liability were as follows as of December 31, 1996 and 1997:
PREDECESSORS COMBINED COMPANY 1996 1997 ------------ ------- Deferred income tax assets: Accounts receivable reserves...................... $ 32 $ 8 Amortization...................................... -- 290 Accrued expenses.................................. 4 -- Vacation accrual.................................. 2 15 Net operating losses.............................. 208 54 ------ ------ Total deferred income tax assets.................... 246 367 Deferred income tax liability: Depreciation...................................... -- (529) ------ ------ Net deferred income tax asset (liability)........... 246 (162) Less valuation allowance............................ (246) -- ------ ------ $ -- $ (162) ====== ======
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):
PREDECESSORS ------------------------------------------------------------------------------- THE DISPOSAL FIBRES GROUP THE DISPOSAL INTERNATIONAL, INC. COMBINED GROUP PERIOD FROM PERIOD FROM COMBINED JANUARY 1, 1995 PREDECESSORS JANUARY 1, 1996 YEAR ENDED THROUGH ONE MONTH ENDED THROUGH DECEMBER 31, 1995 NOVEMBER 30, 1995 DECEMBER 31, 1995 JULY 31, 1996 ----------------- ------------------- ----------------- ----------------- Income tax provision (benefit) at the statutory rate....... (34.0%) 34.0% 34.0% 34.0% Effect of valuation allowance............ -- -- (34.0%) (16.0%) ------- ------- ------- -------- (34.0%) 34.0% -- 18.0% ======= ======= ======= ========
PREDECESSORS ------------------------------------- PREDECESSORS WASTE CONNECTIONS, INC. COMBINED CONSOLIDATED PREDECESSORS NINE MONTHS PERIOD FROM INCEPTION COMBINED ENDED (SEPTEMBER 9, 1997) PERIOD ENDED SEPTEMBER 30, THROUGH DECEMBER 31, 1996 1997 DECEMBER 31, 1997 ----------------- ----------------- ----------------------- Income tax benefit at the statutory rate.............................. (34.0%) (34.0%) (34.0%) Effect of valuation allowance....... 34.0% 34.0% -- Stock compensation expense.......... -- -- 28.0% -------- -------- -------- -- -- (6.0%) ======== ======== ========
F-42 111 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) 11. NET INCOME (LOSS) PER SHARE INFORMATION The following table sets forth the calculation of the numerator and denominator used in the computation of basic and diluted net loss per share and pro forma basic and diluted net income (loss) per share for the period from inception (September 9, 1997) through December 31, 1997 and the nine months ended September 30, 1998. The pro forma basic and diluted net income (loss) per share calculations assume the conversion of all outstanding shares of redeemable convertible preferred stock for the period from inception (September 9, 1997) through December 31, 1997, and the conversion of all outstanding shares of redeemable convertible preferred stock and redeemable common stock for the nine months ended September 30, 1998, as if such conversions occurred as of the first day of each period presented or the actual date of issuance, if subsequent to the first day of the period presented.
SEPTEMBER 30, 1998 DECEMBER 31, 1997 ---------------------------------------------- --------------------- (UNAUDITED) PRO FORMA PRO FORMA PRO FORMA BASIC BASIC BASIC DILUTED BASIC DILUTED NET LOSS NET LOSS NET LOSS NET LOSS NET LOSS NET LOSS PER SHARE PER SHARE PER SHARE PER SHARE PER SHARE PER SHARE --------- --------- --------- --------- ---------- --------- Numerator: Income (loss) before extraordinary item........ $ (5,066) $ (4,788) $ 1,617 $ 1,617 $ 1,617 $ 1,617 Redeemable convertible preferred stock accretion................. (531) -- (917) (917) -- -- --------- --------- --------- --------- --------- --------- Income (loss) applicable to common stockholders before extraordinary item........ $ (5,597) $ (4,788) $ 700 $ 700 $ 1,617 $ 1,617 ========= ========= ========= ========= ========= ========= Extraordinary item.......... -- -- (815) (815) (815) (815) --------- --------- --------- --------- --------- --------- Net income (loss) applicable to common stockholders.... $ (5,597) $ (4,788) $ (115) $ (115) $ 802 $ 802 ========= ========= ========= ========= ========= ========= Denominator: Weighted average common shares outstanding........ 1,872,567 1,872,567 5,476,532 5,476,532 5,476,532 5,476,532 Dilutive effect of stock options and warrants outstanding............... -- -- -- 1,584,836 -- 1,584,836 Incremental common shares issuable upon redemption of redeemable common stock..................... -- -- -- 377,290 377,290 377,290 Incremental common shares issuable upon conversion of preferred stock........ -- 2,499,998 -- -- 1,263,735 1,263,735 --------- --------- --------- --------- --------- --------- 1,872,567 4,372,565 5,476,532 7,438,658 7,117,557 8,702,393 ========= ========= ========= ========= ========= =========
F-43 112 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) As of December 31, 1997, outstanding options to purchase 528,500 shares of common stock (with exercise prices ranging from $2.80 to $10.50), outstanding warrants to purchase 1,056,000 shares of common stock (with exercise prices from $0.01 to $5.00), and the outstanding Redeemable Convertible Preferred Stock could potentially dilute basic earnings per share in the future and have not been included in the computation of diluted net loss per share because to do so would have been antidilutive for the period presented. 12. NEW CREDIT FACILITY On January 30, 1998, the Company obtained a revolving credit facility from BankBoston (the "Credit Facility"). The maximum amount available under the Credit Facility was $25,000 including stand-by letters-of-credit and the borrowings bore interest at various fixed and/or variable rates at the Company's 'option. The Credit Facility allowed for the Company to issue up to $5,000 in stand-by letters-of-credit. The Credit Facility required quarterly payments of interest. The Credit Facility required the Company to pay an annual commitment fee equal to 0.5% of the unused portion of the Credit Facility. In connection with the Credit Facility the Company granted to an affiliate of BankBoston a warrant to purchase 140,000 shares of the Company's common stock with an exercise price of $2.80 per share and an expiration date of January 29, 2008. On May 28, 1998, the Company entered into a new revolving credit facility with a syndicate of banks for which BankBoston N.A. acts as agent (the "May Credit Facility"). The maximum amount available under the May Credit Facility was $60 million (including stand-by letters of credit) and the borrowings bore interest at various fixed and/or variable rates at the Company's option (approximately 7.49% as of September 30, 1998). The May Credit Facility replaced an existing revolving credit facility. The May Credit Facility allowed for the Company to issue up to $5 million in stand-by letters-of-credit. The May Credit Facility required quarterly payments of interest. Borrowings under the May Credit Facility were secured by virtually all of the Company's assets. The May Credit Facility required the Company to pay an annual commitment fee equal to 0.375% of the unused portion of the Credit Facility. On November 20, 1998, the Company entered into a new revolving credit facility with a syndicate of banks for which BankBoston N.A. acts as agent (the "November Credit Facility"). The maximum amount available under the November Credit Facility is $125 million (including stand-by letters of credit) and the borrowings bear interest at various fixed and/or variable rates at the Company's option (approximately 7.0% as of September 30, 1998). The November Credit Facility replaced an existing revolving credit facility. The November Credit Facility allows for the Company to issue up to $15 million in stand-by letters-of-credit. The November Credit Facility requires quarterly payments of interest and it matures in November 2003. Borrowings under the November Credit Facility are secured by virtually all of the Company's assets. The November Credit Facility requires the Company to pay an annual commitment fee equal to 0.375% of the unused portion of the November Credit Facility. The November Credit Facility places certain business, financial and operating restrictions on the Company relating to, among other things the incurrence of additional indebtedness, investments, acquisitions, asset sales, mergers, dividends, distributions and repurchase and redemption of capital stock. The November Credit Facility also requires that specified financial ratios and balances be maintained. Management of the Company expects to record an extraordinary charge of approximately $211 (net of income tax) in the fourth quarter of 1998 related to the extinguishment of the May Credit Facility. F-44 113 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 IS UNAUDITED) 13. RELATED PARTY TRANSACTIONS The Company has entered into certain transactions with Continental Paper, LLC ("Continental"), in which the Company delivers to Continental all of the Company's collected recyclable materials in areas in which Continental has processing facilities and Continental pays the Company market rates for the recyclable materials. Certain of the Company's stockholders are the majority owners of Continental. During the period from inception (September 9, 1997) through December 31, 1997, the Company received approximately $223 from Continental in these transactions. F-45 114 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Shareholders Murrey's Disposal Company, Inc. American Disposal Company, Inc. D.M. Disposal Co., Inc. Tacoma Recycling Company, Inc. We have audited the accompanying combined balance sheets of Murrey's Disposal Company, Inc., American Disposal Company, Inc., D.M. Disposal Co., Inc., and Tacoma Recycling Company, Inc. (collectively the "Murrey Companies") as of December 31, 1996 and 1997, and the related combined statements of income and retained earnings, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Murrey Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Murrey Companies at December 31, 1996 and 1997, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Sacramento, California October 2, 1998, except for Note 12, as to which the date is October 22, 1998 F-46 115 THE MURREY COMPANIES COMBINED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS
DECEMBER 31, ------------------ SEPTEMBER 30, 1996 1997 1998 ------- ------- ------------- (UNAUDITED) Current assets: Cash and cash equivalents............................. $ 81 $ 126 $ 405 Accounts receivable, less allowance for doubtful accounts of $62 in 1996, $74 in 1997 and $82 in 1998........... 2,333 2,779 3,364 Prepaid expenses and other current assets............. 119 79 10 ------- ------- ------- Total current assets.................................... 2,533 2,984 3,779 Property, plant and equipment, net...................... 12,529 14,819 14,371 Intangible assets, net.................................. -- 1,862 1,758 Other assets............................................ 3 31 -- ------- ------- ------- $15,065 $19,696 $19,908 ======= ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings................................. $ 1,609 $ 1,628 $ 620 Accounts payable...................................... 1,108 1,617 2,217 Advances from a related party......................... 818 543 543 Deferred revenue...................................... 765 919 1,432 Accrued liabilities................................... 705 832 1,288 Income taxes payable.................................. 321 228 277 Current portion of long-term debt..................... 928 873 751 ------- ------- ------- Total current liabilities............................... 6,254 6,640 7,128 Long-term debt.......................................... 1,851 4,907 4,047 Deferred income taxes................................... 702 658 658 Commitments and contingencies (Note 7) Shareholders' equity: Common stock at par value; 60,500 shares authorized; 1,470 shares issued and outstanding................ 45 45 45 Additional paid-in capital............................ 455 455 455 Retained earnings..................................... 5,758 6,991 7,575 ------- ------- ------- Total shareholders' equity.............................. 6,258 7,491 8,075 ------- ------- ------- $15,065 $19,696 $19,908 ======= ======= =======
See accompanying notes. F-47 116 THE MURREY COMPANIES COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS (IN THOUSANDS)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, ----------------------------- ------------------ 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- (UNAUDITED) Revenues............................. $27,786 $25,024 $28,874 $21,477 $24,532 Operating expenses: Cost of operations................. 20,859 20,465 23,133 16,933 19,337 Selling, general and administrative.................. 2,101 2,142 2,323 1,653 1,870 Depreciation and amortization...... 923 1,236 1,371 1,350 1,640 ------- ------- ------- ------- ------- Income from operations............... 3,903 1,181 2,047 1,541 1,685 Interest expense..................... (198) (284) (380) (247) (423) Other income (expense), net.......... 210 309 283 150 (97) ------- ------- ------- ------- ------- Income before income taxes........... 3,915 1,206 1,950 1,444 1,165 Income tax provision................. (690) (543) (634) (512) (414) ------- ------- ------- ------- ------- Net income........................... 3,225 663 1,316 932 751 Retained earnings, beginning of period............................. 1,920 5,095 5,758 5,758 6,991 Dividends............................ (50) -- (83) -- (167) ------- ------- ------- ------- ------- Retained earnings, end of period..... $ 5,095 $ 5,758 $ 6,991 $ 6,690 $ 7,575 ======= ======= ======= ======= ======= Pro forma income taxes (unaudited -- Note 11)........................... $(1,338) $ (432) $ (697) $ (522) $ (421) ------- ------- ------- ------- ------- Pro forma net income (unaudited -- Note 11)........................... $ 2,577 $ 774 $ 1,253 $ 922 $ 744 ======= ======= ======= ======= =======
See accompanying notes. F-48 117 THE MURREY COMPANIES COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE MONTHS ENDED YEARS ENDED DECEMBER 31, SEPTEMBER 30, --------------------------- ----------------- 1995 1996 1997 1997 1998 ------- ------- ------- ------- ------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................... $ 3,225 $ 663 $ 1,316 $ 932 $ 751 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................... 923 1,236 1,371 1,056 1,640 Deferred income taxes........................... 147 (19) (44) -- -- Gain on sale of land............................ -- -- -- -- (8) Changes in operating assets and liabilities: Accounts receivable, net..................... (31) 63 (446) (562) (585) Prepaid expenses and other assets............ (83) (36) 40 (616) 69 Accounts payable............................. (156) 932 509 1,004 600 Deferred revenue............................. 68 42 154 95 513 Accrued liabilities.......................... (352) 129 127 26 456 Income taxes payable......................... 383 (232) (93) 426 49 ------- ------- ------- ------- ------- Net cash provided by operating activities............ 4,124 2,778 2,934 2,361 3,485 CASH FLOWS FROM INVESTING ACTIVITIES: Payments for acquisitions............................ -- -- (2,900) (100) -- Capital expenditures for property and equipment...... (3,025) (4,790) (2,108) (2,106) (1,731) Proceeds from sale of land........................... -- -- -- -- 625 Net change in other assets........................... (18) 31 (28) (117) 57 ------- ------- ------- ------- ------- Net cash used in investing activities.................. (3,043) (4,759) (5,036) (2,323) (1,049) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt......................... 750 1,418 3,414 2,021 550 Principal payments on long-term debt................. (1,383) (615) (928) (302) (1,532) Net change in short-term borrowings.................. (77) 659 19 (812) (1,008) Net change in advances from a related party.......... 189 (259) (275) (275) -- Payment of dividends................................. (50) -- (83) -- (167) ------- ------- ------- ------- ------- Net cash provided by (used in) financing activities.... (571) 1,203 2,147 632 (2,157) ------- ------- ------- ------- ------- Net increase (decrease) in cash and cash equivalents... 510 (778) 45 670 279 Cash and cash equivalents: Beginning of period............................... 349 859 81 81 126 ------- ------- ------- ------- ------- End of period..................................... $ 859 $ 81 $ 126 $ 751 $ 405 ======= ======= ======= ======= ======= SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH TRANSACTIONS: Cash paid for interest............................ $ 198 $ 284 $ 358 $ 247 $ 423 ======= ======= ======= ======= ======= Cash paid for income taxes........................ $ 160 $ 792 $ 744 $ 277 $ 10 ======= ======= ======= ======= ======= Issuance of notes payable for land and buildings....................................... $ -- $ 260 $ 315 $ -- $ -- ======= ======= ======= ======= ======= In connection with acquisitions (Note 3) the Murrey Companies acquired assets and issued notes payable to sellers as follows: Fair value of assets acquired................ $ -- $ -- $ 3,100 $ 300 $ -- Notes payable to sellers..................... -- -- (200) (200) -- ------- ------- ------- ------- ------- Cash paid for acquisitions................... $ -- $ -- $ 2,900 $ 100 $ -- ======= ======= ======= ======= =======
See accompanying notes. F-49 118 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 1. BUSINESS, ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BUSINESS AND ORGANIZATION Murrey's Disposal Company, Inc. ("Murrey's"), American Disposal Company, Inc. ("American"), D.M. Disposal Co., Inc. ("DM"), and Tacoma Recycling Company, Inc. ("Tacoma") (collectively the "Murrey Companies") are regional, integrated, non-hazardous solid waste services companies that provide collection, transfer, and disposal of solid waste and recyclables to residential and commercial customers in and around the Tacoma, Washington area. Murrey's, American, DM and Tacoma were incorporated in Washington on March 13, 1963, October 27, 1966, July 12, 1979 and January 30, 1990, respectively. Each of the Murrey Companies' Common Stock is owned 90% by one or both of two trusts. The beneficiary of both trusts is also an officer and director of the Murrey Companies. The remaining stock is owned by two individuals (5% each) who are also officers and directors of the Murrey Companies. BASIS OF COMBINATION The combined financial statements of the Murrey Companies include the accounts of Murrey's, American, DM and Tacoma as a result of their common management which exercises significant influence over their operations. Significant intercompany balances and transactions between the Murrey Companies have been eliminated in combination. INTERIM FINANCIAL INFORMATION The unaudited interim combined financial statements as of September 30, 1998 and for the nine months ended September 30, 1997 and 1998 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS The Murrey Companies considers all highly liquid investments with a maturity of three months or less at purchase to be cash equivalents. F-50 119 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 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 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: Buildings.............................................. 20 years Machinery and equipment................................ 5 - 15 years Rolling stock.......................................... 10 years Containers............................................. 5 - 15 years Furniture and fixtures................................. 3 - 5 years
In connection with the Acquisitions (Note 3) the Murrey Companies acquired certain used property and equipment. This used property and equipment is being depreciated using the straight-line method over its estimated remaining useful lives, which range from one to twelve years. GOODWILL Goodwill represents the excess of the purchase price over the fair value of the net assets acquired (Notes 3 and 4), and is amortized on a straight-line basis over the period of expected benefit of 40 years. The Murrey Companies continually evaluate the value and future benefits of its goodwill. The Murrey Companies assess recoverability from future operations using income from operations of the related acquired business as a measure. Under this approach, the carrying value would be reduced if it becomes probable that the Murrey Companies' best estimate for expected future cash flows of the related business would be less than the carrying amount of the goodwill over the remaining amortization period. For the period ending December 31, 1997, there were no adjustments to the carrying amount of goodwill resulting from these evaluations. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of cash and cash equivalents approximate their fair values as of December 31, 1996 and 1997. The carrying values of short-term borrowings (Note 5) and long-term debt (Note 6) approximate their fair values as of December 31, 1996 and 1997, based on current incremental borrowing rates for similar types of borrowing arrangements. F-51 120 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 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 liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Murrey's, American and Tacoma operate under Subchapter S of the Internal Revenue Code for federal and state income tax reporting purposes. Consequently all of the income tax attributes and liabilities of these companies' operations flow through to the individual shareholders. 2. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment as of December 31, 1996 and 1997 and September 30, 1998 consists of the following:
DECEMBER 31, ------------------ SEPTEMBER 30, 1996 1997 1998 ------- ------- ------------- (UNAUDITED) Land and buildings...................... $ 6,316 $ 6,668 $ 6,111 Machinery and equipment................. 3,518 3,780 3,883 Rolling stock........................... 6,134 7,570 8,315 Containers.............................. 3,140 4,380 5,224 Furniture and fixtures.................. 231 255 242 ------- ------- ------- 19,339 22,653 23,775 Less accumulated depreciation........... (6,810) (7,834) (9,404) ------- ------- ------- $12,529 $14,819 $14,371 ======= ======= =======
3. ACQUISITIONS During 1997, the Murrey Companies purchased substantially all of the assets of Island Disposal (effective May 2, 1997) and Environmental Waste Systems and Olympic Disposal (both effective December 1, 1997) (collectively the "Acquisitions"). The total purchase price for the Acquisitions was approximately $3,100, comprised of $2,900 in cash and promissory notes payable to the sellers totaling $200. Of the combined $3,100 purchase price, $1,791 was recorded as goodwill and $80 was assigned to non-competition agreements. The Acquisitions were accounted for in accordance with the purchase method of accounting and, accordingly, the net assets acquired were included in the Murrey Companies' combined balance sheet based upon their estimated fair values on the date of the Acquisitions. The Murrey Companies' combined statement of operations includes the revenues and expenses of the acquired businesses after the effective date of the transactions. F-52 121 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) Certain items affecting the purchase price and the allocation are preliminary. A summary of the preliminary purchase price allocation as of December 31, 1997, for the Acquisitions is as follows: Acquired assets: Property and equipment.................................... $1,229 Goodwill.................................................. 1,791 Non-competition agreements................................ 80 ------ $3,100 ======
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:
YEARS ENDED DECEMBER 31, -------------------- 1996 1997 ------- ------- (UNAUDITED) Revenue.............................................. $27,485 $31,106 ======= ======= Net Income........................................... $ 706 $ 1,094 ======= =======
The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the actual results of operations had the Acquisitions occurred on January 1, 1996, or the results of future operations of the Murrey Companies. Furthermore, the pro forma results do not give effect to all cost savings or incremental costs that may occur as a result of the integration and consolidation of the Acquisitions. 4. INTANGIBLE ASSETS Intangible assets as of December 31, 1996 and 1997 and September 30, 1998 consists of the following:
DECEMBER 31, ---------------- SEPTEMBER 30, 1996 1997 1998 ------ ------ ------------- (UNAUDITED) Goodwill, net............................. $ -- $1,783 $1,691 Non-competition agreement, net............ -- 79 67 ------ ------ ------ $ -- $1,862 $1,758 ====== ====== ======
Accumulated amortization on intangible assets amounted to $9 as of December 31, 1997 (none in 1996) and $113 as of September 30, 1998. 5. SHORT-TERM BORROWINGS Short-term borrowings consist of various revolving and non-revolving lines-of-credit with banks, bearing interest at variable rates (ranging from 9.0% to 9.25% as of December 31, 1997) and mature at various dates through November 30, 1998. The lines of credit are secured by all cash accounts held with the banks, which totaled $126 as of December 31, 1997. All available amounts under these lines-of-credit were outstanding as of December 31, 1997. F-53 122 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) Certain of these lines-of-credit contain certain restrictive covenants, which among other things require that specified financial balances and ratios be maintained. As of December 31, 1997, the Murrey Companies were in compliance with the covenants. 6. LONG-TERM DEBT Long-term debt as of December 31, 1996 and 1997 and September 30, 1998 consists of the following:
DECEMBER 31, ---------------- SEPTEMBER 30, 1996 1997 1998 ------ ------ ------------- (UNAUDITED) Note payable to a bank bearing interest at a variable rate (approximately 8.5% as of December 31, 1997); monthly payments of principal and interest of $25; maturing in November, 2007; secured by certain cash accounts and a pledge of one of the Murrey Companies exclusive franchise agreements...................................... $ -- $2,000 $1,901 Note payable to a bank bearing interest at 8.6%; monthly payments of principal and interest aggregating $13; maturing in October, 2001; secured by equipment with a net book value of approximately $533 as of December 31, 1997 and certain cash accounts........................... $ -- $ 632 $ 542 Notes payable to a bank bearing interest at various fixed rates (ranging from 9.1% to 9.2% as of December 31, 1997); monthly payments of principal and interest aggregating $25 and one- time payments of $470 and $751 in September, 2000 and May, 2001, respectively; maturing at various dates between September, 2000 and May, 2001; secured by land and buildings with a net book value of approximately $2,548 as of December 31, 1997............................... 1,752 1,544 1,393 Equipment financing notes payable bearing interest at various rates (ranging from 8.6% to 8.8% as of December 31, 1997); monthly payments of principal and interest aggregating $25; maturing at various dates through September, 2001; secured by equipment with an aggregate net book value of approximately $984 as of December 31, 1997............................................ 567 822 479 Notes payable to sellers bearing interest at various rates (ranging from 8.5% to 9.0% as of December 31, 1997); monthly principal and interest payments of $9; maturing at various dates between February, 2001 and October, 2007; secured by land and buildings with a net book value of approximately $908 as of December 31, 1997............................................ 218 471 295
F-54 123 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED)
DECEMBER 31, ---------------- SEPTEMBER 30, 1996 1997 1998 ------ ------ ------------- (UNAUDITED) Unsecured notes payable to seller bearing interest at 8.0% as of December 31, 1997; monthly principal and interest payments of $4; maturing in June, 2002................................... -- 189 100 Others............................................ 242 122 88 ------ ------ ------ 2,779 5,780 4,798 Less: current portion............................. 928 873 751 ------ ------ ------ Long-term debt.................................... $1,851 $4,907 $4,047 ====== ====== ======
As of December 31, 1997, aggregate contractual future principal payments by calendar year on long-term debt are due as follows: 1998........................................................ $ 873 1999........................................................ 780 2000........................................................ 1,056 2001........................................................ 1,232 2002........................................................ 408 Thereafter.................................................. 1,431 ------ $5,780 ======
7. COMMITMENTS AND CONTINGENCIES COMMITMENTS Operating Leases The Murrey Companies lease certain equipment and facilities under non-cancelable operating leases. Rent expense under all operating leases during the years ended December 31, 1995, 1996 and 1997 amounted to $319, $170 and $183, respectively. As of December 31, 1997, future minimum lease payments under these operating leases, by calendar year, are as follows: 1998........................................................ $ 187 1999........................................................ 186 2000........................................................ 167 2001........................................................ 107 2002........................................................ 87 Thereafter.................................................. 355 ------ $1,089 ======
F-55 124 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 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. Legal Proceedings In the normal course of their business and as a result of the extensive governmental regulation of the solid waste industry, the Murrey Companies may periodically become subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines or to revoke or deny renewal of an operating permit held by the Murrey Companies. From time to time the Murrey Companies may also become parties to various claims or suits for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal course of operating a waste management business. However, as of December 31, 1997 and September 30, 1998, there is no current proceeding or litigation involving the Murrey Companies that the Murrey Companies believe will have a material adverse impact on the Murrey Companies' business, financial condition, results of operations or cash flows. Disposal Site The Murrey Companies have been informed that the Hidden Valley Landfill which is currently utilized by them for disposal of waste collected in Pierce County is currently operating under a Consent Decree with the Washington State Department of Ecology and the Environmental Protection Agency. Under the terms of the Consent Decree the Hidden Valley Landfill is required to be closed on or before December 31, 1998; after which all of the waste collected by the Murrey Companies in Pierce County will be long hauled to an alternate disposal site until the new solid waste landfill in Pierce County is opened. The new landfill is projected to open in November 1999. Management of the Murrey Companies does not believe that the closure of the Hidden Valley Landfill will have a material adverse impact on the Murrey Companies' business, combined financial position, results of operations or cash flows. Employees Approximately 44 of the Murrey Companies' route drivers are represented by the Teamsters Union. The Murrey Companies have a collective bargaining agreement that expires in June 1999. The Murrey Companies are not aware of any other organizational efforts among their employees and believes that their relations with their employees are good. F-56 125 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 8. RELATED PARTY TRANSACTIONS OPERATING LEASE The Murrey Companies lease land on which certain of their facilities are located from a shareholder of the Murrey Companies. This lease is pursuant to an informal arrangement whereby the Murrey Companies pay all of the property taxes and other expenses associated with the leased land in lieu of monthly rent. These payments totaled approximately $10 during each of the years ended December 31, 1995, 1996, and 1997. ADVANCES As of December 31, 1996 and 1997, the Murrey Companies had non-interest bearing advances payable to one of their shareholders totaling $818 and $543, respectively. DISPOSAL FEES During the years ended December 31, 1995, 1996 and 1997, the Murrey Companies paid $7,355, $7,730, and $8,592, respectively, in disposal fees to a landfill that is owned and operated by a company in which one of the Murrey Companies shareholders has an approximate 33% ownership interest. 9. 401(k) PLAN The Murrey Companies have a voluntary savings and investment plan (the "401(k) Plan"). The 401(k) Plan is available to all eligible, non-union employees of the Murrey Companies. Under the 401(k) Plan the Murrey Companies' contributions are at the discretion of management of the Murrey Companies. During the years ended December 31, 1995, 1996 and 1997, the Murrey Companies' 401(k) Plan expense was approximately $246, $267 and $316, respectively. 10. INCOME TAXES The provision (benefit) for income taxes for the Murrey Companies pertains solely to DM and consists of the following:
YEARS ENDED DECEMBER 31, ------------------------ 1995 1996 1997 ---- ---- ---- Federal: Current....................................... $543 $562 $678 Deferred...................................... 147 (19) (44) ---- ---- ---- $690 $543 $634 ==== ==== ====
Deferred taxes result from temporary differences in the recognition of certain expense items for income tax and financial reporting purposes. The Murrey Companies' deferred taxes as of December 31, 1996 and 1997 are substantially comprised of depreciation deducted for tax purposes that will be recorded in future periods for financial reporting purposes. F-57 126 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) The principal reasons for the difference between the federal statutory income tax rate and the effective income tax rate are as follows:
YEARS ENDED DECEMBER 31, ------------------------- 1995 1996 1997 ------- ----- ----- Federal expense expected at statutory rates on combined income before income taxes............................... $1,331 $410 $663 Tax effect of companies reporting under Subchapter S....... (645) 124 (42) Other...................................................... 4 9 13 ------ ---- ---- $ 690 $543 $634 ====== ==== ====
11. PRO FORMA INCOME TAX INFORMATION (UNAUDITED) As described in Note 1, Murrey's, American, and Tacoma (the "S Corporations") operate under Subchapter S of the Internal Revenue Code and are not subject to federal income taxes. In connection with the Murrey Companies' proposed merger with Waste Connections, Inc. ("WCI") (Note 12), the Subchapter S election will be terminated. As a result, the S Corporations (as wholly-owned subsidiaries of WCI) will be subject to corporate income taxes subsequent to the termination of S corporation status. The Murrey Companies had combined income for income tax purposes of $2,769, $2,135 and $1,941 for 1995, 1996 and 1997, respectively. Had the Murrey Companies filed federal income tax returns as regular corporations for 1995, 1996 and 1997, income tax expense under the provisions of Financial Accounting Standards No. 109 would have been $1,338, $432 and $697, respectively. The following unaudited pro forma information reflects income tax expense (benefit) for the Murrey Companies as if the S Corporations had also been subject to federal income taxes:
YEARS ENDED DECEMBER 31, ----------------------- 1995 1996 1997 ------ ----- ---- Federal: Current................................................ $ 941 $ 726 $660 Deferred............................................... 397 (294) 37 ------ ----- ---- Pro forma income taxes................................... $1,338 $ 432 $697 ====== ===== ====
The pro forma provisions for income taxes for the years ended December 31, 1995, 1996 and 1997 differ from the amounts computed by applying the applicable statutory federal income tax rate (34%) to income before income taxes due to certain non-deductible expenses. The Murrey Companies pro forma deferred income tax asset of approximately $98 and $71 as of December 31, 1996 and 1997, respectively, relates principally to differences in the recognition of bad debt expenses, vacation accruals, and certain other temporary differences. The Murrey Companies also had pro forma deferred tax liabilities as of December 31, 1996 and 1997 of approximately $1,322 and $1,332 which relate to differences between tax and financial methods of depreciation and the use of the cash method of accounting for tax purposes by certain of the S Corporations. F-58 127 THE MURREY COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 12. SUBSEQUENT EVENT MERGER OF THE MURREY COMPANIES On October 22, 1998, the Murrey Companies and WCI jointly announced that they had signed a definitive agreement under which the Murrey Companies will merge with wholly-owned subsidiaries of WCI. Under the terms of the agreement, substantially all shares of common stock of the Murrey Companies will be exchanged for 2.75 million shares of WCI common stock (subject to adjustment at the date of consummation of the Merger). The transaction is expected to be accounted for as a pooling of interests and is expected to close during the fourth quarter of calendar 1998. 13. YEAR 2000 (UNAUDITED) The Murrey Companies will need to modify or replace portions of their software so that their computer systems will function properly with respect to dates in the year 2000 ("Year 2000") and thereafter. To date, the Murrey Companies have not incurred any costs related to the Year 2000 project. The Murrey Companies do not believe that their expenditures relating to the Year 2000 project will be material. However, if the required Year 2000 modifications and conversions are not made or are not completed in a timely manner, the Year 2000 issue could materially affect their operations. F-59 128 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Shareholders Madera Disposal Systems, Inc. We have audited the accompanying balance sheets of Madera Disposal Systems, Inc. as of December 31, 1996 and 1997, and the related statements of income and retained earnings, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Madera Disposal Systems, Inc. at December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Sacramento, California February 20, 1998 F-60 129 MADERA DISPOSAL SYSTEMS, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, ---------------- 1996 1997 ------ ------ ASSETS Current assets: Cash and equivalents................................... $1,064 $1,527 Accounts receivable, less allowance for doubtful accounts of $111 ($90 in 1996)........................ 788 691 Receivables from shareholders.......................... 100 113 Prepaid expenses and other current assets.............. 216 214 ------ ------ Total current assets................................... 2,168 2,545 Property and equipment, net................................. 3,800 3,636 Assets held for sale........................................ -- 77 Other assets................................................ 36 39 ------ ------ $6,004 $6,297 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable....................................... $ 750 $ 644 Deferred revenue....................................... 208 219 Accrued liabilities.................................... 193 178 Current portion of capital lease obligations........... 218 274 Current portion of long-term debt...................... 177 288 ------ ------ Total current liabilities................................... 1,546 1,603 Long-term portion of capital lease obligations.............. 1,557 1,565 Long-term debt.............................................. 637 329 Commitments and contingencies (Note 4) Shareholders' equity: Common stock: $100 par value; 1,000,000 shares authorized; 500 shares issued and outstanding......... 50 50 Retained earnings...................................... 2,214 2,750 ------ ------ Total shareholders' equity.................................. 2,264 2,800 ------ ------ $6,004 $6,297 ====== ======
See accompanying notes. F-61 130 MADERA DISPOSAL SYSTEMS, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------- 1995 1996 1997 ------ ------ ------ Revenues.................................................... $7,008 $7,770 $7,845 Operating expenses: Cost of operations..................................... 5,288 5,512 5,289 Selling, general and administrative.................... 996 969 1,041 Depreciation and amortization.......................... 467 585 627 ------ ------ ------ Income from operations...................................... 257 704 888 Interest expense............................................ (237) (259) (280) Other income, net........................................... 68 113 173 ------ ------ ------ Net income.................................................. 88 558 781 Retained earnings, beginning of year........................ 1,863 1,656 2,214 Distributions to shareholders............................... (295) -- (245) ------ ------ ------ Retained earnings, end of year.............................. $1,656 $2,214 $2,750 ====== ====== ====== Pro forma income taxes (unaudited -- Note 7)................ $ (30) $ (208) $ (295) ------ ------ ------ Pro forma net income (unaudited -- Note 7).................. $ 58 $ 350 $ 486 ====== ====== ======
See accompanying notes. F-62 131 MADERA DISPOSAL SYSTEMS, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, ------------------------- 1995 1996 1997 ----- ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 88 $ 558 $ 781 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 467 585 627 Gain on sale of property & equipment................... (13) (37) (71) Changes in operating assets and liabilities: Accounts receivable, net............................. (252) (23) 97 Receivables from shareholders........................ (21) (33) (13) Prepaid expenses and other assets.................... -- (52) 2 Other assets......................................... (2) (9) (3) Accounts payable..................................... 265 (29) (106) Deferred revenue..................................... 4 16 11 Accrued liabilities.................................. 105 44 (15) ----- ------ ------ Net cash provided by operating activities:.................. 641 1,020 1,310 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for property and equipment........... (274) (902) (183) Proceeds from sale of assets.............................. 13 97 140 ----- ------ ------ Net cash used in investing activities....................... (261) (805) (43) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt.............................. 265 591 -- Principal payments on long-term debt and capital lease obligations............................................ (576) (351) (559) Cash distributions made to shareholders................... (295) -- (245) ----- ------ ------ Net cash provided by (used in) financing activities......... (606) 240 (804) ----- ------ ------ Net increase (decrease) in cash and equivalents............. (226) 455 463 Cash and equivalents: Beginning of year......................................... 835 609 1,064 ----- ------ ------ End of year............................................... $ 609 $1,064 $1,527 ===== ====== ====== SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH TRANSACTIONS: Cash paid for interest...................................... $ 237 $ 237 $ 279 ===== ====== ====== Capital lease obligations and long-term debt incurred for the purchase of property and equipment.................... $ 854 $ -- $ 426 ===== ====== ======
See accompanying notes. F-63 132 MADERA DISPOSAL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 (IN THOUSANDS) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS Madera Disposal Systems, Inc. ("Madera") is a regional, integrated, non-hazardous solid waste services company that provides collection, transfer disposal and recycling services to residential, commercial and industrial customers. Madera Landfill is contracted by the County of Madera to operate the Fairmead, the North Fork Transfer Station and the materials recovery facility (aka, Mammoth Recycling Facility), all of which are located in the County of Madera, State of California. Madera also holds an exclusive contract with the County of Madera to collect solid waste within the unincorporated areas of the County of Madera. The contracts continue in force and effect until August 2004, and will automatically be extended for one five year period unless Madera is then in material breach or default of its obligations under the materials recovery facility contract. All contracts may be extended for additional periods and upon terms as the County of Madera and Madera may mutually agree upon. On November 9, 1993, Madera entered into an agreement with the County of Madera, whereby Madera was to design, permit, finance, construct, equip, staff, operate and maintain a materials recovery facility (the "Facility") at the County's Fairmead Landfill for the purpose of providing the County of Madera with a guaranteed reduction in the quantity of municipal solid waste requiring landfill disposal. The Facility was to be designed, constructed and operated to receive all municipal solid waste from the Cities of Madera and Chowchilla and the unincorporated areas of the County of Madera. It was also to meet the twenty-five percent (25%) waste reduction requirements of Assembly Bill 939 (Chapter 1095 of the Statutes of 1989) for the Cities of Madera and Chowchilla and the County of Madera by January 11, 1995, through the recycling of recovered material, and work toward the waste reduction requirements of fifty percent (50%) that each jurisdiction must achieve by January 1, 2000. The Facility became operational on August 15, 1994. The County of Madera will compensate Madera for its capital costs incurred in designing, permitting, financing, constructing and equipping the Facility. These costs were $1,661 and are included in property and equipment in the accompanying balance sheets. The County of Madera will reimburse Madera for the equipment and interest costs over a ten year operational period. The County of Madera will also reimburse Madera for its other operational costs incurred in connection with the staffing, maintaining and operating of the materials recovery facility. All of the aforementioned costs are reimbursed to Madera through receipt of a specified portion of waste disposal fees collected by Madera on behalf of the County of Madera for landfill operations. At the termination of the contracts described above, the improvements made by Madera become the sole and exclusive property of the County of Madera, subject only to the County of Madera's continuing obligation to pay or reimburse the Company for any remaining unamortized capital costs of the Facility. In 1995, Madera started a new line of business which provided clean-up and waste removal services to residential and commercial construction businesses. Due to continued losses, in July 1997 Madera ceased operations in this line of business. The estimated fair value of the remaining assets of the business is reflected in the accompanying balance sheets as assets held for sale at December 31, 1997. For the years ended December 31, 1995, 1996, and 1997, this business had revenues of $531, $785 and $193, respectively, and had operating losses of $290, $397, and $215, respectively. F-64 133 MADERA DISPOSAL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS) Madera entered into an exclusive franchise agreement with the City of Chowchilla on April 8, 1996, whereby Madera was granted the exclusive right and franchise to collect, haul, and dispose of all solid waste, recyclable solid waste, and green waste within the city limits of the City of Chowchilla. The term of this franchise shall continue in force and effect for a period of seven years, and the City of Chowchilla may renew and extend the franchise for an additional period of five years or more. SALE OF THE COMPANY Effective February 1, 1998, Madera's shareholders entered into an agreement to sell their stock to Waste Connections, Inc. ("WCI") for cash and stock in WCI. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS Madera considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject Madera to concentrations of credit risks consist primarily of accounts receivable. Credit risk on accounts receivable is minimized as a result of the large and diverse nature of Madera's customer base. Madera maintains an allowance for losses based on the expected collectibility of accounts receivable. Credit losses have been within management's expectations. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Improvements or betterments which significantly extend the life of an asset are capitalized. Expenditures for maintenance and repair costs are charged to operations as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal. Gains and losses resulting from property disposals are included in other income (expense). Depreciation is computed using the straight-line method over the estimated useful lives of the assets or lease term, whichever is shorter. The estimated useful lives are as follows: Machinery and equipment............................... 6 - 10 years Leasehold improvements................................ 10 - 40 years Furniture and fixtures................................ 6 - 10 years
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values of cash and equivalents approximate their fair values as of December 31, 1996 and 1997. The carrying values of the long-term debt and capital lease obligations (Notes 3 F-65 134 MADERA DISPOSAL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS) and 4) approximate their fair values as of December 31, 1996 and 1997, based on current incremental borrowing rates for similar types of borrowing arrangements. REVENUE RECOGNITION Madera recognizes revenues as services are provided. Certain customers are billed in advance and, accordingly, recognition of the related revenues is deferred until the services are provided. INCOME TAXES Madera operates under Subchapter S of the Internal Revenue Code for federal and state income tax reporting purposes. Consequently, all of the income tax attributes and liabilities of the Madera's operations flow through to the individual shareholders. CLOSURE AND POST-CLOSURE COSTS Under regulations pursuant to which the permit for the Fairmead Landfill was issued, Madera and Madera County, as operator and owner, respectively, are jointly liable for closure and post-closure liabilities with respect to the landfill. Madera has not accrued for such liabilities because Madera County, as required by state law, has established a special fund, into which a designated portion of tipping fee surcharges are deposited, to pay such liabilities. Consequently, management of Madera does not believe Madera has any financial obligation for closure and post-closure costs for the Fairmead Landfill as of December 31, 1997. 2. PROPERTY AND EQUIPMENT Property and equipment as of December 31, 1996 and 1997 consists of the following:
1996 1997 ------ ------ Machinery and equipment..................................... $5,480 $5,777 Leasehold improvements...................................... 498 500 Furniture and fixtures...................................... 137 133 ------ ------ 6,115 6,410 Less accumulated depreciation and amortization.............. 2,315 2,774 ------ ------ $3,800 $3,636 ====== ======
3. LONG-TERM DEBT Long-term debt as of December 31, 1996 and 1997 consists of the following:
1996 1997 ---- ---- Equipment financing notes payable bearing interest at various fixed and variable rates (ranging from 6.0% to 12.9% at December 31, 1997); monthly payments of principal and interest aggregating $16; maturing at various dates through August 31, 2001; secured by equipment with net book values aggregating $522 as of December 31, 1997.................... $664 $467 Notes payable to related parties bearing interest at 10.0%; monthly payments of interest; maturing December 1, 1998..... 150 150 ---- ---- 814 617 Less: Current portion....................................... 177 288 ---- ---- Long-term debt.............................................. $637 $329 ==== ====
F-66 135 MADERA DISPOSAL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS) One of the equipment financing notes, with an outstanding balance of $236 as of December 31, 1997, contains certain restrictive covenants, which among other things require that specified financial balances and ratios be maintained, restrict the payment of dividends and prohibit the incurrence of additional indebtedness. As of December 31, 1997, Madera was in compliance with the covenants. As of December 31, 1997, aggregate contractual future principal payments by calendar year on long-term debt are due as follows: 1998........................................................ $288 1999........................................................ 149 2000........................................................ 122 2001........................................................ 58 ---- $617 ====
4. COMMITMENTS AND CONTINGENCIES COMMITMENTS Capital Leases Madera leases certain equipment under capital leases. As of December 31, 1996 and 1997, the following amounts are included in property and equipment as assets under these capital leases:
1996 1997 ------ ------ Cost..................................................... $2,235 $2,605 Less: accumulated amortization........................... 527 780 ------ ------ Net assets under capital leases.......................... $1,708 $1,825 ====== ======
The future minimum lease payments under these capital leases along with the present value of the minimum lease payments as of December 31, 1997 are as follows:
MINIMUM LEASE PAYMENTS YEAR ENDING DECEMBER 31: ------------------------ 1998.............................................. $ 448 1999.............................................. 489 2000.............................................. 427 2001.............................................. 352 2002.............................................. 294 Thereafter........................................ 494 ------ Total minimum lease payments................................ 2,504 Less amount representing interest........................... 665 ------ Present value of minimum lease payments..................... 1,839 Less current portion........................................ 274 ------ Long-term portion........................................... $1,565 ======
OPERATING LEASES Madera leases its facilities and certain equipment under cancelable operating leases for periods of one year or less. Rent expense under all operating leases during the years ended December 31, 1995, 1996 and 1997 amounted to $47, $41 and $33, respectively. F-67 136 MADERA DISPOSAL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS) PERFORMANCE BONDS AND LETTERS OF CREDIT Municipal solid waste collection contracts may require performance bonds to secure contractual performance. As of December 31, 1997, Madera had provided customers and various regulatory authorities with bonds of approximately $200 to secure its obligations. If Madera were unable to obtain surety bonds in sufficient amounts or at acceptable rates, it could be precluded from entering into additional municipal solid waste collection contracts or obtaining or retaining landfill operating permits. ENVIRONMENTAL RISKS Madera is subject to liability for any environmental damage that its solid waste facilities may cause to neighboring landowners, particularly as a result of the contamination of drinking water sources or soil, including damage resulting from conditions existing prior to the acquisition of such facilities by Madera. Madera may also be subject to liability for any off-site environmental contamination caused by pollutants or hazardous substances whose transportation, treatment or disposal was arranged by Madera or its predecessors. Any substantial liability for environmental damage incurred by Madera could have a material adverse effect on Madera's financial condition, results of operations or cash flows. LEGAL PROCEEDINGS In the normal course of its business and as a result of the extensive governmental regulation of the solid waste industry, Madera may periodically become subject to various judicial and administrative proceeding involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines on Madera or to revoke or deny renewal of an operating permit held by Madera. From time to time Madera may also be subject to actions brought by citizens' groups or adjacent landowners in connection with the permitting and licensing of landfills and transfer stations, or alleging environmental damage or violations of the permits and licenses pursuant to which Madera operates. In addition, Madera may become party to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of the waste management business. However, as of December 31, 1997, there is no current proceeding or litigation involving Madera that Madera believes will have a material adverse impact on Madera's business, financial condition, results of operations or cash flows. 5. RELATED PARTY TRANSACTIONS Madera performs repair services on equipment owned and operated by shareholders of Madera. Revenues relating to these activities were $41, $60 and $51 for the years ended December 31, 1995, 1996 and 1997, respectively. As of December 31, 1996 and 1997, Madera has receivables of $100 and $113, respectively, relating to these activities. 6. 401(k) PLAN Madera has a voluntary savings and investment plan (the "401(k) Plan"). The 401(k) Plan is available to all eligible employees of Madera. Under the 401(k) Plan Madera is required to match 100% of employees' contributions up to a maximum of 3% of the employees' wages. During the years ended December 31, 1995, 1996 and 1997, Madera's 401(k) Plan expenses were approximately $78, $107 and $108, respectively. F-68 137 MADERA DISPOSAL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS) 7. PRO FORMA INCOME TAX INFORMATION (UNAUDITED) The following unaudited pro forma information reflects income tax expense (benefit) as if Madera had been subject to federal and state income taxes:
YEAR ENDED DECEMBER 31, -------------------------- 1995 1996 1997 ------ ------ ------ Current: Federal........................................... $(16) $(19) $197 State............................................. -- 12 57 Deferred: Federal........................................... 32 188 33 State............................................. 14 27 8 ---- ---- ---- Pro forma income taxes.............................. $ 30 $208 $295 ==== ==== ====
The pro forma provisions for income taxes for the years ended December 31, 1995, 1996 and 1997 differ from the amounts computed by applying the applicable statutory federal income tax rate (34%) to income before income taxes due to state franchise taxes, certain non-deductible expenses and refundable tax credits. Madera's pro forma deferred income tax asset of approximately $20 and $54 at December 31, 1996 and 1997, respectively, relates principally to differences in the recognition of bad debt expenses, state franchise taxes and certain other temporary differences. Madera also has pro forma deferred tax liabilities at December 31, 1996 and 1997 of approximately $534 and $570, respectively, which relate to differences between tax and financial methods of depreciation. 8. SUBSEQUENT EVENTS On January 12, 1998, Madera distributed $131 to its shareholders. F-69 138 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Shareholders Arrow Sanitary Service, Inc. We have audited the accompanying balance sheet of Arrow Sanitary Service, Inc. as of September 30, 1997, and the related statement of income and retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Arrow Sanitary Service, Inc. at September 30, 1997, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Sacramento, California July 8, 1998 F-70 139 ARROW SANITARY SERVICE, INC. BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS
SEPTEMBER 30, MARCH 31, 1997 1998 ------------- ----------- (UNAUDITED) Current assets: Cash and cash equivalents................................. $ 205 $ 274 Accounts receivable....................................... 520 694 Prepaid expenses and other current assets................. 37 48 ------ ------ Total current assets.............................. 762 1,016 Property and equipment, net................................. 815 926 Intangible assets, net...................................... 121 118 Other assets................................................ 48 13 ------ ------ $1,746 $2,073 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 470 $ 439 Deferred revenue.......................................... 11 11 Accrued liabilities....................................... 151 213 Current portion of long-term debt......................... 168 154 ------ ------ Total current liabilities......................... 800 817 Long-term portion of capital lease obligations.............. -- 45 Long-term debt.............................................. 429 450 Deferred income taxes....................................... 34 46 Commitments and contingencies (Note 4) Shareholders' equity: Common stock: no par value; 1,000 shares authorized; 600 shares issued and outstanding.......................... 47 47 Treasury stock payments................................... (25) (25) Retained earnings......................................... 461 693 ------ ------ Total shareholders' equity........................ 483 715 ------ ------ $1,746 $2,073 ====== ======
See accompanying notes. F-71 140 ARROW SANITARY SERVICE, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS (DOLLARS IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, ---------------- 1997 1997 1998 ------------- ------ ------ (UNAUDITED) Revenues.................................................. $6,209 $2,872 $3,148 Operating expenses: Cost of operations...................................... 4,970 2,080 2,255 Selling, general and administrative..................... 776 448 369 Depreciation and amortization........................... 143 70 85 ------ ------ ------ Income from operations.................................... 320 274 439 Interest expense.......................................... (72) (39) (30) Other income (expense), net............................... (2) (5) 40 ------ ------ ------ Income before income taxes................................ 246 230 449 Income tax expense........................................ (117) (98) (217) ------ ------ ------ Net income................................................ 129 132 232 Retained earnings, beginning of period.................... 332 332 461 ------ ------ ------ Retained earnings, end of period.......................... $ 461 $ 464 $ 693 ====== ====== ======
See accompanying notes. F-72 141 ARROW SANITARY SERVICE, INC. STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED MARCH 31, SEPTEMBER 30, ---------------- 1997 1997 1998 ------------- ------ ------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................... $ 129 $ 132 $ 232 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......................... 143 70 85 Deferred income taxes................................. 34 -- 12 Gain on sale of property and equipment................ (2) -- -- Changes in operating assets and liabilities: Accounts receivable................................. (2) (105) (174) Prepaid expenses and other current assets........... 19 17 (11) Other assets........................................ 1 2 35 Accounts payable.................................... 43 (46) (31) Accrued liabilities................................. 70 110 62 ----- ----- ----- Net cash provided by operating activities................ 435 180 210 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for property and equipment.......... (117) (80) (134) Treasury stock payments.................................. (5) -- -- ----- ----- ----- Net cash used in investing activities...................... (122) (80) (134) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt............................. -- 200 97 Principal payments on long-term debt..................... (191) (298) (104) ----- ----- ----- Net cash used in financing activities...................... (191) (98) (7) ----- ----- ----- Net increase in cash....................................... 122 2 69 Cash and cash equivalents, beginning of period............. 83 83 205 ----- ----- ----- Cash and cash equivalents, end of period................... $ 205 $ 85 $ 274 ===== ===== ===== SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH TRANSACTIONS: Cash paid for interest..................................... $ 74 $ 39 $ 33 ===== ===== =====
See accompanying notes. F-73 142 ARROW SANITARY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO MARCH 31, 1998 AND THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS Arrow Sanitary Service, Inc. (the "Company") is a regional, integrated, non-hazardous solid waste services company that provides collection, hauling and disposal of recyclable materials for residential and commercial customers in various counties of Oregon and Washington in and around Portland, Oregon. SALE OF THE COMPANY On June 17, 1998, the Company's shareholders entered into an agreement to sell all capital stock in the Company to Waste Connections, Inc. ("WCI") for cash and common stock of WCI. INTERIM FINANCIAL INFORMATION The unaudited interim financial statements as of March 31, 1998 and for the six months ended March 31, 1997 and 1998 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ended September 30, 1998. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. Credit risk on accounts receivable is minimized as a result of the large and diverse nature of the Company's customer base. Credit losses have been within management's expectations. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Improvements or betterments which significantly extend the life of an asset are capitalized. Expenditures for maintenance and repair costs are charged to operations as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal. Gains and losses F-74 143 ARROW SANITARY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO MARCH 31, 1998 AND THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) resulting from property disposals are included in other income (expense). Depreciation is computed using the straight-line method over the estimated useful lives of the assets, or lease term, whichever is shorter. The estimated useful lives of property and equipment are as follows: Buildings.............................................. 30 years Machinery and equipment................................ 3 - 10 years Rolling stock.......................................... 10 years Furniture and fixtures................................. 3 - 6 years Containers............................................. 5 - 12 years
INTANGIBLE ASSETS Intangible assets are comprised of the following at September 30, 1997: Goodwill.................................................... $126 Covenant not to compete..................................... 12 ---- 138 Accumulated amortization.................................... (17) ---- $121 ====
Goodwill represents the excess of the purchase price over the fair value of the net assets of entities previously acquired by the Company and is amortized on a straight-line basis over the period of expected benefit of 40 years. The covenant not to compete is amortized on a straight-line basis over the period of expected benefit of 5 years. REVENUE RECOGNITION The Company recognizes revenues as services are provided. Certain customers are billed in advance and, accordingly, recognition of the related revenues is deferred until the services are provided. INCOME TAXES The Company uses the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. SIGNIFICANT CUSTOMERS AND SUPPLIERS The Company has three major customers which represent 21%, 14% and 11% of total sales, respectively, for the year ended September 30, 1997. In addition, the Company purchases a substantial portion of its recyclable materials and equipment from four major suppliers. F-75 144 ARROW SANITARY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO MARCH 31, 1998 AND THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 2. PROPERTY AND EQUIPMENT Property and equipment consists of the following:
SEPTEMBER 30, MARCH 31, 1997 1998 ------------- ----------- (UNAUDITED) Land.............................................. $ 121 $ 121 Buildings......................................... 168 168 Machinery and equipment........................... 480 593 Rolling stock..................................... 1,026 1,028 Furniture and fixtures............................ 104 109 Containers........................................ 296 342 ------- ------- 2,195 2,361 Less accumulated depreciation and amortization.... (1,380) (1,435) ------- ------- $ 815 $ 926 ======= =======
3. FINANCING ARRANGEMENTS BANK LINE OF CREDIT The Company maintains a revolving line of credit with a financial institution. Under the agreement, the Company may borrow an amount up to $150. Interest on the revolving line of credit accrues at the financial institution's prime rate (8.5% at September 30, 1997) plus 1.5%. The agreement provides that the Company comply with various financial and other covenants. The line of credit had no amounts outstanding at September 30, 1997. LONG-TERM DEBT Long-term debt as of September 30, 1997 consists of the following: Contract financing notes payable bearing interest at 9%; payable in monthly installments of principal and interest (ranging from $1 to $2); maturing between October 20, 1998 and November 15, 2004..................................... $159 Mortgage financing notes payable bearing interest at 8.25%; payable in monthly installments of principal and interest of $1; maturing on January 20, 2022; secured by certain real estate............................................... 139 Equipment financing notes payable bearing interest (ranging from 8.5% to 10.75%); payable in monthly installments of principal (ranging from $2 to $5) plus interest; maturing on March 20, 1998 and October 12, 2000; secured by the Company's accounts receivable, inventory, equipment, and certain other assets...................................... 299 ---- 597 Less: current portion....................................... 168 ---- Long-term debt.............................................. $429 ====
One of the equipment financing notes, with no outstanding balance at September 30, 1997, contains certain restrictive covenants, which among other things require that specified financial F-76 145 ARROW SANITARY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO MARCH 31, 1998 AND THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 3. FINANCING ARRANGEMENTS (CONTINUED) balances and ratios be maintained, restrict the payment of dividends and prohibit the incurrence of additional indebtedness. As of September 30, 1997, aggregate contractual future principal payments by fiscal year on long-term debt are due as follows: 1998........................................................ $168 1999........................................................ 121 2000........................................................ 81 2001........................................................ 27 2002........................................................ 26 Thereafter.................................................. 174 ---- $597 ====
4. COMMITMENTS AND CONTINGENCIES COMMITMENTS Operating Leases The Company leases its facilities and certain equipment under noncancelable operating leases. Rent expense under these agreements approximated $50 for the year ended September 30, 1997. The future minimum lease payments under these agreements as of September 30, 1997 are as follows: 1998........................................................ $ 54 1999........................................................ 54 2000........................................................ 49 2001........................................................ 48 2002........................................................ 48 Thereafter.................................................. 494 ---- $747 ====
CONTINGENCIES Legal Proceedings In the normal course of its business and as a result of the extensive governmental regulation of the solid waste industry, the Company may periodically become subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines on the Company or to revoke or deny renewal of an operating permit held by the Company. From time to time the Company may also be subject to actions brought by citizens' groups or adjacent landowners in connection with the permitting and licensing of landfills and transfer stations, or alleging environmental damage or violations of the permits and licenses pursuant to which the Company operates. F-77 146 ARROW SANITARY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO MARCH 31, 1998 AND THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 4. COMMITMENTS AND CONTINGENCIES (CONTINUED) In addition, the Company may become party to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of the waste management business. However, as of September 30, 1997, there is no current proceeding or litigation involving the Company that the Company believes will have a material adverse impact on the Company's business, financial condition, results of operations or cash flows. Employees Approximately 11 of the Company's route drivers are represented by the Teamsters Union. The Company entered into a three-year collective bargaining agreement in March 1998. The Company is not aware of any other organizational efforts among its employees and believes that its relations with its employees are good. 5. 401(k) PLAN The Company has a voluntary savings and investment plan (the "401(k) Plan"). The 401(k) Plan is available to all eligible employees of the Company. Under the 401(k) Plan the Company is required to match 3% of employees' contributions up to a maximum of 6% of the employees' wages once the employee contributes a minimum of 3%. The Company will match 100% of employee contributions between 3 and 6%. Sixteen of twenty-one eligible employees participated in the plan with minimum contributions of at least 3%. During the year ended September 30, 1997, the Company's 401(k) Plan expense was approximately $35. 6. INCOME TAXES The provision for income taxes for the year ended September 30, 1997 consists of the following: Current: Federal................................................... $ 60 State..................................................... 23 Deferred: Federal................................................... 29 State..................................................... 5 ---- $117 ====
Deferred taxes result from temporary differences in the recognition of certain expense items for income tax and financial reporting purposes. The Company's deferred taxes as of September 30, 1997 are substantially comprised of depreciation deducted for tax purposes that will be recorded in future periods for financial reporting purposes. F-78 147 ARROW SANITARY SERVICE, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO MARCH 31, 1998 AND THE SIX MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 6. INCOME TAXES (CONTINUED) The principal reasons for the difference between the effective income tax rate and the federal statutory income tax rate are as follows: Federal expense expected at statutory rates................. $ 84 State and local income taxes, net of Federal benefit........ 15 Officers life insurance expense............................. 17 Other....................................................... 1 ---- $117 ====
The Company paid $10 for income taxes during the year ended September 30, 1997. 7. YEAR 2000 (UNAUDITED) The Company will need to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 ("Year 2000") and thereafter. To date, the Company has not incurred any costs related to the Year 2000 project. The Company does not believe that its expenditures relating to the Year 2000 project will be material. However, if the required Year 2000 modifications and conversions are not made or are not completed in a timely manner, the Year 2000 issue could materially affect the Company's operations. F-79 148 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Shrader Refuse and Recycling Service Company We have audited the accompanying balance sheets of Shrader Refuse and Recycling Service Company as of September 30, 1996 and 1997, and the related statements of income, stockholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Shrader Refuse and Recycling Service Company at September 30, 1996 and 1997, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. GRANT THORNTON LLP Lincoln, Nebraska August 24, 1998 F-80 149 SHRADER REFUSE AND RECYCLING SERVICE COMPANY BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS
SEPTEMBER 30, ---------------- JUNE 30, 1996 1997 1998 ------ ------ ------------- (UNAUDITED) Current assets: Cash and cash equivalents................................ $ 287 $ 116 $ 342 Marketable equity securities............................. 246 403 576 Accounts receivable, less allowance for doubtful accounts of $29 and $32 at September 30, 1996 and 1997, respectively.......................................... 674 897 808 Prepaid expenses......................................... 37 69 79 ------ ------ ------ Total current assets............................. 1,244 1,485 1,805 Property and equipment, net................................ 3,939 5,195 5,112 Goodwill, net.............................................. 223 214 209 Other assets............................................... 122 157 208 ------ ------ ------ $5,528 $7,051 $7,334 ====== ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable......................................... $ 244 $ 202 $ 323 Accrued liabilities...................................... 100 103 117 Current portion of long-term debt........................ 763 703 703 Current portion of capital lease obligations............. 18 97 97 ------ ------ ------ Total current liabilities........................ 1,125 1,105 1,240 Long-term debt, net of current portion..................... 1,676 1,258 959 Capital lease obligations, net of current portion.......... 338 1,583 1,511 Commitments and contingencies (Note F) Stockholders' equity: Common stock: $1 par value; 10,000 shares authorized; 8,571 shares issued and outstanding................. 9 9 9 Retained earnings........................................ 2,338 3,012 3,465 Net unrealized gain on marketable equity securities...... 42 84 150 ------ ------ ------ Total stockholders' equity....................... 2,389 3,105 3,624 ------ ------ ------ $5,528 $7,051 $7,334 ====== ====== ======
The accompanying notes are an integral part of these statements. F-81 150 SHRADER REFUSE AND RECYCLING SERVICE COMPANY STATEMENTS OF INCOME (IN THOUSANDS)
NINE YEAR ENDED MONTHS ENDED SEPTEMBER 30, JUNE 30, ---------------- ---------------- 1996 1997 1997 1998 ------ ------ ------ ------ (UNAUDITED) Revenues............................................. $5,461 $6,896 $5,027 $5,382 Operating expenses: Cost of operations................................. 3,861 4,601 3,241 3,479 Selling, general and administrative................ 516 567 426 425 Depreciation and amortization...................... 565 770 546 697 ------ ------ ------ ------ 4,942 5,938 4,213 4,601 ------ ------ ------ ------ Income from operations............................... 519 958 814 781 Other income (expense): Interest expense................................... (206) (292) (219) (287) Other income, net.................................. 35 59 19 19 ------ ------ ------ ------ (171) (233) (200) (268) ------ ------ ------ ------ Net income........................................... $ 348 $ 725 $ 614 $ 513 ====== ====== ====== ====== Pro forma income taxes (unaudited) (Note G).......... $ 141 $ 290 $ 245 $ 206 ------ ------ ------ ------ Pro forma net income (unaudited) (Note G)............ $ 207 $ 435 $ 369 $ 307 ====== ====== ====== ======
The accompanying notes are an integral part of these statements. F-82 151 SHRADER REFUSE AND RECYCLING SERVICE COMPANY STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED SEPTEMBER 30, 1996 AND 1997 AND THE NINE MONTHS ENDED JUNE 30, 1998 (INFORMATION RELATED TO THE NINE MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
NET UNREALIZED GAIN (LOSS) ON COMMON STOCK MARKETABLE TOTAL --------------- RETAINED EQUITY STOCKHOLDERS' SHARES AMOUNT EARNINGS SECURITIES EQUITY ------ ------ -------- -------------- ------------- Balance October 1, 1995................. 8,571 $9 $2,154 $ (2) $2,161 Net income.............................. -- -- 348 -- 348 Distributions to stockholders........... -- -- (164) -- (164) Change in net unrealized gain (loss) on marketable equity securities.......... -- -- -- 44 44 ----- -- ------ ---- ------ Balance at September 30, 1996........... 8,571 9 2,338 42 2,389 Net income.............................. -- -- 725 -- 725 Distributions to stockholders........... -- -- (51) -- (51) Change in net unrealized gain (loss) on marketable equity securities.......... -- -- -- 42 42 ----- -- ------ ---- ------ Balance at September 30, 1997........... 8,571 9 3,012 84 3,105 Net income.............................. -- -- 513 -- 513 Distributions to stockholders........... -- -- (60) -- (60) Change in net unrealized gain (loss) on marketable equity securities.......... -- -- -- 66 66 ----- -- ------ ---- ------ Balance at June 30, 1998................ 8,571 $9 $3,465 $150 $3,624 ===== == ====== ==== ======
The accompanying notes are an integral part of this statement. F-83 152 SHRADER REFUSE AND RECYCLING SERVICE COMPANY STATEMENTS OF CASH FLOWS (IN THOUSANDS)
NINE YEAR ENDED MONTHS ENDED SEPTEMBER 30, JUNE 30, ----------------- ---------------- 1996 1997 1997 1998 ------- ------ ------ ------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 348 $ 725 $ 614 $ 513 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.......................... 565 770 546 697 Realized (gain) loss on marketable equity securities... 8 (23) (19) (19) Gain on sale of property and equipment................. (6) (8) -- -- Changes in operating assets and liabilities: Accounts receivable, net............................. (25) (223) (49) 89 Prepaid expenses..................................... 16 (32) (7) (10) Other assets......................................... (6) (35) (85) (51) Accounts payable..................................... 73 (42) (30) 121 Accrued liabilities.................................. 23 3 18 14 ------- ------ ------ ------ Net cash provided by operating activities......... 996 1,135 988 1,354 ------- ------ ------ ------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for property and equipment........... (2,010) (655) (395) (609) Proceeds from sale of property and equipment.............. 6 26 -- -- Purchases of marketable equity securities................. (272) (307) (273) (232) Proceeds from sale of marketable equity securities........ 81 215 184 144 ------- ------ ------ ------ Net cash used in investing activities............. (2,195) (721) (484) (697) ------- ------ ------ ------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt.............................. 1,777 300 120 250 Principal payments on long-term debt and capital lease obligations............................................ (518) (834) (617) (621) Cash distributions made to stockholders................... (164) (51) (39) (60) ------- ------ ------ ------ Net cash provided by (used in) financing activities...................................... 1,095 (585) (536) (431) ------- ------ ------ ------ Net change in cash and cash equivalents..................... (104) (171) (32) 226 Cash and cash equivalents: Beginning of period....................................... 391 287 287 116 ------- ------ ------ ------ End of period............................................. $ 287 $ 116 $ 255 $ 342 ======= ====== ====== ====== SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH TRANSACTIONS: Cash paid for interest.................................... $ 206 $ 299 $ 219 $ 287 ======= ====== ====== ====== Capital lease obligations incurred for the purchase of property and equipment................................. $ 376 $1,380 $1,380 $ -- ======= ====== ====== ======
The accompanying notes are an integral part of these statements. F-84 153 SHRADER REFUSE AND RECYCLING SERVICE COMPANY NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 AND 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.) NOTE A -- ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Organization and Business Shrader Refuse and Recycling Service Company (the "Company") is a non-hazardous solid waste services company that provides collection, hauling, disposal and recycling services to residential and commercial customers in various counties of Nebraska. The Company derives a portion of its revenue from exclusive municipal contracts, of which a significant number will be subject to competitive bidding at some time in the future. The Company intends to bid on additional municipal contracts as a means of adding customers. There can be no assurance that the Company will be the successful bidder to obtain or retain contracts that come up for competitive bidding. 2. Sale of the Company On July 31, 1998, the Company's stockholders sold all capital stock of the Company to Waste Connections, Inc. ("WCI") for cash and common stock of WCI. 3. Interim Financial Information The unaudited interim financial statements as of June 30, 1998 and for the nine months ended June 30, 1997 and 1998 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending September 30, 1998. 4. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 5. Cash Equivalents The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. 6. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. Credit risk on accounts receivable is minimized as a result of the large and diverse nature of the Company's customer base. Credit losses have been within management's expectations. F-85 154 SHRADER REFUSE AND RECYCLING SERVICE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 AND 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.) NOTE A -- ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 7. Marketable Equity Securities The Company's marketable equity securities are classified as "available for sale" and stated at market value. Unrealized holding gains and losses on such securities are reported as a separate component of stockholders' equity until realized. Gains and losses on the disposition of marketable equity securities are determined using the first-in, first-out method. Declines in the fair value of individual securities below their cost that are other than temporary are recorded as realized losses through a charge to income. 8. Property and Equipment Property and equipment are stated at cost. Improvements or betterments which significantly extend the life of an asset are capitalized. Expenditures for maintenance and repair costs are charged to operations as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal. Gains and losses resulting from property disposals are included in other income or expense. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, or lease term, whichever is shorter. The estimated useful lives of property and equipment are as follows: Buildings under capital leases.......................... 10 years Machinery and equipment................................. 3-10 years Rolling stock........................................... 5-10 years Containers.............................................. 5-12 years
9. Goodwill Goodwill represents the excess of the purchase price over the fair value of the tangible net assets of entities previously acquired by the Company and is amortized on a straight-line basis over the period of expected benefit of 40 years. 10. Revenue Recognition The Company recognizes revenues as services are provided. Certain customers are billed in advance and, accordingly, recognition of the related revenues is deferred until the services are provided. 11. Income Taxes The Company operates under Subchapter "S" of the Internal Revenue Code for federal and state income tax reporting purposes. Consequently, all of the income tax attributes and liabilities of the Company's operations flow through to the individual shareholders. F-86 155 SHRADER REFUSE AND RECYCLING SERVICE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 AND 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.) NOTE A -- ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 12. Significant Customer The Company has one major customer which represents 16% of total revenues for the year ended September 30, 1997. NOTE B -- MARKETABLE EQUITY SECURITIES At September 30, 1996 and 1997, the aggregate market value of marketable equity securities exceeded their aggregate cost by $42 and $84, respectively. Gross unrealized gains totaled $44 and $89 and gross unrealized losses totaled $2 and $5 at September 30, 1996 and 1997, respectively. Proceeds from sales of marketable equity securities during the years ended September 30, 1996 and 1997 were $81 and $215, respectively. Gross gains of $4 and gross losses of $12 were realized on sales during 1996. Gross gains of $37 and gross losses of $14 were realized on sales during 1997. NOTE C -- PROPERTY AND EQUIPMENT Property and equipment consists of the following:
SEPTEMBER 30, ---------------- JUNE 30, 1996 1997 1998 ------ ------ ------------- (UNAUDITED) Buildings under capital leases..................... $ 376 $1,756 $1,756 Machinery and equipment............................ 440 455 471 Rolling stock...................................... 3,359 3,656 4,009 Containers......................................... 1,781 2,089 2,328 ------ ------ ------ 5,956 7,956 8,564 Less accumulated depreciation and amortization..... 2,017 2,761 3,452 ------ ------ ------ $3,939 $5,195 $5,112 ====== ====== ======
NOTE D -- GOODWILL Goodwill is comprised of the following:
SEPTEMBER 30, ---------------- JUNE 30, 1996 1997 1998 ------ ------ ------------- (UNAUDITED) Goodwill........................................... $ 351 $ 351 $ 351 Accumulated amortization........................... 128 137 142 ------ ------ ------ $ 223 $ 214 $ 209 ====== ====== ======
F-87 156 SHRADER REFUSE AND RECYCLING SERVICE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 AND 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.) NOTE E -- FINANCING ARRANGEMENTS
SEPTEMBER 30, ---------------- JUNE 30, 1996 1997 1998 ------ ------ ------------- (UNAUDITED) Notes payable to bank bearing interest at rates ranging from 7.75% to 9.50%, payable in monthly installments of principal and interest; maturing through August 2001.............................. $2,244 $1,766 $1,467 Note payable to related party, with interest at 9% per annum payable quarterly until monthly installments of principal and interest commence on November 1997. This note matures July 2003 and is without collateral............................ 195 195 195 ------ ------ ------ 2,439 1,961 1,662 Less current portion............................... 763 703 703 ------ ------ ------ Long-term debt, net of current portion............. $1,676 $1,258 $ 959 ====== ====== ======
On July 1, 1998, the Company entered into an $875 credit facility with a bank maturing December 2001. The credit facility is a line of credit through January 1, 1999, whereupon all borrowings under the facility will be refinanced on a note payable due in monthly installments through December 2001. Borrowings bear interest at 8.0% per annum. During July 1998, the Company utilized all of the credit facility for equipment purchases. The notes payable to bank and the credit facility are collateralized by substantially all of the Company's assets and the personal guarantees of the stockholders. The Company is subject to certain restrictive covenants with the bank, which among other things, require that a specified debt service coverage ratio be maintained and restrict the payment of dividends solely to amounts sufficient to meet the tax requirements of the stockholders relative to the Company's status as a Subchapter "S" Corporation. The Company was in compliance with or received waivers of the covenant requirements for the year ended September 30, 1997. As of September 30, 1997, aggregate contractual future principal payments by fiscal year are due as follows: 1998................................................ $ 703 1999................................................ 546 2000................................................ 355 2001................................................ 284 2002................................................ 39 Thereafter.......................................... 34 ------ $1,961 ======
In conjunction with the acquisition of the Company by WCI on July 31, 1998, all of the outstanding long-term debt of the Company was repaid. F-88 157 SHRADER REFUSE AND RECYCLING SERVICE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 AND 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.) NOTE F -- COMMITMENTS AND CONTINGENCIES COMMITMENTS Leases The Company leases three facilities from a related party under two ten-year leases expiring in 2005 and 2007. For financial reporting purposes, minimum lease rentals relating to the facilities have been capitalized. The related assets and obligations have been recorded using the Company's implicit borrowing rate at the inception of the leases. The following amounts are included in property and equipment as buildings under capital leases:
SEPTEMBER 30, -------------- JUNE 30, 1996 1997 1998 ---- ------ ----------- (UNAUDITED) Buildings.................................... $376 $1,756 $1,756 Less accumulated amortization................ 38 121 253 ---- ------ ------ $338 $1,635 $1,503 ==== ====== ======
The following is a schedule by fiscal years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of September 30, 1997: 1998........................................................ $ 321 1999........................................................ 321 2000........................................................ 321 2001........................................................ 321 2002........................................................ 321 Thereafter.................................................. 1,368 ------ Total minimum lease payments................................ 2,973 Less amount representing interest........................... 1,293 ------ $1,680 ====== Current portion............................................. $ 97 Long-term portion........................................... 1,583 ------ $1,680 ======
Prior to entering into the current leases, the Company leased these facilities on a month-to-month basis from the related party. The Company recognized rent expense of $171 and $117 in fiscal 1996 and 1997, respectively. Total rent and minimum lease payments to the related party during fiscal 1996 and 1997 were $249 and $260, respectively. In conjunction with the acquisition of the Company by WCI on July 31, 1998, the current leases were terminated, two of the three facilities were acquired and the remaining facility was leased under a two-year lease with an option to extend for an additional two years through July 2002. F-89 158 SHRADER REFUSE AND RECYCLING SERVICE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 AND 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.) NOTE F -- COMMITMENTS AND CONTINGENCIES (CONTINUED) Noncompete Agreement The Company has a noncompete agreement with a related party that requires the Company to pay $4 a month through October 1997 provided the related party abides by the noncompete agreement. The Company paid the related party $44 in each of the fiscal years ended September 30, 1996 and 1997. CONTINGENCIES Legal Proceedings In the normal course of its business and as a result of the extensive governmental regulation of the solid waste industry, the Company may periodically become subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines on the Company or to revoke or deny renewal of an operating permit held by the Company. From time to time the Company may also be subject to actions brought by citizens' groups or adjacent landowners in connection with the permitting and licensing of landfills and transfer stations, or alleging environmental damage or violations of the permits and licenses pursuant to which the Company operates. In addition, the Company may become party to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of the waste management business. As of September 30, 1997, there is no current proceeding or litigation involving the Company that the Company believes will have a material adverse impact on the Company's business, financial condition, results of operations or cash flows. NOTE G -- PRO FORMA INCOME TAX INFORMATION (UNAUDITED) Unaudited pro forma information reflects income tax expense as if the Company had been subject to federal and state income taxes. The pro forma provisions for income taxes for the years ended September 30, 1996 and 1997 and the nine month periods ended June 30, 1997 and 1998 differ from the amounts computed by applying the applicable statutory federal income tax rate (34%) to income before income taxes due to state income taxes and certain non-deductible expenses. F-90 159 SHRADER REFUSE AND RECYCLING SERVICE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 AND 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.) NOTE G -- PRO FORMA INCOME TAX INFORMATION (UNAUDITED) (CONTINUED) The following is a summary of pro forma income taxes for the years ended September 30, 1996 and 1997:
YEAR ENDED SEPTEMBER 30, -------------- 1996 1997 ----- ----- Current: Federal................................................... $ 47 $ 66 State..................................................... 10 14 Deferred: Federal................................................... 69 171 State..................................................... 15 39 ---- ---- Pro forma income taxes...................................... $141 $290 ==== ====
The Company's pro forma deferred income tax liabilities of approximately $739 and $949 at September 30, 1996 and 1997, respectively, relate principally to differences between tax and financial methods of reporting depreciation expense and the use of the cash method of accounting for income tax purposes which gives rise to differences between financial statement and tax return recognition of receivables, prepaid expenses, accounts payable and accrued liabilities. NOTE H -- FINANCIAL INSTRUMENTS The following estimated fair value information pertains to the Company's financial instruments and does not purport to represent the aggregate net fair value of the Company. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying amount approximates fair value because of the short maturity of those instruments. Marketable equity securities: Quoted market prices for the Company's marketable equity securities are used to estimate fair value. Long-term debt and capital lease obligations: Current incremental borrowing rates for similar type borrowings are used to estimate the fair value of the Company's long-term debt and capital lease obligations. F-91 160 SHRADER REFUSE AND RECYCLING SERVICE COMPANY NOTES TO FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 30, 1996 AND 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO JUNE 30, 1998 AND THE NINE MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED.) NOTE H -- FINANCIAL INSTRUMENTS (CONTINUED) The carrying amounts and estimated fair values of the Company's financial instruments are as follows:
SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 --------------------- --------------------- ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- --------- -------- --------- Financial Assets: Cash and cash equivalents..................... $ 287 $ 287 $ 116 $ 116 Marketable equity securities.................. 246 246 403 403 Financial Liabilities: Long-term debt................................ 2,439 2,528 1,961 1,970 Capital lease obligations..................... 356 486 1,680 2,038
F-92 161 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS The Members Contractor's Waste Removal, L.C. We have audited the accompanying balance sheet of Contractor's Waste Removal, L.C. as of December 31, 1997, and the related statements of operations and change in members' deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Contractor's Waste Removal, L.C. at December 31, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Sacramento, California August 26, 1998 F-93 162 CONTRACTOR'S WASTE REMOVAL, L.C. BALANCE SHEETS (IN THOUSANDS) ASSETS
DECEMBER 31, MARCH 31, 1997 1998 ------------ ----------- (UNAUDITED) Current assets: Accounts receivable, net of allowance for doubtful accounts of $75........................................ $ 256 $ 222 Property and equipment: Containers................................................ 1,332 1,703 Furniture and fixtures.................................... 104 104 Vehicles.................................................. 454 562 ------ ------ 1,890 2,369 Less: accumulated depreciation and amortization............. 316 375 ------ ------ 1,574 1,994 Other assets................................................ 34 14 ------ ------ $1,864 $2,230 ====== ====== LIABILITIES AND MEMBERS' DEFICIT Current liabilities: Overdraft on bank balance................................. $ 35 $ 38 Accounts payable.......................................... 291 135 Accrued liabilities....................................... 121 71 Lines of credit........................................... 392 392 Current portion of long-term debt......................... 510 1,025 Current portion of notes payable to members............... 50 50 Current portion of capital lease obligations.............. 59 59 ------ ------ Total current liabilities......................... 1,458 1,770 Long-term debt.............................................. 375 518 Notes payable to members.................................... 95 95 Capital lease obligations................................... 180 178 Commitments and contingencies (Note 6) Members' deficit............................................ (244) (331) ------ ------ $1,864 $2,230 ====== ======
See accompanying notes. F-94 163 CONTRACTOR'S WASTE REMOVAL, L.C. STATEMENTS OF OPERATIONS AND CHANGE IN MEMBERS' DEFICIT (IN THOUSANDS)
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, -------------- 1997 1997 1998 ------------ ----- ----- (UNAUDITED) Revenues.................................................... $1,903 $ 377 $ 438 Operating expenses: Cost of operations........................................ 1,234 262 315 Selling, general and administrative....................... 359 67 97 Depreciation and amortization............................. 202 48 59 ------ ----- ----- Income (loss) from operations............................... 108 -- (33) Interest expense............................................ (178) (40) (54) ------ ----- ----- Net loss.................................................... (70) (40) (87) Members' withdrawals........................................ (14) -- -- ------ ----- ----- Net change in members' deficit.............................. (84) (40) (87) Members' deficit, beginning of period....................... (160) (160) (244) ------ ----- ----- Members' deficit, end of period............................. $ (244) $(200) $(331) ====== ===== =====
See accompanying notes. F-95 164 CONTRACTOR'S WASTE REMOVAL, L.C. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, -------------- 1997 1997 1998 ------------ ----- ----- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (70) $ (40) $ (87) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization.......................... 202 48 59 Changes in operating assets and liabilities: Accounts receivable, net............................. (83) (18) 34 Other assets......................................... (27) (1) 20 Accounts payable..................................... 105 (81) (156) Accrued liabilities.................................. 18 (13) (50) ----- ----- ----- Net cash provided by (used in) operating activities.... 145 (105) (180) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for property and equipment........... (235) -- -- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt and notes payable to members................................................ 435 229 208 Principal payments on long-term debt and notes payable to members................................................ (309) (146) (29) Principal payments on capital lease obligations........... (45) (12) (2) Member withdrawals........................................ (14) -- -- ----- ----- ----- Net cash provided by financing activities................... 67 71 177 ----- ----- ----- Net change in overdraft in bank balances.................... (23) (34) (3) Overdraft in bank balances at beginning of period........... (12) (12) (35) ----- ----- ----- Overdraft in bank balances at end of period................. $ (35) $ (46) $ (38) ===== ===== ===== SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest...................................... $ 151 $ 40 $ 54 ===== ===== =====
See accompanying notes. F-96 165 CONTRACTOR'S WASTE REMOVAL, L.C. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 (IN THOUSANDS) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS Contractor's Waste Removal, L.C. (the "Company") is a Utah limited liability company. The Company is a non-hazardous solid waste services company that provides collection, hauling and disposal of materials primarily for commercial customers in various counties in the State of Utah. Upon the sale or liquidation of the Company, the members have verbally agreed that each member will receive an amount equal to their original contribution basis in the Company as a first priority distribution after payment of all debt and other obligations of the Company including any notes payable to members. Remaining proceeds, if any, will be split between the members based upon their respective ownership percentages of the Company. INTERIM FINANCIAL INFORMATION The unaudited interim financial statements as of March 31, 1998 and for the three months ended March 31, 1997 and 1998 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risks consist primarily of accounts receivable. Credit risk on accounts receivable is minimized as a result of the large and diverse nature of the Company's customer base. The Company does maintain an allowance for such credit losses. Credit losses have been within management's expectations. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Improvements or betterments which significantly extend the life of an asset are capitalized. Expenditures for maintenance and repair costs are charged to operations as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, or lease term, whichever is shorter. The estimated useful lives are as follows: Containers............................................. 10-12 years Furniture and fixtures................................. 3-5 years Vehicles............................................... 5 years
F-97 166 CONTRACTOR'S WASTE REMOVAL, L.C. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) REVENUE RECOGNITION The Company recognizes revenues as services are provided. INCOME TAXES In conformity with the Internal Revenue Code and applicable state and local tax statutes, taxable income or loss of the Company is required to be reported in the tax returns of the individual members and, accordingly, no provision has been made in the accompanying financial statements for any federal, state, or local income taxes. 2. SHORT-TERM BORROWINGS The Company maintains four revolving lines of credit (the "Lines") with a financial institution. Under the Lines, the Company may borrow an amount up to $410. Borrowings under the Lines bear interest at the financial institution's prime rate (8.5% at December 31, 1997) plus 3.25%. The Lines are secured by the Company's accounts receivable and equipment and are personally guaranteed by the members. The Lines had $392 in the aggregate outstanding at December 31, 1997. 3. LONG-TERM DEBT Long-term debt as of December 31, 1997 consists of the following: Unsecured notes payable to private individuals bearing interest at 10%; payable in monthly installments of interest with the principal amount due at maturity; maturing on May 31, 1998 and July 3, 2010................. $ 282 Equipment financing notes payable; bearing interest at rates ranging from 8.9% to 13%; payable in monthly installments of principal plus interest; maturing June 4, 2000 through June 1, 2003; secured by property and equipment and personally guaranteed by the members...................... 584 Other....................................................... 19 ------ 885 Less: current portion....................................... 510 ------ Long-term debt.............................................. $ 375 ======
As of December 31, 1997, aggregate contractual future principal payments by fiscal year on long-term debt are due as follows: 1998........................................................ $ 510 1999........................................................ 101 2000........................................................ 101 2001........................................................ 54 2002........................................................ 14 Thereafter.................................................. 105 ------ $ 885 ======
F-98 167 CONTRACTOR'S WASTE REMOVAL, L.C. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 4. NOTES PAYABLE TO MEMBERS The Company has various notes payable to members which bear interest at rates ranging from 11% to 13% payable in monthly installments of principal and interest. The notes mature on January 1, 1998 through July 1, 2005. As of December 31, 1997, aggregate contractual future principal payments by fiscal year on notes payable to members are due as follows: 1998........................................................ $ 50 1999........................................................ 15 2000........................................................ 13 2001........................................................ 15 2002........................................................ 14 Thereafter.................................................. 38 ------ $ 145 ======
5. CAPITAL LEASE OBLIGATION Property and equipment includes $443 of equipment under capital lease as of December 31, 1997. Accumulated amortization for such equipment was $47 as of December 31, 1997. The future minimum lease payments under the capital lease along with the present value of the minimum lease payments as of December 31, 1997 are as follows: Minimum lease payments Year ending December 31: 1998........................................................ $ 83 1999........................................................ 77 2000........................................................ 77 2001........................................................ 53 ---- Total minimum lease payments................................ 290 Less amount representing interest........................... 51 ---- Present value of minimum lease payments..................... 239 Current portion............................................. 59 ---- Amounts due after one year.................................. $180 ====
6. COMMITMENTS AND CONTINGENCIES COMMITMENTS Operating Leases The Company leases its facilities and certain equipment under non-cancellable operating leases for periods ranging from 1 to 3 years. Rent expense under operating leases was approximately $31 for the year ended December 31, 1997. The future minimum lease payments under operating leases are $28, $29 and $15 for the years ended December 31, 1998, 1999, and 2000, respectively. F-99 168 CONTRACTOR'S WASTE REMOVAL, L.C. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) CONTINGENCIES Legal Proceedings In the normal course of its business and as a result of the extensive governmental regulation of the solid waste industry, the Company may periodically become subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines on the Company or to revoke or deny renewal of an operating permit held by the Company. In addition, the Company may become party to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of the waste management business. However, as of December 31, 1997, there is no current proceeding or litigation involving the Company that the Company believes will have a material adverse impact on the Company's business, financial condition, results of operations and cash flows. 7. RELATED PARTY TRANSACTIONS During the year ended December 31, 1997, the Company purchased approximately $98 of containers from a Company 50% owned by a member. 8. YEAR 2000 (UNAUDITED) The Company will need to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 ("Year 2000") and thereafter. To date, the Company has not incurred any costs related to the Year 2000 project. The Company does not believe that its expenditures relating to the Year 2000 project will be material. However, if the required Year 2000 modifications and conversions are not made or are not completed in a timely manner, the Year 2000 issue could materially affect the Company's operations. 9. SUBSEQUENT EVENTS ACQUISITION OF UTAH DUMPSTER The Company entered into an agreement effective January 1, 1998 to purchase the assets of Utah Dumpster, a non-hazardous solid waste services company, for total consideration of $600 (consisting primarily of assumed liabilities of Utah Dumpster). The acquisition will be accounted for as a purchase. No amounts have been included in the accompanying December 31, 1997 financial statements with respect to the assets, liabilities, or operations of Utah Dumpster. The operations of Utah Dumpster have been included in the Company's unaudited statements of operations for the three months ended March 31, 1998. SALE OF THE COMPANY On June 1, 1998, the Company's Members entered into an agreement to sell all of the Company membership interests to Waste Connections, Inc. ("WCI") for cash and stock of WCI. F-100 169 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Stockholders Curry Transfer and Recycling, Inc. We have audited the accompanying consolidated balance sheet of Curry Transfer and Recycling, Inc. as of December 31, 1997, and the related consolidated statements of income and retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Curry Transfer and Recycling, Inc. at December 31, 1997, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Sacramento, California July 31, 1998 F-101 170 CURRY TRANSFER AND RECYCLING, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE ACCOUNTS) ASSETS
DECEMBER 31, MARCH 31, 1997 1998 ------------ ----------- (UNAUDITED) Current assets: Cash and cash equivalents................................. $ 225 $ 297 Marketable securities..................................... 460 478 Accounts receivable....................................... 388 379 Prepaid expenses and other current assets................. 78 49 ------ ------ Total current assets.............................. 1,151 1,203 Property and equipment, net................................. 1,244 1,269 Intangible assets, net...................................... 110 107 Other assets................................................ 185 167 ------ ------ $2,690 $2,746 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.......................................... $ 122 $ 114 Accrued expenses.......................................... 97 104 Accrued income taxes...................................... 159 172 Deferred revenue.......................................... 205 206 Current portion of long-term debt......................... 213 200 Current portion of capital lease obligations.............. 90 101 ------ ------ Total current liabilities......................... 886 897 Long-term debt, net of current portion...................... 222 175 Capital lease obligations, net of current portion........... 141 141 Deferred income taxes....................................... 85 85 Commitments and contingencies (Note 5) Stockholders' equity: Common stock; no par value; 2,500 shares authorized, issued and outstanding................................. 67 67 Retained earnings......................................... 1,604 1,660 Unrealized holding gains on marketable securities......... 39 75 Treasury stock agreement.................................. (354) (354) ------ ------ Total stockholders' equity.................................. 1,356 1,448 ------ ------ $2,690 $2,746 ====== ======
See accompanying notes. F-102 171 CURRY TRANSFER AND RECYCLING, INC. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (IN THOUSANDS)
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ---------------- 1997 1997 1998 ------------ ------ ------ (UNAUDITED) Revenues.................................................. $3,617 $ 800 $ 795 Operating expenses: Cost of operations...................................... 2,259 548 481 Selling, general and administrative..................... 655 147 159 Depreciation and amortization........................... 260 61 69 ------ ------ ------ Income from operations.................................... 443 44 86 Other income (expense): Interest and dividend income............................ 25 2 7 Interest expense........................................ (75) (9) (12) Gain on sale of assets.................................. 41 -- 9 Other income............................................ 23 -- -- ------ ------ ------ Income before income taxes................................ 457 37 90 Income tax provision...................................... 183 15 34 ------ ------ ------ Net income................................................ 274 22 56 Retained earnings, beginning of period.................... 1,330 1,330 1,604 ------ ------ ------ Retained earnings, end of period.......................... $1,604 $1,352 $1,660 ====== ====== ======
See accompanying notes. F-103 172 CURRY TRANSFER AND RECYCLING, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ------------ 1997 1997 1998 ------------ ---- ---- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................. $ 274 $ 22 $ 56 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................. 260 61 69 Deferred income taxes..................................... 9 -- -- Gain on sale of assets.................................... (41) -- (9) Changes in operating assets and liabilities: Accounts receivable.................................... (26) (22) 9 Prepaid expenses and other assets...................... (16) (29) 29 Accounts payable....................................... (3) (21) (8) Accrued expenses....................................... 16 44 7 Accrued income taxes................................... 88 15 13 Deferred revenue....................................... 17 5 1 ----- ---- ---- Net cash provided by operating activities................... 578 75 167 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment....................... (218) (9) (19) Proceeds from sale of property and equipment.............. 89 -- 22 Purchases of marketable securities........................ (125) (52) (18) Proceeds from sale of marketable securities............... 72 -- -- ----- ---- ---- Net cash used in investing activities....................... (182) (61) (15) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt................................ $(156) $(14) $(51) Proceeds from long-term debt.............................. -- -- Payments of revolving line of credit...................... (32) (23) -- Payments for acquisition of treasury stock................ (30) (8) Payments on capital lease obligations..................... (71) (6) (29) ----- ---- ---- Net cash used in financing activities....................... (289) (51) (80) ----- ---- ---- Net increase (decrease) in cash and cash equivalents........ 107 (37) 72 Cash and cash equivalents, beginning of period.............. 118 118 225 ----- ---- ---- Cash and cash equivalents, end of period.................... $ 225 $ 81 $297 ===== ==== ==== SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH TRANSACTIONS: Cash paid for interest.................................... $ 49 ===== Cash paid for income taxes................................ $ 131 ===== Purchase of equipment with capital lease obligations...... $ 182 ===== Sale of land for note receivable............................ $ 27 =====
See accompanying notes. F-104 173 CURRY TRANSFER AND RECYCLING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS Curry Transfer and Recycling, Inc. ("CTR") provides full service waste disposal to residential and commercial customers in the Curry County, Oregon area including the cities of Brookings, Gold Beach, and Port Orford and the unincorporated areas of Curry County under exclusive franchise agreements that expire from 2009 to 2011. Oregon Waste Technology, Inc. ("OWT"), a wholly-owned subsidiary of CTR, provides sani-can rentals, septic tank pumping, and drain maintenance to the general public in the Curry County area including the cities of Brookings, Gold Beach, and Port Orford and the unincorporated areas of Curry County. SALE OF THE COMPANY On June 25, 1998, the Company's stockholders entered into an agreement to sell all capital stock in the Company to Waste Connections, Inc. ("WCI") for cash. PRINCIPLES OF CONSOLIDATION The consolidated financial statements includes the accounts of CTR and OWT (collectively, "the Company"). All significant intercompany transactions and balances have been eliminated in consolidation. INTERIM FINANCIAL INFORMATION The unaudited interim financial statements as of March 31, 1998 and for the three months ended March 31, 1997 and 1998 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. F-105 174 CURRY TRANSFER AND RECYCLING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Expenditures for maintenance, repairs, and minor renewals are charged to operations as incurred. Improvements and betterments that significantly extend the life of an asset are capitalized. Depreciation is calculated using the straight-line method over the estimated useful life of the asset. Machinery and equipment have lives between 5 and 10 years. Buildings and improvements have lives between 15 and 30 years. Assets purchased under capital leases are depreciated using the straight-line method over the estimated useful life of the asset or the lease term, whichever is shorter. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable. The Company grants credit to qualified local customers and generally does not require collateral. Credit risk on accounts receivable is minimized as a result of the large and diverse nature of the Company's customer base. Credit losses have been within management's expectations. INTANGIBLE ASSETS Intangible assets are comprised of the following at December 31, 1997: Goodwill.................................................... $ 137 Franchise agreements........................................ 235 Covenants not to compete.................................... 27 Other....................................................... 1 ----- 400 Accumulated amortization.................................... (290) ----- $ 110 =====
Goodwill represents the excess of the purchase price over the fair value of the net assets of entities previously acquired by the Company and is amortized on a straight-line basis over the period of expected benefit of 40 years. Franchise agreements are amortized on a straight-line basis over the period of expected benefits of 9 to 10 years. The covenants not to compete are amortized on a straight-line basis over the period of expected benefit. REVENUE RECOGNITION The Company recognizes revenues as services are provided. Certain customers are billed in advance and, accordingly, recognition of the related revenues is deferred until the services are provided. INCOME TAXES The Company uses the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial F-106 175 CURRY TRANSFER AND RECYCLING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 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. 2. MARKETABLE SECURITIES Marketable securities consist of the following at December 31, 1997:
APPROXIMATE ORIGINAL FAIR MARKET NUMBER OF SHARES COST VALUE ---------------- -------- ----------- Nuveen Municipal Bond Fund............ 30,640 $298 $340 ====== ==== ==== Putnam Investments Mutual funds....... 4,351 $ 96 $ 96 ====== ==== ==== Nuveen Growth and Income Fund......... 835 $ 21 $ 19 ====== ==== ==== Certificate of deposit................ N/A $ 5 $ 5 ====== ==== ====
For the year ended December 31, 1997, a gain of $3 was realized using the average cost of shares sold. The Nuveen Municipal Bond Fund shares are classified as available for sale marketable debt securities. Total approximate fair market values of marketable securities at December 31, 1997 were $460, and were determined using quoted market prices. The net unrealized holding gains on available for sale securities have been included as a separate component of stockholders' equity and increased $9 during 1997. 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following:
DECEMBER 31, MARCH 31, 1997 1998 ------------ ----------- (UNAUDITED) Land............................................. $ 112 $ 112 Buildings........................................ 340 340 Machinery and equipment.......................... 2,080 2,170 Leased machinery and equipment................... 423 424 ------- ------- 2,955 3,046 Less: accumulated depreciation................... (1,711) (1,777) ------- ------- Total fixed assets, net................ $ 1,244 $ 1,269 ======= =======
F-107 176 CURRY TRANSFER AND RECYCLING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS LONG-TERM DEBT Long-term debt consists of the following at December 31, 1997: Mortgage payable to an individual; bearing interest at 10.25%; payable in monthly installments of $1 through June 26, 2001; secured by land with a net book value of $12 at December 31, 1997......................................... $ 32 Notes payable to lending institutions; bearing interest ranging from 8.75 to 11%; payable in monthly installments ranging from $1 to $2 through December 18, 1999; secured by various equipment and vehicles with a net book value of $104 at December 31, 1997................................. 54 Note payable to banks; bearing interest ranging from 1.75% over prime to 14%; payable in one payment of $112 on September 18, 1998 and monthly installments ranging from $1 to $2 through February 10, 1999; secured by equipment and various vehicles with a net book value of $18 at December 31, 1997, and 30,424 shares of marketable securities (Note 2)....................................... 135 Note payable to an individual interest imputed at 8%, payable in monthly installments of $2,500 through December 15, 2007 under a stock purchase agreement secured by treasury stock............................................ 214 ----- Total long-term debt.............................. 435 Less: current portion....................................... (213) ----- $ 222 =====
As of December 31, 1997, the Company has the ability to borrow an additional $65 on one of its notes payable to a bank. As of December 31, 1997, aggregate contractual future principal payments by calendar year on long-term debt are due as follows: 1998........................................................ $213 1999........................................................ 60 2000........................................................ 37 2001........................................................ 30 2002........................................................ 30 Thereafter.................................................. 65 ---- $435 ====
CAPITAL LEASE OBLIGATIONS Capital lease obligations consist of the following at December 31, 1997: Capital lease obligations payable to banks at an imputed interest rate ranging from 9.75% to 13% payable in monthly installments ranging from $0.5 to $2 through June 14, 2002; secured by various equipment. vehicles and buildings with a net book value of $365 at December 31, 1997........ $231 ---- Total present value of capital lease obligations............ 231 Less: current portion....................................... (90) ---- $141 ====
F-108 177 CURRY TRANSFER AND RECYCLING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) As of December 31, 1997, aggregate contractual future lease payments on capital lease obligations by calendar year are due as follows: 1998........................................................ $107 1999........................................................ 75 2000........................................................ 60 2001........................................................ 13 2002........................................................ 7 ---- Total payments on capital lease obligations................. 262 Less: amount representing interest.......................... (31) ---- Present value of capital lease obligations.................. $231 ====
5. COMMITMENTS AND CONTINGENCIES OPERATING LEASES The Company leases certain office equipment. Office equipment and property is rented under cancellable, month-to-month leases. The Company currently leases land, under a month-to-month operating lease, from a stockholder. The monthly rent expense is $3. The Company leases two garbage trucks under a month-to-month operating lease from an affiliated company. The monthly rent expense is $5. The Company leases a transfer station, under an operating lease which terminates in December 1998. Future minimum rental payments required under the transfer station lease are $7 in 1998. Rent expense for the year ended December 31, 1997 was $133. ENVIRONMENTAL RISKS The Company is subject to liability for environmental damage that the solid waste facilities it operates may cause to neighboring landowners, particularly as a result of the contamination of drinking water sources or soil, including damage resulting from conditions existing prior to use of such facilities by the Company. The Company may also be subject to liability for any off-site environmental contamination caused by pollutants or hazardous substances whose transportation, treatment or disposal was arranged by the Company or its predecessors. Any substantial liability for environmental damage incurred by the Company could have a material adverse effect on the Company's financial condition, results of operations or cash flows. LEGAL PROCEEDINGS In the normal course of its business and as a result of the extensive governmental regulation of the solid waste industry, the Company may periodically become subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines on the Company or to revoke or deny renewal of an operating permit held by the Company. From time to time the Company may also be subject to actions brought F-109 178 CURRY TRANSFER AND RECYCLING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) by citizens' groups or adjacent landowners in connection with the permitting and licensing of landfills and transfer stations, or alleging environmental damage or violations of the permits and licenses pursuant to which the Company operates. In addition, the Company may become party to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of the waste management business. However, as of December 31, 1997, there is no current proceeding or litigation involving the Company that the Company believes will have a material adverse impact on the Company's business, financial condition, results of operations or cash flows. 6. TREASURY STOCK AGREEMENT In November 1993, CTR entered into an agreement to purchase 1,225 shares of common stock held by one of its stockholders at $368 per share. At December 31, 1997, CTR had paid $139 for 378 shares of stock. The agreement allows for adjustments to the price per share based on certain future events and requires the shares to be held in an escrow account pending the Company's payments on a note payable issued to the former shareholder in connection with the agreement. As of December 31, 1997, 928 shares were held in escrow. At December 31, 1997, $354 has been recorded as a contra-equity account, which reflects $139 of payments made to the former stockholder through December 31, 1997 and a $215 note payable due to the former stockholder (discounted to its net present value assuming 8% imputed interest). Subsequent to December 31, 1997, CTR made five payments totaling $13 under the terms of this agreement, and the entire balance was paid in connection with the sale of the Company on June 25, 1998. 7. INCOME TAXES The provision for income taxes for the year ended December 31, 1997 consists of the following: Current: Federal................................................... $140 State..................................................... 34 Deferred: Federal................................................... 8 State..................................................... 1 ---- $183 ====
Deferred taxes result from temporary differences in the recognition of certain revenue and expense items for income tax and financial reporting purposes. The Company's deferred taxes as of December 31, 1997 are substantially comprised of depreciation deducted for tax purposes that will be recorded in future periods for financial reporting purposes. F-110 179 CURRY TRANSFER AND RECYCLING, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) The principal reasons for the difference between the effective income tax rate and the federal statutory income tax rate are as follows: Federal expense expected at statutory rates................. $155 State and local income taxes, net of Federal benefit........ 23 Other....................................................... 5 ---- $183 ====
8. 401(k) PLAN The Company has a voluntary savings and investment plan (the "Plan"). The Plan is available to all eligible employees of the Company. Eligible employees are those which have been employed with the Company for a year or more. The employees are not required to contribute to the Plan. During the year ended December 31, 1997, twelve of the nineteen eligible employees participated in the Plan and the Company's expense was $11. 9. TRUST AGREEMENTS During 1997, the Company acted as an agent for Curry County, Oregon, pursuant to two trust agreements by and between the Company, various local governmental agencies, and a national bank (the "Agreements"). The Agreements require the Company to collect rates established by Curry County from customers and remit such funds to the trusts established to provide closure/post closure funding for two landfills located in or around Curry County, Oregon. No trust assets or liabilities have been recorded in the Company's financial statements as of December 31, 1997. 10. YEAR 2000 (UNAUDITED) The Company will need to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 ("Year 2000") and thereafter. To date, the company has not incurred any costs related to the Year 2000 project. The Company does not believe that its expenditures relating to the Year 2000 project will be material. However, if the required Year 2000 modifications and conversions are not made or are not completed in a timely manner, the Year 2000 issue could materially affect the Company's operations. F-111 180 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders B&B Sanitation We have audited the accompanying combined balance sheet of B&B Sanitation (See Note A1) as of December 31, 1997, and the related combined statements of earnings, stockholders' deficit, and cash flows for the year then ended. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of B&B Sanitation as of December 31, 1997, and the combined results of their operations and their combined cash flows for the year then ended in conformity with generally accepted accounting principles. GRANT THORNTON LLP Oklahoma City, Oklahoma October 1, 1998 F-112 181 B&B SANITATION COMBINED BALANCE SHEETS (IN THOUSANDS) ASSETS
DECEMBER 31, MARCH 31, 1997 1998 ------------ ----------- (UNAUDITED) CURRENT ASSETS Cash................................................... $ 28 $ 2 Accounts receivable.................................... 200 194 ------ ------ Total current assets........................... 228 196 PROPERTY AND EQUIPMENT -- AT COST, net................... 925 975 RESTRICTED INVESTMENTS................................... 41 41 OTHER ASSETS............................................. 32 26 ------ ------ $1,226 $1,238 ====== ====== LIABILITIES AND STOCKHOLDERS' DEFICIT CURRENT LIABILITIES Accounts payable....................................... $ 26 $ 75 Current portion of long-term debt...................... 364 371 Accrued liabilities.................................... 33 26 ------ ------ Total current liabilities...................... 423 472 LONG-TERM DEBT, less current maturities.................. 798 774 LANDFILL CLOSURE LIABILITY............................... 458 477 COMMITMENTS AND CONTINGENCIES (note F)................... -- -- STOCKHOLDERS' DEFICIT Common stock........................................... $ 3 $ 3 Accumulated deficit.................................... (456) (488) ------ ------ (453) (485) ------ ------ $1,226 $1,238 ====== ======
The accompanying notes are an integral part of these statements. F-113 182 B&B SANITATION COMBINED STATEMENTS OF EARNINGS (IN THOUSANDS)
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ------------ 1997 1997 1998 ------------ ---- ---- (UNAUDITED) Revenues.................................................... $1,965 $439 $497 Operating expenses Cost of operations........................................ 1,074 262 275 Selling, general, and administrative expenses............. 320 75 91 Depreciation.............................................. 259 58 63 ------ ---- ---- Total Operating Expenses.......................... 1,653 395 429 ------ ---- ---- Operating income.................................. 312 44 68 Other income (expense) Interest.................................................. (108) (25) (27) Other..................................................... 1 -- -- ------ ---- ---- Total other income (expense)...................... (107) (25) (27) ------ ---- ---- NET EARNINGS...................................... $ 205 $ 19 $ 41 ------ ---- ---- Pro forma income tax expense (unaudited) (Note I)........... $ 78 $ 7 $ 16 ------ ---- ---- Pro forma net earnings (unaudited) (Note I)................. $ 127 $ 12 $ 25 ====== ==== ====
The accompanying notes are an integral part of these statements. F-114 183 B&B SANITATION COMBINED STATEMENT OF STOCKHOLDERS' DEFICIT (IN THOUSANDS)
COMMON ACCUMULATED STOCK DEFICIT TOTAL ------ ----------- ----- Balance at January 1, 1997............................... $3 $(532) $(529) Distributions............................................ -- (139) (139) Contributions............................................ -- 10 10 Net earnings............................................. -- 205 205 -- ----- ----- Balance at December 31, 1997............................. 3 (456) (453) Distributions, net (unaudited)........................... -- (73) (73) Net earnings (unaudited)................................. -- 41 41 -- ----- ----- Balance at March 31, 1998 (unaudited).................... $3 $(488) $(485) == ===== =====
The accompanying notes are an integral part of this statement. F-115 184 B&B SANITATION COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, -------------- 1997 1997 1998 ------------ ----- ----- (UNAUDITED) Increase (Decrease) in Cash Cash flows from operating activities Net earnings........................................... $ 205 $ 19 $ 41 Adjustments to reconcile net earnings to net cash provided by operations Depreciation........................................ 259 57 63 Change in assets and liabilities Accounts receivable............................... (45) (18) 6 Other assets...................................... (19) (20) 6 Accounts payable.................................. 10 61 49 Accrued liabilities............................... 16 2 (7) Landfill closure liability........................ 56 11 19 ----- ----- ----- Net cash provided by operations................ 482 112 177 Cash flows from investing activities Purchase of property and equipment..................... (383) (120) (113) Purchase of investments................................ (41) -- -- ----- ----- ----- Net cash used in investing activities.......... (424) (120) (113) Cash flows from financing activities Proceeds from long-term debt........................... 329 39 -- Payments on long-term debt............................. (253) -- (17) Distributions to stockholders.......................... (139) (24) (73) Contributions by stockholders.......................... 10 -- -- ----- ----- ----- Net cash provided by (used in) financing activities................................... (53) 15 (90) ----- ----- ----- NET INCREASE (DECREASE) IN CASH................ 5 7 (26) Cash at beginning of period.............................. 23 23 28 ----- ----- ----- Cash at end of period.................................... $ 28 $ 30 $ 2 ----- ----- ----- Cash paid during the period for interest................. $ 109 $ 25 $ 27 ===== ===== =====
The accompanying notes are an integral part of these statements. F-116 185 B&B SANITATION NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 (DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS) NOTE A -- BASIS OF PRESENTATION AND NATURE OF OPERATIONS The accompanying combined financial statements include the accounts of B&B Sanitation, Inc. ("B&B"), Red Carpet Landfill, Inc. ("Red Carpet"), and Darlin Equipment, Inc. ("Darlin"), collectively referred to as "B&B Sanitation" or the "Company" which are all owned by the same two shareholders. All significant intercompany balances and transactions have been eliminated. B&B's principal operations consist of collection, transfer, and disposal of nonhazardous solid waste for commercial and residential customers. Red Carpet's principal operations consist of the operation of the landfill in which B&B disposes of waste. Darlin's principal operations consist of leasing heavy equipment to Red Carpet. NOTE B -- SUMMARY OF ACCOUNTING POLICIES The summary of the significant accounting policies applied in the preparation of the accompanying combined financial statements follows. 1. Property and Equipment Depreciation is provided principally on accelerated methods over estimated useful lives ranging from three to ten years. 2. Income Taxes In accordance with B&B's, Red Carpet's, and Darlin's elections under Subchapter S of the Internal Revenue Code, corporate taxable income is generally treated as passing directly through to the owners and is not subject to income tax at the corporate level. Accordingly, no provision has been made for income taxes. 3. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures; accordingly, actual results could differ from those estimates. 4. Revenue Recognition Revenues are recognized as services are provided. 5. Closure and Post-Closure Costs The Companies have a financial obligation relating to closure and post-closure costs of its disposal facilities. The Companies have accrued for these future obligations relating to closure and post-closure costs of its landfill (generally for a term of thirty years after final closure of the landfill), based on engineering estimates of current costs of remediation and consumption of permitted landfill airspace and the remaining useful airspace volume on the landfill. 6. Restricted Investments The Companies have placed certain monies to be used only for landfill closure and post-closure liabilities in a trust account for the benefit of the State of Oklahoma. The Companies' securities held as restricted investments are classified as trading and are recorded at fair value on the balance sheet with the change in fair value for the period included in earnings. The securities have a fair value of $40 at December 31, 1997 with gross unrealized gains of $0 and gross unrealized losses of $1. F-117 186 B&B SANITATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS) NOTE B -- SUMMARY OF ACCOUNTING POLICIES (CONTINUED) 7. Accounts Receivable The Companies consider accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. If amounts become uncollectible, they will be charged to operations when that determination is made. 8. Interim Financial Information The unaudited interim financial statements as of March 31, 1998 and for the three months ended March 31, 1997 and 1998 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. NOTE C -- PROPERTY AND EQUIPMENT At December 31, 1997, property and equipment consisted of the following: Equipment................................................... $2,140 Landfill.................................................... 83 Modular buildings........................................... 14 ------ 2,237 Less accumulated depreciation............................. 1,385 ------ 852 Land........................................................ 73 ------ $ 925 ======
NOTE D -- LONG-TERM DEBT Long-term debt consists of the following at December 31, 1997: Note payable to bank; payable in monthly installments of $29, including interest at prime plus 1% (9.5% at December 31, 1997) through May 2001; collateralized by equipment, accounts receivable, land, and stock of the Companies....... $ 983 Line of credit with bank, monthly interest payments at 9.5% with principal due May 1998; collateralized by trucks and equipment................................................... 80 Note payable to individual; payable in monthly installments of principal and interest at 10.06% through June 2006; uncollateralized............................................ 34 Note payable to individual; payable in monthly installments of principal and interest at 8% through March 2001; uncollateralized............................................ 30 Note payable to individual; payable in monthly installments of principal and interest at 9% through July 2002; uncollateralized............................................ 22 Note payable to finance company, payable in monthly installments of principal and interest at 4.8% through May 2000; collateralized by vehicle............................. 13 ---------- 1,162 Less current maturities................................... 364 ---------- $ 798 ==========
F-118 187 B&B SANITATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS) NOTE D -- LONG-TERM DEBT (CONTINUED) Aggregate annual maturities of long-term debt for years ending December 31 are as follows: 1998........................................................ $ 364 1999........................................................ 312 2000........................................................ 338 2001........................................................ 113 2002........................................................ 6 2003 and thereafter......................................... 29 ------ $1,162 ======
The note payable to bank contains certain covenants, the most significant of which are restrictions on personal draws and salaries of the owners and maintaining no less than a 125% debt service coverage ratio, as defined. NOTE E -- COMMON STOCK The following is a description of the common stock for the Companies: B&B $1 par value; authorized, 50,000 shares; issued and outstanding, 500 shares Red Carpet $1 par value; authorized, 1,000 shares; issued and outstanding, 1,000 shares Darlin $1 par value; authorized, 1,000 shares, issued and outstanding, 1,000 shares
NOTE F -- COMMITMENTS AND CONTINGENCIES The Companies are subject to liability for any environmental damage that its solid waste facilities may cause to neighboring landowners or residents, particularly as a result of the contamination of soil, groundwater, or surface water, and especially drinking water. The Companies may also be subject to liability for any off-site environmental contamination caused by pollutants or hazardous substances whose transportation, treatment, or disposal was performed by the Companies. Any substantial liability for environmental damage incurred by the Companies could have a material adverse effect on their financial condition, results of operations, or cash flows. As of December 31, 1997, the Companies are not aware of any such environmental liabilities. The Companies have four operating lease agreements under which the Companies lease heavy trucks over periods ranging from 48 to 60 months. These agreements provide for monthly lease payments over the term of the leases and options to purchase the trucks for fair value at the end of the lease term. Lease expense was approximately $97 for the year ended December 31, 1997. The future minimum annual rental commitments on operating leases are as follows:
YEAR ENDING DECEMBER 31 ----------------------- 1998............................................... $ 91 1999............................................... 76 2000............................................... 46 2001............................................... 4 ---- $217 ====
F-119 188 B&B SANITATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) (DOLLARS IN THOUSANDS EXCEPT SHARE AMOUNTS) NOTE G -- EMPLOYEE BENEFIT PLAN The Companies have a defined contribution 401(k) savings and retirement plan in effect for all qualifying employees. General and administrative expense includes $18 for the year ended December 31, 1997 for this plan. The Companies match employee contributions at rates determined by management. NOTE H -- SUBSEQUENT EVENT On June 5, 1998, the Companies were acquired by Waste Connections, Inc. for approximately $4,600, including liabilities of the Companies of approximately $1,400 which were paid off at closing. NOTE I -- PRO FORMA INCOME TAX INFORMATION (UNAUDITED) Unaudited pro forma information reflects income tax expense as if the Companies had been subject to federal and state income taxes on a combined basis. The pro forma provisions for income taxes for the year ended December 31, 1997 and the three month period ended March 31, 1997 and 1998 differ from the amounts computed by applying the applicable statutory federal income tax rate (34%) to income before income taxes primarily due to state income taxes. The following is a summary of pro forma income taxes for the year ended December 31, 1997: Current: Federal................................................... $ 85 State..................................................... 5 Deferred: Federal................................................... (11) State..................................................... (1) ---- Pro forma income taxes...................................... $ 78 ====
The Companies' pro forma deferred income tax assets of approximately $268 at December 31, 1997 relate principally to the use of the cash method of accounting for income tax purposes and certain landfill closure liabilities not recognized for tax purposes. F-120 189 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders J & J Sanitation We have audited the accompanying combined balance sheet of J & J Sanitation (See Note A 1.) as of December 31, 1997, and the related combined statements of operations, stockholders' and partners' deficit, and cash flows for the year then ended. These financial statements are the responsibility of J & J Sanitation's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of J & J Sanitation at December 31, 1997, and the combined results of their operations and their combined cash flows for the year then ended in conformity with generally accepted accounting principles. GRANT THORNTON LLP Lincoln, Nebraska October 7, 1998 F-121 190 J & J SANITATION COMBINED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS
DECEMBER 31, JUNE 30, 1997 1998 ------------ ----------- (UNAUDITED) Current assets: Cash and cash equivalents................................. $ 28 $ 48 Accounts receivable, less allowance for doubtful accounts of $14 at December 31, 1997............................ 184 220 Prepaid expenses.......................................... 9 14 ------ ------ Total current assets.............................. 221 282 Property and equipment, net................................. 1,120 1,054 ------ ------ $1,341 $1,336 ====== ====== LIABILITIES AND STOCKHOLDERS' AND PARTNERS' DEFICIT Current liabilities: Accounts payable.......................................... $ 96 $ 154 Deferred revenue.......................................... 28 14 Accrued liabilities....................................... 53 54 Note payable.............................................. -- 9 Current portion of long-term debt......................... 67 60 Current portion of capital lease obligations.............. 129 112 ------ ------ Total current liabilities......................... 373 403 Long-term debt, net of current portion...................... 616 647 Capital lease obligations, net of current portion........... 372 323 Commitments and contingencies (Note D) Stockholders' and partners' deficit: J & J Sanitation Inc. -- common stock: $10 par value; 1,000 shares authorized, issued and outstanding........ 10 10 Big Red Roll Off Inc. -- common stock: $10 par value; 1,000 shares authorized, issued and outstanding........ 10 10 Paid in capital........................................... 77 77 Accumulated deficit....................................... (40) (62) Partners' deficit -- J & J Sanitation of South Dakota..... (77) (72) ------ ------ Total stockholders' and partners' deficit......... (20) (37) ------ ------ $1,341 $1,336 ====== ======
The accompanying notes are an integral part of these statements. F-122 191 J & J SANITATION COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, --------------- 1997 1997 1998 ------------ ------ ------ (UNAUDITED) Revenues.................................................... $2,346 $1,162 $1,210 Operating expenses: Cost of operations........................................ 1,789 884 854 Selling, general and administrative....................... 319 135 213 Depreciation and amortization............................. 197 101 107 ------ ------ ------ 2,305 1,120 1,174 ------ ------ ------ Income from operations................................. 41 42 36 Interest expense............................................ 108 55 53 ------ ------ ------ Loss before income taxes............................... (67) (13) (17) Income tax benefit.......................................... -- -- -- ------ ------ ------ NET LOSS............................................... $ (67) $ (13) $ (17) ====== ====== ====== Pro forma income tax benefit (unaudited) (Note E)........... $ -- $ -- $ -- ====== ====== ====== Pro forma net loss (unaudited) (Note E)..................... $ (67) $ (13) $ (17) ====== ====== ======
The accompanying notes are an integral part of these statements. F-123 192 J & J SANITATION COMBINED STATEMENT OF STOCKHOLDERS' AND PARTNERS' EQUITY YEAR ENDED DECEMBER 31, 1997 AND THE SIX MONTHS ENDED JUNE 30, 1998 (INFORMATION RELATED TO THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
TOTAL J & J SANITATION, BIG RED STOCKHOLDERS' INC. ROLL OFF INC. AND COMMON STOCK COMMON STOCK PARTNERS' PARTNERS' ----------------- --------------- PAID-IN ACCUMULATED EQUITY EQUITY SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (DEFICIT) (DEFICIT) ------- ------- ------ ------ ------- ----------- --------- ------------- Balance at January 1, 1997................ -- $-- -- $-- $-- $ -- $ 11 $ 11 Issuance of common stock............... -- -- 1,000 10 15 -- -- 25 Exchange of partners' equity for common stock............... 1,000 10 -- -- 46 -- (56) -- Net loss.............. -- -- -- -- -- (40) (27) (67) Partners' drawings.... -- -- -- -- -- -- (5) (5) Contributions from stockholders........ -- -- -- -- 16 -- -- 16 ----- --- ----- --- --- ---- ---- ---- Balance at December 31, 1997............ 1,000 10 1,000 10 77 (40) (77) (20) Net income (loss)..... -- -- -- -- -- (22) 5 (17) ----- --- ----- --- --- ---- ---- ---- Balance at June 30, 1998................ 1,000 $10 1,000 $10 $77 $(62) $(72) $(37) ===== === ===== === === ==== ==== ====
The accompanying notes are an integral part of this statement. F-124 193 J & J SANITATION COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ------------- 1997 1997 1998 ------------ ----- ---- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss.................................................. $ (67) $ (13) $(17) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.......................... 197 101 107 Changes in operating assets and liabilities: Accounts receivable, net............................... (6) (17) (36) Prepaid expenses....................................... (3) (10) (5) Accounts payable....................................... 16 85 58 Deferred revenue....................................... 4 (12) (14) Accrued liabilities.................................... 15 2 1 ----- ----- ---- Net cash provided by operating activities......... 156 136 94 ----- ----- ---- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for property and equipment........... (138) (4) (53) ----- ----- ---- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt and notes payable............ 635 -- 76 Principal payments on long-term debt and capital lease obligations............................................ (694) (142) (97) Issuance of common stock.................................. 25 25 -- Contributions from stockholders........................... 16 -- -- Partners' drawings........................................ (5) -- -- ----- ----- ---- Net cash used in financing activities............. (23) (117) (21) ----- ----- ---- Net change in cash and cash equivalents..................... (5) 15 20 Cash and cash equivalents: Beginning of period....................................... 33 33 28 ----- ----- ---- End of period............................................. $ 28 $ 48 $ 48 ===== ===== ==== SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH TRANSACTIONS: Cash paid for interest.................................... $ 108 $ 55 $ 53 Capital lease obligations incurred for the purchase of property and equipment................................. 88 88 -- Partners' equity exchanged for J & J Sanitation Inc. common stock........................................... 56 56 --
The accompanying notes are an integral part of these statements. F-125 194 J & J SANITATION NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 (INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) (DOLLARS IN THOUSANDS) NOTE A -- ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 1. Basis of Presentation and Organization and Business The combined financial statements include the accounts of J & J Sanitation Inc., Big Red Roll Off Inc. and J & J Sanitation of South Dakota (a partnership), collectively referred to as "J & J Sanitation". These entities are under common control. All material intercompany accounts and transactions have been eliminated. J & J Sanitation is a non-hazardous solid waste services company that provides collection, hauling, disposal and recycling services to residential and commercial customers in various counties of Nebraska and South Dakota. J & J Sanitation derives a portion of its revenue from exclusive municipal contracts, of which a significant number will be subject to competitive bidding at some time in the future. J & J Sanitation intends to bid on additional municipal contracts as a means of adding customers. There can be no assurance that J & J Sanitation will be the successful bidder to obtain or retain contracts that come up for competitive bidding. 2. Sale of J & J Sanitation On July 31, 1998, all capital stock and partnership net assets of J & J Sanitation were sold to Waste Connections, Inc. ("WCI") for cash and common stock of WCI. 3. Interim Financial Information The unaudited interim financial statements as of June 30, 1998 and for the six months ended June 30, 1997 and 1998 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. 4. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 5. Cash Equivalents J & J Sanitation considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. F-126 195 J & J SANITATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) (DOLLARS IN THOUSANDS) NOTE A -- ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 6. Concentrations of Credit Risk Financial instruments that potentially subject J & J Sanitation to concentrations of credit risk consist primarily of accounts receivable. Credit risk on accounts receivable is minimized as a result of the large and diverse nature of J & J Sanitation's customer base. Credit losses have been within management's expectations. 7. Property and Equipment Property and equipment are stated at cost. Improvements or betterments which significantly extend the life of an asset are capitalized. Expenditures for maintenance and repair costs are charged to operations as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal. Gains and losses resulting from property disposals are included in other income or expense. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, or lease term, whichever is shorter. The estimated useful lives of property and equipment are as follows: Machinery and equipment................................ 3 - 10 years Rolling stock.......................................... 5 - 10 years Containers............................................. 5 - 12 years
8. Revenue Recognition J & J Sanitation recognizes revenues as services are provided. Certain customers are billed in advance and, accordingly, recognition of the related revenues is deferred until the services are provided. 9. Income Taxes Big Red Roll Off Inc. uses the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. J & J Sanitation Inc. operates under Subchapter "S" of the Internal Revenue Code and J & J Sanitation of South Dakota operates as a partnership for federal and state income tax reporting purposes. Consequently, all of the income tax attributes and liabilities from the operations of J & J Sanitation Inc. and J & J Sanitation of South Dakota flow through to the individual shareholders or partners. 10. Fair Value of Financial Instruments The carrying values of the long-term debt (Note C) and capital lease obligations (Note D) approximate their fair values as of December 31, 1997 based on current incremental borrowing rates for similar types of borrowing arrangements. F-127 196 J & J SANITATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) (DOLLARS IN THOUSANDS) NOTE A -- ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 11. Significant Customer The Company has one major customer which represents 11% of total revenues for the year ended December 31, 1997. NOTE B -- PROPERTY AND EQUIPMENT Property and equipment consists of the following:
DECEMBER 31, JUNE 30, 1997 1998 ------------ ----------- (UNAUDITED) Rolling stock.................................... $1,107 $1,074 Containers....................................... 287 287 Other............................................ 161 214 ------ ------ 1,555 1,575 Less accumulated depreciation and amortization... 435 521 ------ ------ $1,120 $1,054 ====== ======
NOTE C -- FINANCING ARRANGEMENTS
DECEMBER 31, JUNE 30, 1997 1998 ------------ ----------- (UNAUDITED) Notes payable to banks bearing interest at fixed and variable rates ranging from 7.9% to 10% at December 31, 1997, payable in monthly installments of principal and interest; maturing through January 2008.................. $683 $707 Less current portion............................. 67 60 ---- ---- Long-term debt, net of current portion........... $616 $647 ==== ====
At the end of 1997, J & J Sanitation entered into a new credit arrangement with a bank which included a $60 line of credit maturing December 31, 1998 and a term note for $625 maturing January 2008. Borrowings bear interest at a variable rate based on the bank's index rate less 1.75% to 1.80%. The initial rates of the line of credit and term note were 10% and 9.95%, respectively. The term note was used for refinancing certain notes payable to banks, equipment purchases and general operating purposes. At December 31, 1997, no amounts were outstanding on the line of credit. The notes payable to banks and the line of credit are collateralized by substantially all of J & J Sanitation's assets. J & J Sanitation is subject to certain restrictive covenants with its primary lender, which among other things, limit the incurring of additional indebtedness without the lender's written approval. Subsequent to December 31, 1997, aggregate contractual future principal payments by year are $67 in 1998, $63 in 1999, $49 in 2000, $54 in 2001, $57 in 2002 and $393 thereafter. F-128 197 J & J SANITATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) (DOLLARS IN THOUSANDS) NOTE C -- FINANCING ARRANGEMENTS (CONTINUED) In conjunction with the acquisition of J & J Sanitation by WCI on July 31, 1998, all of the outstanding long-term debt of J & J Sanitation was repaid. NOTE D -- COMMITMENTS AND CONTINGENCIES COMMITMENTS Leases J & J Sanitation leases certain rolling stock under long-term leases expiring through 2002 which have been capitalized. The related assets and obligations have been recorded using J & J Sanitation's implicit borrowing rate at the inception of the leases. At the expirations of such leases, J & J Sanitation has the option to purchase the rolling stock at an agreed-upon residual value. The following amounts are included in property and equipment as rolling stock under capital leases:
DECEMBER 31, JUNE 30, 1997 1998 ------------ ----------- (UNAUDITED) Rolling stock.................................... $690 $657 Less accumulated amortization.................... 200 236 ---- ---- $490 $421 ==== ====
The following is a schedule by years of future minimum lease payments under capital leases together with the present value of the net minimum lease payments as of December 31, 1997: 1998........................................................ $171 1999........................................................ 131 2000........................................................ 148 2001........................................................ 133 2002........................................................ 18 ---- Total minimum lease payments................................ 601 Less amount representing interest........................... 100 ---- $501 ==== Current portion............................................. $129 Long-term portion........................................... 372 ---- $501 ====
J & J Sanitation also leases certain facilities and other equipment under operating leases expiring through 1999. Minimum rental payments under such operating leases in 1998, 1999 and in the aggregate are $5, $2 and $7, respectively. J & J Sanitation recognized rent expense under these operating leases totaling $39 in 1997. In conjunction with the acquisition of J & J Sanitation by WCI on July 31, 1998, the rolling stock under capital leases was acquired at values approximating the capital lease obligation at that date and the related leases were terminated. F-129 198 J & J SANITATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) (DOLLARS IN THOUSANDS) NOTE D -- COMMITMENTS AND CONTINGENCIES (CONTINUED) CONTINGENCIES Legal Proceedings In the normal course of its business and as a result of the extensive governmental regulation of the solid waste industry, J & J Sanitation may periodically become subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines on J & J Sanitation or to revoke or deny renewal of an operating permit held by J & J Sanitation. From time to time J & J Sanitation may also be subject to actions brought by citizens' groups or adjacent landowners in connection with the permitting and licensing of landfills and transfer stations, or alleging environmental damage or violations of the permits and licenses pursuant to which J & J Sanitation operates. In addition, J & J Sanitation may become party to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of the waste management business. As of December 31, 1997, there is no current proceeding or litigation involving J & J Sanitation that management believes will have a material adverse impact on J & J Sanitation's business, financial condition, results of operations or cash flows. NOTE E -- INCOME TAXES Unaudited pro forma information reflects income taxes as if all of J & J Sanitation had been subject to federal and state income taxes. The income tax benefit and unaudited pro forma income tax benefit for the year ended December 31, 1997 differs from the amounts computed by applying the applicable statutory federal income tax rate (34%) to loss before income taxes as follows:
PRO FORMA INCOME TAX INCOME TAX BENEFIT BENEFIT ---------- ----------- (UNAUDITED) Income tax benefit at the statutory rate............. 34.0% 34.0% Income taxed at shareholder level.................... (34.0) -- Valuation allowance.................................. -- (34.0) ----- ----- --% --% ===== =====
Unaudited pro forma deferred income tax assets at December 31, 1997 are fully offset by a valuation allowance as there is no assurance the deferred tax assets would be realized. Unaudited pro forma deferred tax assets arise principally from the loss in the current year, differences between tax and financial methods of reporting depreciation expense, and the use of the cash method of accounting for income tax purposes which gives rise to differences between financial statement and tax return recognition of receivables, prepaid expenses, accounts payable and accrued liabilities. F-130 199 J & J SANITATION NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (INFORMATION RELATING TO JUNE 30, 1998 AND THE SIX MONTHS ENDED JUNE 30, 1997 AND 1998 IS UNAUDITED) (DOLLARS IN THOUSANDS) NOTE F -- RELATED PARTY TRANSACTIONS Great Plains Recycling Inc. (GPR) has an arrangement with J & J Sanitation to perform solid waste processing, recyclable recovery, transfer and disposal services. J & J Sanitation's stockholders and partners are majority owners of GPR. Cost of operations in the combined statement of operations for 1997 includes a charge of $672 for these services. At December 31, 1997, J & J Sanitation owes GPR $84 which is included in accounts payable. In conjunction with the acquisition of J & J Sanitation by WCI on July 31, 1998, WCI entered into a long-term agreement with GPR to provide comparable services. WCI also has the option to acquire GPR effective November 1999 provided GPR achieves defined levels of profitability. F-131 200 REPORT OF INDEPENDENT AUDITORS Board of Directors and Stockholders Amador Disposal Services, Inc. and Mother Lode Sani-Hut, Inc. In our opinion, the accompanying combined balance sheet and the related combined statements of operations and retained earnings and of cash flows present fairly, in all material respects, the combined financial position of Amador Disposal Services, Inc. and Mother Lode Sani-Hut, Inc. (collectively, the Companies) at June 30, 1998, and the combined results of their operations and their cash flows for the year then ended, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Companies' management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. /s/ PricewaterhouseCoopers LLP Sacramento, California December 30, 1998 F-132 201 AMADOR DISPOSAL SERVICES, INC. AND MOTHER LODE SANI-HUT, INC. COMBINED BALANCE SHEETS ASSETS
JUNE 30, SEPTEMBER 30, 1998 1998 ---------- ------------- (UNAUDITED) Current assets: Cash and cash equivalents................................. $ 162,963 $ 239,048 Trade accounts receivable, net............................ 183,369 190,386 Prepaid expenses and other current assets................. 17,680 76,202 ---------- ---------- Total current assets.............................. 364,012 505,636 Property, plant and equipment, net.......................... 2,174,042 2,106,705 Other assets................................................ 30,000 30,000 ---------- ---------- Total assets...................................... $2,568,054 $2,642,341 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt......................... 42,631 38,055 Accounts payable.......................................... 95,249 86,984 Accrued liabilities....................................... 100,251 144,640 ---------- ---------- Total current liabilities......................... 238,131 269,679 Long-term debt, net......................................... 1,164,720 1,157,766 ---------- ---------- Total liabilities................................. 1,402,851 1,427,445 ---------- ---------- Commitments and contingencies (Note 5) Stockholders' equity: Common stock, no par value; 2,500 shares authorized, issued and outstanding................................. 181,000 181,000 Common stock, $100 par value; 5,000 shares authorized, 75 shares issued and outstanding.......................... 7,500 7,500 Additional paid-in capital................................ 118,430 118,430 Retained earnings......................................... 858,273 907,966 ---------- ---------- Total stockholders' equity........................ 1,165,203 1,214,896 ---------- ---------- Total liabilities and stockholders' equity........ $2,568,054 $2,642,341 ========== ==========
The accompanying notes are an integral part of the financial statements. F-133 202 AMADOR DISPOSAL SERVICES, INC. AND MOTHER LODE SANI-HUT, INC. COMBINED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
THREE MONTHS ENDED YEAR ENDED SEPTEMBER 30, JUNE 30, ---------------------- 1998 1997 1998 ---------- ---------- -------- (UNAUDITED) REVENUES............................................. $2,996,013 $ 758,169 $845,601 OPERATING EXPENSES: Cost of operations................................. 2,123,800 532,296 563,277 General and administrative......................... 507,256 110,777 129,165 Depreciation and amortization...................... 311,731 70,562 73,656 ---------- ---------- -------- Income from operations..................... 53,226 44,534 79,503 OTHER INCOME AND EXPENSE: Interest expense................................... (115,702) (25,929) (29,220) Other (expense) income, net........................ (18,810) 721 1,010 ---------- ---------- -------- (Loss) income before income taxes.......... (81,286) 19,326 51,293 Income tax provision................................. 1,600 1,600 1,600 ---------- ---------- -------- Net (loss) income.......................... (82,886) 17,726 49,693 Balance of retained earnings, beginning of period.... 991,159 989,823 858,273 Dividends paid..................................... (50,000) -- -- ---------- ---------- -------- Balance of retained earnings, end of period.......... $ 858,273 $1,007,549 $907,966 ========== ========== ======== Pro forma income tax (benefit) provision (unaudited) (Note 6)........................................... $ (19,224) $ 4,059 $ 10,901 ========== ========== ======== Pro forma net (loss) income (unaudited) (Note 6)..... $ (62,062) $ 15,267 $ 40,392 ========== ========== ========
The accompanying notes are an integral part of the financial statements. F-134 203 AMADOR DISPOSAL SERVICES, INC. AND MOTHER LODE SANI-HUT, INC. COMBINED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED SEPTEMBER 30, JUNE 30, --------------------- 1998 1997 1998 ---------- --------- -------- (UNAUDITED) CASH FLOW FROM OPERATING ACTIVITIES: Net (loss) income................................... $ (82,886) $ 17,726 $ 49,693 Adjustments to reconcile net (loss) income to cash provided by operating activities: Depreciation and amortization.................... 311,731 70,562 73,656 Loss (gain) on disposals of property and equipment...................................... 21,152 204 (159) Cash provided by or (used in) changes in operating assets and liabilities, net: Accounts receivable............................ (21,226) 2,323 (7,018) Prepaid expenses............................... 7,597 (54,963) (58,520) Other assets................................... -- 8,367 -- Accounts payable............................... 8,671 13,030 (8,265) Accrued liabilities............................ (1,283) 29,807 44,389 --------- --------- -------- Net cash provided by operating activities... 243,756 87,056 93,776 --------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of property and equipment.............. (306,658) (256,727) (9,160) Proceeds from the sale of equipment................. 1,180 700 3,000 --------- --------- -------- Net cash used in investing activities....... (305,478) (256,027) (6,160) --------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt........................ 258,000 258,000 -- Principal payments on long-term debt................ (67,893) (14,640) (11,531) Dividends paid...................................... (50,000) -- -- --------- --------- -------- Net cash provided by (used in) financing activities................................ 140,107 243,360 (11,531) --------- --------- -------- Net increase in cash balance................ 78,385 74,389 76,085 Cash and cash equivalents at beginning of period...... 84,578 84,578 162,963 --------- --------- -------- Cash and cash equivalents at end of period............ $ 162,963 $ 158,967 $239,048 ========= ========= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.............................. $ 115,136 $ 26,042 $ 29,220 ========= ========= ======== Cash paid for income taxes.......................... $ 2,412 $ 683 $ 400 ========= ========= ========
The accompanying notes are an integral part of the financial statements. F-135 204 AMADOR DISPOSAL SERVICES, INC. AND MOTHER LODE SANI-HUT, INC. NOTES TO COMBINED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF COMBINATION The combined financial statements include the accounts of Amador Disposal Services, Inc. (Amador Disposal) and Mother Lode Sani-Hut, Inc. (Mother Lode) (and collectively, the Companies). Amador Disposal and Mother Lode have common management which exercise significant influence over their operations. All material intercompany balances and transactions have been eliminated in combination. BUSINESS AND ORGANIZATION The Companies, both California corporations, are regional, integrated, non-hazardous solid waste services companies that provide containers, collection, transfer, disposal, recycling and landfill services to commercial and residential customers in Northern California. INTERIM FINANCIAL INFORMATION (UNAUDITED) The interim combined financial statements as of September 30, 1998 and for the three month periods ended September 30, 1997 and 1998 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending June 30, 1999. CASH AND CASH EQUIVALENTS The Companies consider all highly liquid investments with maturities of 3 months or less when purchased to be cash equivalents for purposes of the combined statements of cash flows. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Improvements or betterments which significantly extend the life of the assets are capitalized. Interest costs are also capitalized on self-constructed assets. Expenditures for maintenance and repairs are charged against operations as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal. Gains or losses resulting from property disposal are included in other income (expense). Depreciation is computed using the straight-line method over the following estimated useful lives of the assets: Building................................................ 30 years Containers, machinery and equipment..................... 3-10 years Rolling stock and vehicles.............................. 5-7 years
REVENUE RECOGNITION Revenues are recognized as services are provided. F-136 205 AMADOR DISPOSAL SERVICES, INC. AND MOTHER LODE SANI-HUT, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) INCOME TAXES The Companies have elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code for federal and California state income tax purposes. Under S corporation status, the Companies' income is taxable to the stockholders, with only minimal state income taxes charged to the Companies. CLOSURE AND POST-CLOSURE COSTS Pursuant to a contract with Amador County to operate the Amador County Solid Waste Sanitary Landfill (Landfill), Amador Disposal is responsible to provide specified levels of cover on designated cells on the Landfill in the normal course of operations; however, the Companies are not responsible for closure and post-closure activities. The responsibility for closure and post-closure liabilities is that of Amador County. Consequently, the management does not believe the Companies have any material financial obligation for closure and post-closure costs for the Landfill. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments. The carrying values of the notes payable approximate their fair values as of June 30, 1998, and September 30, 1997 and 1998, based on current incremental borrowing rates for similar types of borrowing arrangements. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Companies to concentrations of credit risks consist primarily of accounts receivable. Credit risk on accounts receivable is minimized as the Companies' customer base consists largely of numerous customers with small individual balances. The Companies maintain allowances for losses based on the expected collectibility of accounts receivable. Credit losses have been within management's expectations. The Companies operate under various franchise agreements with local municipalities. Approximately $1,693,000 or 56% of revenues for the year ended June 30, 1998, was earned from customers in municipalities covered by five franchise agreements, which expire from 1998 through 2022, inclusive of options to extend. One of the five franchise agreements was not renewed upon its expiration on June 30, 1998. For the year ended June 30, 1998, revenue earned under this franchise agreement was approximately $425,000. 2. TRADE ACCOUNTS RECEIVABLE: Trade accounts receivable is presented net of an allowance for doubtful accounts of approximately $15,000 each at June 30, 1998, and September 30, 1997 and 1998. F-137 206 AMADOR DISPOSAL SERVICES, INC. AND MOTHER LODE SANI-HUT, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) 3. PROPERTY, PLANT AND EQUIPMENT:
JUNE 30, SEPTEMBER 30, 1998 1998 ----------- ------------- (UNAUDITED) Land and buildings............................. $ 1,268,548 $ 1,271,910 Containers, machinery and equipment............ 652,069 652,069 Rolling stock and vehicles..................... 1,760,102 1,735,761 ----------- ----------- 3,680,719 3,659,740 Less accumulated depreciation.................. (1,506,677) (1,553,035) ----------- ----------- $ 2,174,042 $ 2,106,705 =========== ===========
4. LONG-TERM DEBT: Long-term debt as of June 30 and September 30, 1998, consists of the following:
JUNE 30, SEPTEMBER 30, 1998 1998 ---------- ------------- (UNAUDITED) Notes payable to individuals, interest at prime plus 1.5% (10% at June 30, 1998 and September 30, 1998), payable in monthly installments, principal due September 2001, guaranteed by the stockholders of Amador Disposal....................................... $ 950,000 $ 950,000 Notes payable to individuals, interest at prime (8% at June 30, 1998 and September 30, 1998), payable in monthly installments of principal and interest of $2,208 through September 2007, collateralized by a deed of trust on certain real property................ $ 172,804 $ 169,614 Note payable, interest at prime plus 2% (10.5% at June 30, 1998 and September 30, 1998), payable in monthly installments of principal and interest of $655 through April 1999, collateralized by certain equipment....... $ 6,106 $ 4,285 Note payable, interest at 10.5%, payable in monthly installments of principal and interest of $560 through October 2002, collateralized by certain equipment..... $ 23,306 $ 22,229 Contract payable, interest at 10.5%, payable in monthly installments of principal and interest of $1,078 through October 2002, collateralized by certain equipment............................................. $ 44,873 $ 42,797 Contract payable, interest at prime plus 2% (10.25% at June 30, 1998 and September 1998), payable in monthly installments of principal and interest of $1,200 through March 1999, collateralized by certain equipment............................................. 10,262 6,896 ---------- ---------- 1,207,351 1,195,821 Less current portion 42,631 38,055 ---------- ---------- Total long-term debt $1,164,720 $1,157,766 ========== ==========
F-138 207 AMADOR DISPOSAL SERVICES, INC. AND MOTHER LODE SANI-HUT, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) Maturities of long-term debt are as follows:
YEAR ENDING AMOUNT ----------- ---------- 1999.................................................. $ 42,631 2000.................................................. 28,799 2001.................................................. 981,585 2002.................................................. 34,647 2003.................................................. 24,485 Thereafter............................................ 95,204 ---------- $1,207,351 ==========
5. COMMITMENTS AND CONTINGENCIES COMMITMENTS Franchise Agreements, Contracts and Permits The Companies have various franchise agreements with the counties and cities that they serve. These franchise agreements typically require a franchise fee of two to five percent of gross annual revenues earned in that jurisdiction, or a fee per collection truck operated in that jurisdiction during the year, to be paid to the municipality. These franchise agreements expire between April 2000 and October 2022, inclusive of options to extend. The Companies also have contracts to operate the Landfill and a Materials Recovery Facility (Facility) at the Landfill, expiring July 2002 and March 2016, respectively, with an option to extend for the Facility. The disposal fee at the Landfill and the related surcharge fees vary with the type of refuse. Surcharge fees collected as a part of the landfill revenue are payable to Amador County. The landfill rate schedule for the Facility is determined by Amador County annually. CONTINGENCIES Environmental Risks The Companies may be subject to liability for any environmental damage that their solid waste facilities may cause to neighboring landowners or residents, particularly as a result of the contamination of soil, groundwater or surface water, and especially drinking water, including damage resulting from conditions existing prior to the acquisition of such land and facilities by the Companies. The Companies may also be subject to liability for any off-site environmental contamination cause by pollutants or hazardous substance whose transportation, treatment or disposal was arranged by the Companies. Any substantial liability for environmental damage incurred by the Companies could have a material adverse effect on the Companies' combined financial condition, results of operations or cash flows. As of June 30, 1998 and September 30, 1998, the Companies are not aware of any such environmental liabilities. Legal Proceedings In the normal course of their business and as a result of the extensive governmental regulations of the solid waste industry, the Companies are periodically subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines on the Companies or to revoke or deny renewal of an operating permit held by the Companies. From time to time the Companies are also subject to actions brought by citizens' groups or adjacent landowners or residents alleging environmental damage or violations of the permits and licenses pursuant to which the Companies operate. In addition, the Companies F-139 208 AMADOR DISPOSAL SERVICES, INC. AND MOTHER LODE SANI-HUT, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) are parties to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of the waste management business. However, as of June 30, 1998 and September 30, 1998, there is no current proceedings or litigation involving the Companies that the Companies believe will have a material adverse impact on the Companies' business, combined financial position, results of operations and cash flows. 6. PENSION PLAN: Amador Disposal has a defined contribution pension plan for eligible employees with at least 1,000 hours within one year of employment. Amador Disposal contributes up to 10% of participants' compensation, which vest based on years of employment over seven years. Pension expense was approximately $49,000 for the year ended June 30, 1998, and approximately $12,000 and $13,000 for the three months ended September 30, 1997 and 1998, respectively. 7. SALE OF THE COMPANIES: On December 30, 1998, the shareholders of the Companies sold their stock to Waste Connections, Inc. (WCI), a publicly traded company. WCI intends to account for the acquisition using the purchase method. 8. PRO FORMA INCOME TAX INFORMATION (UNAUDITED): As described in Note 1, the Companies operate under Subchapter S of the Internal Revenue Code and are not subject to federal or state income taxes. Upon the sale of the Companies stock by the Companies stockholders to WCI (Note 7), the Subchapter S election will be terminated. As a result, the Companies will be subject to corporate income taxes subsequent to the termination of the S corporation status. The following unaudited pro forma information reflects income tax (benefit) expense for the year ended June 30, 1998 as if the Companies had been subject to federal and state income taxes: Federal taxes: Current................................................ $ -- Deferred............................................... (15,887) State taxes: Current................................................ 1,600 Deferred............................................... (4,937) -------- Pro forma income tax benefit................... $(19,224) --------
The pro forma provision for income taxes for the year ended June 30, 1998 differs from the amounts computed by applying the applicable statutory federal income tax rate (34%) to loss before income taxes due to graduated income tax rates. The Companies' unaudited pro forma deferred tax liability at June 30, 1998 would be approximately $11,000 which relates primarily to differences between tax and financial methods of depreciation. F-140 209 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Shareholders Butler County Landfill, Inc. Kobus Construction, Inc. We have audited the accompanying combined balance sheet of Butler County Landfill, Inc. and Kobus Construction, Inc. (collectively the "Companies") as of December 31, 1997, and the related combined statements of income and retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Companies at December 31, 1997, and the combined results of their operations and their cash flows for the year ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP Sacramento, California December 30, 1998 F-141 210 BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC. COMBINED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) ASSETS
DECEMBER 31, SEPTEMBER 30, 1997 1998 ------------ ------------- (UNAUDITED) Current assets: Cash and cash equivalents................................. $ 33 $ 47 Short-term investments.................................... 28 47 Accounts receivable....................................... 344 428 Prepaid expenses and other current assets................. 84 107 ------ ------ Total current assets.............................. 489 629 Property, plant and equipment, net.......................... 3,219 3,124 Restricted assets........................................... 352 331 Other assets................................................ 18 20 ------ ------ $4,078 $4,104 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings..................................... $ 27 $ -- Accounts payable.......................................... 114 107 Accrued liabilities....................................... 280 168 Current portion of closure and post closure costs......... 94 46 Current portion of long-term debt......................... 452 608 ------ ------ Total current liabilities......................... 967 929 Long-term debt.............................................. 960 816 Closure and post closure costs.............................. 361 474 Commitments and contingencies (Note 5) Shareholders' equity: Common stock: at par value; 10,100 shares authorized; 300 shares issued and outstanding.......................... 10 10 Additional paid-in capital................................ 2 2 Retained earnings......................................... 1,778 1,873 ------ ------ Total shareholders' equity........................ 1,790 1,885 ------ ------ $4,078 $4,104 ====== ======
See accompanying notes. F-142 211 BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC. COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS (IN THOUSANDS)
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, ------------------ 1997 1997 1998 ------------ ------- ------- (UNAUDITED) Revenues.................................................. $3,010 $2,470 $2,419 Operating expenses: Cost of operations...................................... 1,898 1,604 1,659 Depreciation and amortization........................... 631 470 408 Selling, general and administrative..................... 236 183 130 ------ ------ ------ Income from operations.................................... 245 213 222 Interest expense.......................................... (180) (137) (109) Other income (expense), net............................... 43 5 109 ------ ------ ------ Net income................................................ 108 81 222 Retained earnings, beginning of period.................... 1,820 1,820 1,778 Distributions to shareholders............................. (150) (121) (127) ------ ------ ------ Retained earnings, end of period.......................... $1,778 $1,780 $1,873 ====== ====== ====== Pro forma income taxes (unaudited -- Note 6).............. $ (42) $ (32) $ (86) ====== ====== ====== Pro forma net income (unaudited -- Note 6)................ $ 66 $ 49 $ 136 ====== ====== ======
See accompanying notes. F-143 212 BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC. COMBINED STATEMENTS OF CASH FLOWS INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (IN THOUSANDS)
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, ------------------ 1997 1997 1998 ------------ -------- ------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.............................................. $ 108 $ 81 $ 222 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........................ 631 470 408 Gain on sale of property, plant and equipment........ (5) (4) (51) Closure and post closure expenses.................... 101 75 65 Changes in operating assets and liabilities: Accounts receivable................................ (38) (46) (84) Prepaid expenses and other current assets.......... 20 34 (23) Accounts payable................................... (17) 38 (7) Accrued liabilities................................ 106 105 (112) ----- ------- ----- Net cash provided by operating activities............... 906 753 418 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for property, plant and equipment............................................ (385) (283) (473) Proceeds from the sale of property, plant and equipment............................................ 162 81 212 Purchases of short-term investments..................... -- -- (19) Change in restricted assets............................. (237) (198) 21 Change in other assets.................................. (3) (3) (2) ----- ------- ----- Net cash used in investing activities................... (463) (403) (261) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt............................ 608 604 436 Principal payments on short-term borrowings and long- term debt............................................ (972) (831) (452) Distributions to shareholders........................... (150) (121) (127) ----- ------- ----- Net cash used in financing activities..................... (514) (348) (143) ----- ------- ----- Net (decrease) increase in cash and cash equivalents...... (71) 2 14 Cash and cash equivalents, beginning of period............ 104 104 33 ----- ------- ----- Cash and cash equivalents, end of period.................. $ 33 $ 106 $ 47 ===== ======= ===== SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH TRANSACTIONS: Cash paid for interest.................................... $ 180 $ 137 $ 109 ===== ======= =====
See accompanying notes. F-144 213 BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS Butler County Landfill, Inc. ("Butler") is a solid waste company that owns and operates a landfill in Butler County, Nebraska. Kobus Construction Inc. ("Kobus") is a solid waste company that provides collection, transfer and disposal services to residential and commercial customers in Butler County, Nebraska. BASIS OF COMBINATION The combined financial statements include the accounts of Butler and Kobus (collectively, the "Companies") as a result of their common ownership. Significant inter-company balances and transactions between the Companies have been eliminated in combination. SALE OF THE COMPANIES On December 11, 1998, the Companies' shareholders entered into an agreement to sell all capital stock of the Companies to Waste Connections, Inc. ("WCI") for cash and common stock of WCI. INTERIM FINANCIAL INFORMATION The unaudited interim combined financial statements as of September 30, 1998 and for the nine months ended September 30, 1997 and 1998 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. CASH EQUIVALENTS The Companies consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. CONCENTRATIONS OF CREDIT RISK Financial instruments that potentially subject the Companies to concentrations of credit risk consist primarily of accounts receivable. Credit risk on accounts receivable is minimized as a result of the large and diverse nature of the Companies' customer bases. Historically, credit losses have been immaterial. F-145 214 BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost. Improvements or betterments which significantly extend the life of an asset are capitalized. Expenditures for maintenance and repair costs are charged to operations as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal. Gains and losses resulting from property disposals are included in other income (expense). Depreciation is computed using the straight-line method over the estimated useful lives of the assets, or lease term, whichever is shorter. The estimated useful lives of property, plant and equipment (excluding landfill related assets) are as follows: Building and land improvements...................... 15 - 39 years Equipment and vehicles.............................. 3 - 7 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 Companies' weighted average cost of indebtedness. Landfill permitting, acquisition and preparation costs, excluding the estimated residual value of land, are amortized as permitted airspace of the landfill is consumed. Landfill preparation costs include the costs of construction associated with excavation, liners, site berms and the installation of leak detection and leachate collection systems. In determining the amortization rate for a landfill, preparation costs include the total estimated costs to complete construction of the landfills' permitted capacity. Units-of-production amortization rates are determined annually for the Companies' operating landfill. The rates are based on estimates provided by the Companies' outside engineers and consider the information provided by surveys which are performed at least annually. LONG-LIVED ASSETS The Companies continually evaluate the value and future benefits of their long-lived assets. The Companies assess recoverability based on estimates of future undiscounted cash flows. Under this approach, the carrying value would be reduced to fair value if it becomes probable that the Companies' best estimates for expected undiscounted future cash flows would be less than the carrying amount of the long-lived assets. Through December 31, 1997, there were no adjustments to the carrying amounts of long-lived assets resulting from these evaluations. RESTRICTED ASSETS The Companies are required to fund certain portions of their estimated closure and post closure liabilities. These amounts are held in a trust account restricted for expenditures on closure and post closure costs. During 1997, the Companies were awarded two grants from the Nebraska Department of Environmental Quality ("DEQ") totaling $184 for the purchase of composting and recycling equipment. Grant funds of $96 were received in 1997, however at year end no expenditures had F-146 215 BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) been made. During 1996, the Companies received a $25 grant from the DEQ for the abatement of scrap tires collected at the landfill. As of December 31, 1997, $17 had been received under this grant and had not been spent. As of December 31, 1997, restricted assets consist of the following: Unspent funds received under DEQ grants..................... $113 Closure and post closure trust fund amounts................. 239 ---- $352 ====
CLOSURE AND POST CLOSURE COSTS Accrued closure and post-closure costs include the current and non-current portion of accruals associated with obligations for closure and post-closure monitoring and maintenance of the landfill. The Companies, based as input from outside engineers, estimate future closure and post-closure monitoring and maintenance costs for sold waste landfills based on its interpretation of the technical standards of the U.S. Environmental Protection Agency's Subtitle D regulations and the air emissions standards under the Clean Air Act as they are being applied on a state-by-state basis. Closure and post closure monitoring and maintenance costs represent the costs related to cash expenditures yet to be incurred when a landfill facility ceases to accept waste and closes. Accruals for closure and post-closure monitoring and maintenance requirements in the U.S. consider final capping of the site, site inspection, groundwater monitoring, leachate management, methane gas control and recovery, and operating and maintenance costs to be incurred during the period after the facility closes. Certain of these environmental costs, principally capping and methane gas control costs, are also incurred during the operating life of the site in accordance with the landfill operation requirements of Subtitle D and the air emissions standards. Reviews of the future requirements for closure and post-closure monitoring and maintenance costs for the Companies' operating landfills are performed by the Companies' consulting engineers at least annually and are the basis upon which the Companies' estimates of these future costs and the related accrual rates are revised. The Companies provides accruals for these estimated costs as the remaining permitted airspace of such facilities is consumed. The State of Nebraska requires a specified portion of these accrued closure and post-closure obligations to be funded at any point in time. REVENUE RECOGNITION The Companies recognize revenues as services are provided related to hauling and disposal and upon the receipt and acceptance of waste material at its landfill and materials recovery facility. INCOME TAXES The Companies operate under Subchapter S of the Internal Revenue Code for federal and state income tax reporting purposes. Consequently all of the income tax attributes and liabilities of the Companies' operations flow through to the individual shareholders and no provision for income taxes has been made in the combined financial statements. F-147 216 BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) 2. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment as of December 31, 1997 and September 30, 1998 consists of the following:
DECEMBER 31, SEPTEMBER 30, 1997 1998 ------------ ------------- (UNAUDITED) Buildings and land improvements................ $ 737 $ 870 Landfill related assets........................ 2,982 2,982 Equipment and vehicles......................... 1,796 1,780 ------- ------- 5,515 5,632 Less accumulated depreciation and amortization................................. (2,296) (2,508) ------- ------- $ 3,219 $ 3,124 ======= =======
3. SHORT-TERM BORROWINGS The Companies maintain an equipment line of credit (the "Line") with a financial institution. Under the Line, the Companies may borrow an amount up to $100 for the purchase of equipment. Interest on the Line is payable at 9.5% semi-annually. All outstanding principal plus accrued interest was paid off on January 15, 1998. The Line was secured by substantially all of the Companies' assets and was also guaranteed by the Companies' shareholders. 4. LONG-TERM DEBT Long-term debt as of December 31, 1997 consists of the following:
DECEMBER 31, 1997 ------------ Construction note payable bearing interest at 10.75%; payable in monthly installments of principal and interest of $30; maturing December 2000; secured by the landfill and Materials Recovery Facility with a net carrying value of $854 as of December 31, 1997........................... $ 908 Notes payable bearing various rates of interest (ranging from 8.75% to 9.5%), payable in monthly installments of principal and interest (aggregating $23), maturing at various dates through February 2002; secured by substantially all of the Companies' assets................ 308 Note payable bearing interest at 6%; payable in annual installments of principal and interest of $10; maturing February 1, 2012; secured by land with a net carrying value of $125 as of December 31, 1997..................... 97 Equipment financing notes payable bearing interest at various rates (ranging from 9.5% to 9.9%); payable in monthly installments of principal and interest (aggregating $4); maturing through November 2000; secured by substantially all of the Companies' assets............. 99 ------ 1,412 Less current portion........................................ 452 ------ Long-term debt.............................................. $ 960 ======
F-148 217 BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) As of December 31, 1997, aggregate contractual future principal payments by calendar year on long-term debt are due as follows: 1998........................................................ $ 452 1999........................................................ 465 2000........................................................ 392 2001........................................................ 18 2002........................................................ 10 Thereafter.................................................. 75 ------ $1,412 ======
5. COMMITMENTS AND CONTINGENCIES COMMITMENTS Operating Leases The Companies leases certain equipment under cancelable and noncancelable operating leases. Rent expense under these agreements amounted to $106 for the year ended December 31, 1997. As of December 31, 1997, future minimum lease payments under these noncancelable operating leases, by calendar year, are as follows: 1998........................................................ $ 90 1999........................................................ 81 2000........................................................ 38 2001........................................................ 9 ---- $218 ====
CONTINGENCIES Environmental Risks The Companies are subject to liability for any environmental damage that the solid waste facilities they operate may cause to neighboring landowners, particularly as a result of the contamination of drinking water sources or soil, including damage resulting from conditions existing prior to the operation of such facilities by the Companies. The Companies may also be subject to liability for any off-site environmental contamination caused by pollutants or hazardous substances whose transportation, treatment or disposal was arranged by the Companies. Any substantial liability for environmental damage incurred by the Companies could have a material adverse effect on the Companies' combined financial condition, results of operations or cash flows. Legal Proceedings In the normal course of their business and as a result of the extensive governmental regulation of the solid waste industry, the Companies may periodically become subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines on the Companies or to revoke or deny renewal of an operating F-149 218 BUTLER COUNTY LANDFILL, INC. AND KOBUS CONSTRUCTION, INC. NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (DOLLARS IN THOUSANDS) (INFORMATION RELATING TO SEPTEMBER 30, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998 IS UNAUDITED) permit held by the Companies. From time to time the Companies may also be subject to actions brought by citizens' groups or adjacent landowners in connection with the permitting and licensing of landfills and transfer stations, or alleging environmental damage or violations of the permits and licenses pursuant to which the Companies operates. In addition, the Companies may become party to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of the waste management business. However, as of December 31, 1997 and September 30 1998, there are no current proceedings or litigation involving the Companies that the Companies believe will have a material adverse impact on the Companies' business, financial condition, results of operations or cash flows. 6. PRO FORMA INCOME TAX INFORMATION (UNAUDITED) As described in Note 1, the Companies operate under Subchapter S of the Internal Revenue Code and are not subject to Federal income taxes. The pro form income taxes represent estimates of income tax expense had the Companies filed income tax returns as regular corporations. The pro forma provisions for income taxes for the year ended December 31, 1997 and the nine months ended September 30, 1997 and 1998, differ from the amounts computed by applying the applicable statutory federal income tax rate (34%) to income before income taxes due primarily to state franchise taxes. 7. YEAR 2000 (UNAUDITED) The Companies will need to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 ("Year 2000") and thereafter. To date, the Companies have not incurred any costs related to the Year 2000 project. The Companies do not believe that their expenditures relating to the Year 2000 project will be material. However, if the required Year 2000 modifications and conversions are not made or are not completed in a timely manner, the Year 2000 issue could materially affect the Companies' operations. F-150 219 - ------------------------------------------------------ - ------------------------------------------------------ YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WASTE CONNECTIONS HAS NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT CONTAINED 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
PAGE ---- Prospectus Summary................... 3 Risk Factors......................... 8 Use of Proceeds...................... 14 Price Range of Common Stock.......... 15 Dividend Policy...................... 15 Capitalization....................... 16 Dilution............................. 17 Selected Historical and Pro Forma Financial and Operating Data....... 18 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 22 Business............................. 32 Management........................... 48 Certain Transactions................. 55 Principal Stockholders............... 58 Description of Capital Stock......... 59 Shares Eligible for Future Sale...... 62 Plan of Distribution................. 64 Legal Matters........................ 66 Experts.............................. 66 Available Information................ 67 Index to Financial Statements........ F-1
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 3,250,000 SHARES [LOGO] COMMON STOCK ------------------- PROSPECTUS ------------------- BT ALEX. BROWN CIBC OPPENHEIMER FIRST ANALYSIS SECURITIES CORPORATION , 1999 - ------------------------------------------------------ - ------------------------------------------------------ 220 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. SEC Registration Fee........................................ $ 18,572.57 NASDAQ Listing Fee*......................................... $ 17,500.00 NASD Filing Fee............................................. $ 7,180.78 Accounting Fees and Expenses*............................... $ 600,000.00 Printing and Engraving Expenses*............................ $ 200,000.00 Legal Fees and Expenses*.................................... $ 200,000.00 Transfer Agent and Registrar Fees*.......................... $ 2,500.00 Miscellaneous Expenses*..................................... $ 54,246.65 ------------- Total*...................................................... $1,100,000.00
- --------------- * Estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Amended and Restated Certificate of Incorporation (the "Restated Certificate") of Waste Connections provides that a director will not be personally liable to Waste Connections or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law (the "Delaware Law"), which concerns unlawful payments of dividends, stock purchases or redemptions, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware Law is subsequently amended to permit further limitation of the personal liability of directors, the liability of a director of Waste Connections will be eliminated or limited to the fullest extent permitted by the Delaware Law as amended. Section 145(a) of the Delaware Law provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person's conduct was unlawful. Section 145(b) of the Delaware Law states that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another II-1 221 corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 145(c) of the Delaware Law provides that to the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of Section 145, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by such person in connection therewith. Section 145(d) of the Delaware Law states that any indemnification under subsections (a) and (b) of Section 145 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of Section 145. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (i) by a majority of the directors who were not parties to such action, suit or proceeding, even though less than a quorum, or (ii) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (iii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (iv) by the stockholders. Section 145(e) of the Delaware Law provides that expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in Section 145. Such expenses (including attorneys' fees) incurred by former officers and directors or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate. Section 145(f) of the Delaware Law states that the indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of Section 145 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person's official capacity and as to action in another capacity while holding such office. Section 145(g) of the Delaware Law provides that a corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under the provisions of Section 145. II-2 222 Section 145(j) of the Delaware Law states that the indemnification and advancement of expenses provided by, or granted pursuant to, Section 145 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Pursuant to Section 145 of the Delaware Law, Waste Connections has purchased insurance on behalf of its present and former directors and officers against any liability asserted against or incurred by them in such capacity or arising out of their status as such. Waste Connections has entered into indemnification agreements with each of its directors and officers providing for mandatory indemnification and advancement of expenses to the maximum extent permitted by the Delaware Law. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Set forth below is a listing of all sales by Waste Connections of unregistered securities since Waste Connections was incorporated on September 9, 1997. All such sales were exempt from registration under the Securities Act, pursuant to Section 4(2) of the Securities Act (and, as noted below, Regulation D or Rule 701 thereunder), as they were transactions not involving a public offering. The Company believes that each of the issuances made pursuant to Section 4(2) was made to a sophisticated investor, who had the financial resources to bear the information concerning Waste Connections. The consideration paid to Waste Connections in respect of each issuance was cash, unless otherwise indicated. Waste Connections sales described below were made by Waste Connections without the issuance of any underwriters. 1. In September and October 1997, Waste Connections in a private placement sold an aggregate of 2,300,000 shares of common stock at a price of $0.01 per share and 2,499,998 shares of Series A Preferred Stock at a price of $2.80 per share to 19 accredited investors, including certain officers and directors of Waste Connections. Such sales were made in accordance with Regulation D promulgated under the Securities Act. 2. In February 1998, Waste Connections issued to the shareholders of Madera an aggregate of 1,000,000 shares of common stock and warrants to purchase 200,000 shares of common stock at an exercise price of $4.00 per share, all as part of the consideration for the acquisition of Madera. Such shares and warranties were issued pursuant to Regulation D under the Securities Act. 3. In April 1998, Waste Connections issued to Jesse's Disposal and A-1 Disposal, Inc. an aggregate of 41,818 shares of common stock, valued at approximately $500,000, as part of the consideration for the acquisition of certain business assets of those companies. Such shares were issued pursuant to Regulation D under the Securities Act. 4. In May 1998, Waste Connections issued to the shareholders of Sower's Sanitation, Inc. and Sunshine Sanitation Incorporated an aggregate of 27,272 shares of common stock, valued at approximately $300,000, as part of the consideration for Waste Connections' acquisition of those companies. Such shares were issued pursuant to Regulation D under the Securities Act. 5. In May 1998, Waste Connections issued to the shareholders of T&T Disposal, Inc. an aggregate of 13,636 shares of common stock, valued at approximately $150,000, as part of the consideration for Waste Connections' acquisition of that company. Such shares were issued pursuant to Regulation D under the Securities Act. 6. In June 1998, Waste Connections issued to Contractor's Waste Removal, L.C. an aggregate of 76,923 shares of common stock, valued at approximately $1,000,000, as part of the consideration for Waste Connections' acquisition of certain business assets of that company. Such shares were issued pursuant to Regulation D under the Securities Act. II-3 223 7. In June 1998, Waste Connections issued to the shareholders of Arrow Sanitary Services, Inc. an aggregate of 213,750 shares of common stock, valued at approximately $3,043,800, as part of the consideration for Waste Connections' acquisition of that company. Such shares were issued pursuant to Regulation D under the Securities Act. 8. In July 1998, Waste Connections issued to the shareholders of Shrader Refuse and Recycling Services Company an aggregate of 146,608 shares of common stock, valued at approximately $1,345,660, as part of the consideration for Waste Connections' merger with that company. Such shares were issued pursuant to Regulation D under the Securities Act. 9. In September 1998, Waste Connections issued to Youngclaus Enterprises 6,510 shares of common stock, valued at approximately $139,000, as part of the consideration for the acquisition of certain assets of that business. Such shares were issued pursuant to Regulation D under the Securities Act. 10. From September 1997 through January 6, 1999, Waste Connections issued options to purchase an aggregate of 1,039,550 shares of common stock to various officers and employees, with a weighted average exercise price per share of $7.22. Such options are exercisable on various dates at prices ranging from $2.80 to $22.125. Such options were issued pursuant to Rule 701 under the Securities Act. 11. From September 1997 through January 6, 1999, Waste Connections issued warrants to purchase an aggregate of 1,463,935 shares to various consultants, with a weighted average exercise price of $3.31 per share. Such warrants are exercisable on various dates at prices ranging from $0.01 to $22.125. Such warrants were issued pursuant to Regulation D under the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE (a) EXHIBITS.
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS --------- ----------------------- 1.1 Form of Underwriting Agreement among the Registrant and the Underwriters 3.1* Amended and Restated Certificate of Incorporation of Waste Connections, in effect as of the date hereof 3.2* Amended and Restated By-laws of Waste Connections, in effect as of the date hereof 4.1* Form of Common Stock Certificate 5.1 Opinion of Shartsis, Friese & Ginsburg LLP 10.1***+ Amended and Restating Revolving Credit Agreement, dated as of November 20, 1998, between Waste Connections and various banks represented by BankBoston, N.A. 10.2* 1997 Stock Option Plan 10.3* Form of Option Agreement(1) 10.4* Form of Warrant Agreement(2) 10.5* Warrant Agreement and related Anti-Dilution Agreement issued to Imperial Bank 10.6* Warrant Agreement and related Anti-Dilution Agreement issued to BankBoston, N.A. 10.7* Form of Stock Purchase Agreement dated as of September 30, 1997(3) 10.8***+ Form of Third Amended and Restated Investors' Rights Agreement dated as of December 31, 1998(3)
II-4 224
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS --------- ----------------------- 10.9* Employment Agreement among Waste Connections, J. Bradford Bishop, Frank W. Cutler, James N. Cutler, Jr. and Ronald J. Mittelstaedt, dated as of October 1, 1997 10.10* First Amended Employment Agreement between Waste Connections and Darrell Chambliss, dated as of October 1, 1997 10.11* First Amended Employment Agreement between Waste Connections and Michael Foos, dated as of October 1, 1997 10.12* First Amended Employment Agreement between Waste Connections and Eric Moser, dated as of October 1, 1997 10.13* Employment Agreement between Waste Connections and Steven Bouck, dated as of February 1, 1998 10.14* Employment Agreement between Waste Connections and Eugene V. Dupreau, dated as of February 23, 1998 10.15* Employment Agreement between Waste Connections and Charles B. Youngclaus, dated as of February 23, 1998 10.16+* Purchase and Sale Agreement, dated as of September 29, 1997, between Browning-Ferris Industries, Inc., Browning-Ferris, Inc. and Browning-Ferris Industries of Idaho, Inc., as Sellers, and Waste Connections, Waste Connections of Idaho, Inc. and Continental Paper Recycling, L.L.C. as Buyers 10.17+* Stock Purchase Agreement, dated as of January 26, 1998, among Waste Connections, Waste Connections of Idaho, Inc. and the shareholders of Waste Connections of Idaho, Inc. 10.18+* Stock Purchase Agreement, dated as of February 4, 1998, among Waste Connections and the shareholders of Madera Disposal Company, Inc. 10.19+* Asset Purchase Agreement, dated as of March 1, 1998, among Waste Connections, Waste Connections of Idaho, Inc., Hunter Enterprises, Inc. and the shareholder of Hunter Enterprises, Inc. 10.20* Form of Indemnification Agreement entered into by Waste Connections and each of its directors and officers 10.21+* Asset Purchase Agreement, dated as of April 8, 1998, between Waste Connections, Waste Connections of Wyoming, Inc., A-1 Disposal, Inc., David Jones and Thomas Fries 10.22+* Asset Purchase Agreement, dated as of April 8, 1998, between Waste Connections, Waste Connections of Wyoming, Inc. and Gwendolyn L. Sullivan 10.23+* Stock Purchase Agreement, dated as of May 8, 1998, by and among Waste Connections, Sunshine Sanitation, Incorporated, Robert E. Ewing and Sherry D. Ewing 10.24+* Stock Purchase Agreement, dated as of May 8, 1998, by and among Waste Connections, Sowers' Sanitation, Inc., James C. Sowers and Mildred A. Sowers 10.25+* Stock Purchase Agreement, dated as of May 11, 1998, by and among Waste Connections, T&T Disposal, Inc. and Timothy Thomas 10.26+# Asset Purchase Agreement, dated as of June 1, 1998, by and among Waste Connections, Waste Connections of Utah, Inc., Contractor's Waste, L.C., and Brad Kitchen, Heath Johnston and R. Scott McQuarrie
II-5 225
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS --------- ----------------------- 10.27+## Stock Purchase Agreement, dated as of June 5, 1998, by and among Waste Connections, B&B Sanitation, Inc., Red Carpet Landfill, Inc., Darlin Equipment, Inc., Lyle J. Buller, Larue A. Buller, the Lyle J. Buller Revocable Trust dated 10/11/96 and Larue A. Buller, Trustee of the Larue A. Buller Revocable Trust dated 10/11/96 10.28++ Stock Purchase Agreement dated as of June 17, 1998, by and among Waste Connections, Arrow Sanitary Service, Inc., Steven Giusto, Dennis Giusto, John Giusto, Michael Giusto and Kenneth Giusto 10.29++ Stock Purchase Agreement dated as of June 25, 1998, by and among Waste Connections, Curry Transfer and Recycling, Oregon Waste Technology, Petty H. Smart and A. Lewis Rucker 10.30**+ Purchase and Sale Agreement dated as of June 25, 1998, by and between Petty H. Smart and Waste Connections 10.31**+ Loan Agreement dated as of June 1, 1998, between Madera Disposal Systems, Inc. and the California Pollution Control Financing Authority 10.32** Employment Agreement between Waste Connections and David M. Hall, dated as of July 8, 1998 10.33**+ Asset Purchase Agreement, dated as of July 27, 1998, by and among Waste Connections, Waste Connections of Utah, Inc., Miller Containers, Inc., and Douglas L. Miller 10.34+++ Agreement and Plan of Merger, dated as of July 30, 1998, by and among Waste Connections, WCI Acquisition Corporation, Shrader Refuse and Recycling Service Company, Duane E. Shrader, Myrlen A. Shrader, Daniel L. Shrader, Mark S. Shrader, Michael D. Shrader and Daren L. Shrader 10.35+++ Purchase and Sale Agreement dated as of July 31, 1998, by and between Ambler Vincent Development Company and Shrader Refuse and Recycling Service Company 10.36**+ Asset Purchase Agreement dated as of August 21, 1998, among Waste Connections, Waste Connection of Utah, Inc. and Joseph E. Cunningham and Scott L. Helm 10.37**+ Asset Purchase Agreement, dated as of August 10, 1998, by and among Waste Connections, Waste Connections of Utah, Inc., ABC Waste Inc., and David Boren 10.38** Form of Investors' Rights Agreement, dated as of July 31, 1998(4) 10.39**+ Purchase Agreement, dated as of July 31, 1998, by and among Waste Connections, Waste Connections of Nebraska, Inc., J & J Sanitation Inc., Big Red Roll Off Inc., Garry L. Jeffords, Darin R. Mueller, Leslie J. Jeffords, Leland J. Jeffords, Bradley Rowan, Great Plains Recycling, Inc., Roma L. Jeffords, Kristie K. Mueller, Sheri L. Jeffords and Betty L. Hargis 10.40***+ Asset Purchase Agreement, dated as of September 18, 1998, by and among Waste Connections, Waste Connections of Nebraska, Inc., Affiliated Waste Services, L.L.C., Leroy's Sanitary Service, Inc., Elden's Sanitary Service, Inc., Dennis' Sanitary Service, Inc., LeRoy Hintz and Janice Hintz, Dennis J. Mrsny and Mary Mrsny, and Elden W. Mrsny and Doris Mrsny 10.41***+ Asset Purchase Agreement, dated as of September 9, 1998, by and among Waste Connections, Madera Disposal Systems, Inc. and Charles B. Youngclaus
II-6 226
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS --------- ----------------------- 10.42***+ Asset Purchase Agreement, dated as of September 21, 1998, by and among Waste Connections, Waste Connections of Utah, Inc., Country Garbage Service Inc., Jay Mecham, Karl Bankowski, and Robert Lopez 10.43***+ Asset Purchase Agreement, dated as of September 18, 1998, by and among Waste Connections, Waste Connections of Nebraska, Inc., Gary D. Wolff and Elizabeth L. Wolff 10.44***+ Agreement and Plan of Merger, dated as of September 21, 1998, by and among Waste Connections, WCI Acquisition Corporation, Evergreen Waste Systems Inc., Keith H. Alexander and Todd D. Alexander 10.45***+ Asset Purchase Agreement, dated as of September 22, 1998, by and among Waste Connections, Curry Transfer & Recycling, Inc., Harrell's Septic, Ralph Hirt and Renate Hirt 10.46***+ Asset Purchase Agreement, dated as of September 25, 1998, by and among Waste Connections, Curry Transfer & Recycling, Inc., Westlane Disposal, Loren Parker and Roberta Parker 10.47***+ Asset Purchase Agreement, dated as of October 15, 1998, by and among Waste Connections, Waste Connections of Idaho, Inc., R&N LLC, Rumsey Sanitation, Inc., NADL Sanitation Inc., Bradley D. Rumsey, Emil Nejdl, and Kathy K. Rumsey 10.48***+ Purchase and Sale Agreement, dated as of October 15, 1998, by and between R&N LLC and Waste Connections of Idaho, Inc. 10.49***+ Agreement and Plan of Merger dated as of October 22, 1998, by and among Waste Connections, WCI Acquisition Corporation I, WCI Acquisition Corporation II, WCI Acquisition Corporation III, WCI Acquisition Corporation IV, Murrey's Disposal Company, Inc., American Disposal Company, Inc., D.M. Disposal Co., Inc., Tacoma Recycling Company, Inc., the Murrey Trust UTA August 5, 1993, as amended, the Bonnie L. Murrey Revocable Trust UTA August 5, 1993, as amended, Donald J. Hawkins and Irmgard R. Wilcox 10.50+ Purchase Agreement dated as of December 11, 1998, by and among Waste Connections, Butler County Landfill, Inc., Kobus Construction, Inc., Tom Kobus and Debbie Kobus 21.1*** Subsidiaries of the Registrant 23.1 Consent of Shartsis, Friese & Ginsburg LLP (included in Exhibit 5.1) 23.2 Consent of Ernst & Young LLP, Independent Auditors 23.3 Consent of Grant Thornton LLP, Independent Auditors 23.4 Consent of PricewaterhouseCoopers LLP, Independent Auditors 23.5 Consent of Williams, Kastner & Gibbs PLLC 24.1 Power of Attorney (included in Part II of the Registration Statement under the caption "Signatures")
- --------------- * Incorporated by reference to the exhibits filed with the Registrant's Registration Statement on Form S-1, Registration No. 333-48029. ** Incorporated by reference to the exhibits filed with the Registrant's Registration Statement on Form S-4, Registration No. 333-59199. *** Incorporated by reference to the exhibits filed with the Registrant's Registration Statement on Form S-4, Registration No. 333-65615. II-7 227 # Incorporated by reference to the exhibit filed with the Registrant's Form 8-K filed on June 15, 1998. ## Incorporated by reference to the exhibit filed with the Registrant's Form 8-K filed on June 22, 1998. + Incorporated by reference to the exhibit filed with the Registrant's Form 8-K filed on July 1, 1998. ++ Incorporated by reference to the exhibit filed with the Registrant's Form 8-K filed on August 11, 1998. + Filed without exhibits and schedules (to be provided supplementally on request of the Commission). (1) Pursuant to the 1997 Stock Option Plan, Waste Connections issued options in this form to the following officers of Waste Connections (or in certain cases to an entity controlled by such individual) for the number of shares of Common Stock indicated: Darrell W. Chambliss (150,000); Michael R. Foos (150,000); Ronald J. Mittelstaedt (100,000); Eric J. Moser (85,000); Steven F. Bouck (200,000); Eugene V. Dupreau (10,000) and Charles B. Youngclaus (10,000). Waste Connections also issued options in this form to the following directors of Waste Connections: Michael W. Harlan (15,000); and William J. Razzouk (15,000). (2) Waste Connections issued warrants in this form to the following directors of Waste Connections (or in certain cases to an entity controlled by such individual) for the number of shares of Common Stock indicated: James N. Cutler, Jr. (247,000); J. Bradford Bishop (247,000); Ronald J. Mittelstaedt (100,000). Waste Connections also issued warrants in this form as follows: warrants to purchase 247,000 shares of Common Stock to Board consultant Frank W. Cutler; warrants to purchase an aggregate of 200,000 shares of Common Stock to the shareholders of Madera in connection with Waste Connections's acquisition of Madera; warrants to purchase 66,794 shares of Common Stock to four consultants to Waste Connections; and warrants to purchase 50,000 shares of Common Stock to Steven Bouck. (3) Each purchaser of shares in Waste Connections' September 1997 private placement of 2,300,000 shares of Common Stock and 2,499,998 shares of Series A Preferred Stock entered into a Stock Purchase Agreement and an Investors' Rights Agreement in these forms with respect to the shares purchased. Subsequent holders of Waste Connections' Common Stock have also become parties to the Investors' Rights Agreement. (4) Each of the selling shareholders of Shrader Refuse and Recycling Service Company is a party to this Investors' Rights Agreement. (b) FINANCIAL STATEMENT SCHEDULE. The following Financial Statement Schedule is filed herewith and made a part hereof: Schedule II -- Valuation and Quantifying Accounts. All other schedules for which provision is made in the applicable accounting regulations of the Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide to the Underwriters, at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission such II-8 228 indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-9 229 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Roseville, State of California, on January 7, 1999. WASTE CONNECTIONS, INC. By: /s/ RONALD J. MITTELSTAEDT ------------------------------------ Ronald J. Mittelstaedt President, Chief Executive Officer and Chairman Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in their respective capacities and on the respective dates set forth opposite their names. Each person whose signature appears below hereby appoints Ronald J. Mittelstaedt and Steven F. Bouck and each of them, each of whom may act without joinder of the other, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute in the name and on behalf of each such person any amendment or any post-effective amendment to this Registration Statement, and any registration statement relating to any offering made in connection with the offering covered by this Registration Statement that is to be effective on filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Commission, granting unto said attorneys-in-fact and agents full power and authority to do and perform each and every act and thing appropriate or necessary to be done, as fully and for all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or their substitute or substitutes may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on January 7, 1999.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RONALD J. MITTELSTAEDT President, Chief Executive January 7, 1999 - ----------------------------------------------------- Officer and Chairman Ronald J. Mittelstaedt /s/ EUGENE V. DUPREAU Director and Vice January 7, 1999 - ----------------------------------------------------- President -- Madera Eugene V. Dupreau /s/ MICHAEL W. HARLAN Director January 7, 1999 - ----------------------------------------------------- Michael W. Harlan /s/ WILLIAM J. RAZZOUK Director January 7, 1999 - ----------------------------------------------------- William J. Razzouk /s/ STEVEN F. BOUCK Executive Vice President January 7, 1999 - ----------------------------------------------------- and Chief Financial Officer Steven F. Bouck /s/ MICHAEL R. FOOS Vice President and January 7, 1999 - ----------------------------------------------------- Corporate Controller Michael R. Foos
II-10 230 WASTE CONNECTIONS, INC. AND PREDECESSORS SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (IN THOUSANDS)
ADDITIONS ----------------------- DEDUCTIONS BALANCE AT CHARGED TO CHARGED TO (WRITE-OFFS, BALANCE BEGINNING COSTS AND OTHER NET OF AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS COLLECTIONS) OF PERIOD ----------- ---------- ---------- ---------- ------------ --------- Deducted from asset accounts: Allowance for doubtful accounts: Fibres International, Inc.: January 1, 1995 through November 30, 1995..................... $ 18 $ 10 $-- $ -- $ 28 The Disposal Group Combined: Year ended December 31, 1995.... 73 139 -- (99) 113 Period from January 1, 1996 through July 31, 1996........ 113 72 -- (94) 91 Predecessors Combined: One month ended December 31, 1995......................... 28 -- -- -- 28 Period ended December 31, 1996......................... 28 61 -- (8) 81 Nine months ended September 30, 1997......................... 81 139 -- (97) 123 Waste Connections, Inc.: Period from inception (September 9, 1997) through December 31, 1997......................... -- 19 -- 19
II-11 231 EXHIBIT INDEX
EXHIBIT PAGE NUMBER DESCRIPTION OF EXHIBITS NUMBER ------- ----------------------- ------ 1.1 Form of Underwriting Agreement among the Registrant and the Underwriters................................................ 3.1* Amended and Restated Certificate of Incorporation of Waste Connections, in effect as of the date hereof................ 3.2* Amended and Restated By-laws of Waste Connections, in effect as of the date hereof....................................... 4.1* Form of Common Stock Certificate............................ 5.1++ Opinion of Shartsis, Friese & Ginsburg LLP.................. 10.1***+ Amended and Restating Revolving Credit Agreement, dated as of November 20, 1998, between Waste Connections and various banks represented by BankBoston, N.A. ...................... 10.2* 1997 Stock Option Plan...................................... 10.3* Form of Option Agreement(1)................................. 10.4* Form of Warrant Agreement(2)................................ 10.5* Warrant Agreement and related Anti-Dilution Agreement issued to Imperial Bank............................................ 10.6* Warrant Agreement and related Anti-Dilution Agreement issued to BankBoston, N.A. ........................................ 10.7* Form of Stock Purchase Agreement dated as of September 30, 1997(3)..................................................... 10.8***+ Form of Third Amended and Restated Investors' Rights Agreement dated as of December 31, 1998(3).................. 10.9* Employment Agreement among Waste Connections, J. Bradford Bishop, Frank W. Cutler, James N. Cutler, Jr. and Ronald J. Mittelstaedt, dated as of October 1, 1997................... 10.10* First Amended Employment Agreement between Waste Connections and Darrell Chambliss, dated as of October 1, 1997.......... 10.11* First Amended Employment Agreement between Waste Connections and Michael Foos, dated as of October 1, 1997............... 10.12* First Amended Employment Agreement between Waste Connections and Eric Moser, dated as of October 1, 1997................. 10.13* Employment Agreement between Waste Connections and Steven Bouck, dated as of February 1, 1998......................... 10.14* Employment Agreement between Waste Connections and Eugene V. Dupreau, dated as of February 23, 1998...................... 10.15* Employment Agreement between Waste Connections and Charles B. Youngclaus, dated as of February 23, 1998................ 10.16+* Purchase and Sale Agreement, dated as of September 29, 1997, between Browning-Ferris Industries, Inc., Browning-Ferris, Inc. and Browning-Ferris Industries of Idaho, Inc., as Sellers, and Waste Connections, Waste Connections of Idaho, Inc. and Continental Paper Recycling, L.L.C. as Buyers......
232
EXHIBIT PAGE NUMBER DESCRIPTION OF EXHIBITS NUMBER ------- ----------------------- ------ 10.17+* Stock Purchase Agreement, dated as of January 26, 1998, among Waste Connections, Waste Connections of Idaho, Inc. and the shareholders of Waste Connections of Idaho, Inc. ... 10.18+* Stock Purchase Agreement, dated as of February 4, 1998, among Waste Connections and the shareholders of Madera Disposal Company, Inc. ..................................... 10.19+* Asset Purchase Agreement, dated as of March 1, 1998, among Waste Connections, Waste Connections of Idaho, Inc., Hunter Enterprises, Inc. and the shareholder of Hunter Enterprises, Inc. ....................................................... 10.20* Form of Indemnification Agreement entered into by Waste Connections and each of its directors and officers.......... 10.21+* Asset Purchase Agreement, dated as of April 8, 1998, between Waste Connections, Waste Connections of Wyoming, Inc., A-1 Disposal, Inc., David Jones and Thomas Fries................ 10.22+* Asset Purchase Agreement, dated as of April 8, 1998, between Waste Connections, Waste Connections of Wyoming, Inc. and Gwendolyn L. Sullivan....................................... 10.23+* Stock Purchase Agreement, dated as of May 8, 1998, by and among Waste Connections, Sunshine Sanitation, Incorporated, Robert E. Ewing and Sherry D. Ewing......................... 10.24+* Stock Purchase Agreement, dated as of May 8, 1998, by and among Waste Connections, Sowers' Sanitation, Inc., James C. Sowers and Mildred A. Sowers................................ 10.25+* Stock Purchase Agreement, dated as of May 11, 1998, by and among Waste Connections, T&T Disposal, Inc. and Timothy Thomas...................................................... 10.26+# Asset Purchase Agreement, dated as of June 1, 1998, by and among Waste Connections, Waste Connections of Utah, Inc., Contractor's Waste, L.C., and Brad Kitchen, Heath Johnston and R. Scott McQuarrie...................................... 10.27+## Stock Purchase Agreement, dated as of June 5, 1998, by and among Waste Connections, B&B Sanitation, Inc., Red Carpet Landfill, Inc., Darlin Equipment, Inc., Lyle J. Buller, Larue A. Buller, the Lyle J. Buller Revocable Trust dated 10/11/96 and Larue A. Buller, Trustee of the Larue A. Buller Revocable Trust dated 10/11/96.............................. 10.28++ Stock Purchase Agreement dated as of June 17, 1998, by and among Waste Connections, Arrow Sanitary Service, Inc., Steven Giusto, Dennis Giusto, John Giusto, Michael Giusto and Kenneth Giusto.......................................... 10.29++ Stock Purchase Agreement dated as of June 25, 1998, by and among Waste Connections, Curry Transfer and Recycling, Oregon Waste Technology, Petty H. Smart and A. Lewis Rucker...................................................... 10.30**+ Purchase and Sale Agreement dated as of June 25, 1998, by and between Petty H. Smart and Waste Connections............ 10.31**+ Loan Agreement dated as of June 1, 1998, between Madera Disposal Systems, Inc. and the California Pollution Control Financing Authority......................................... 10.32** Employment Agreement between Waste Connections and David M. Hall, dated as of July 8, 1998.............................. 10.33**+ Asset Purchase Agreement, dated as of July 27, 1998, by and among Waste Connections, Waste Connections of Utah, Inc., Miller Containers, Inc., and Douglas L. Miller..............
233
EXHIBIT PAGE NUMBER DESCRIPTION OF EXHIBITS NUMBER ------- ----------------------- ------ 10.34+++ Agreement and Plan of Merger, dated as of July 30, 1998, by and among Waste Connections, WCI Acquisition Corporation, Shrader Refuse and Recycling Service Company, Duane E. Shrader, Myrlen A. Shrader, Daniel L. Shrader, Mark S. Shrader, Michael D. Shrader and Daren L. Shrader............ 10.35+++ Purchase and Sale Agreement dated as of July 31, 1998, by and between Ambler Vincent Development Company and Shrader Refuse and Recycling Service Company........................ 10.36**+ Asset Purchase Agreement dated as of August 21, 1998, among Waste Connections, Waste Connection of Utah, Inc. and Joseph E. Cunningham and Scott L. Helm............................. 10.37**+ Asset Purchase Agreement, dated as of August 10, 1998, by and among Waste Connections, Waste Connections of Utah, Inc., ABC Waste Inc., and David Boren....................... 10.38** Form of Investors' Rights Agreement, dated as of July 31, 1998(4)..................................................... 10.39**+ Purchase Agreement, dated as of July 31, 1998, by and among Waste Connections, Waste Connections of Nebraska, Inc., J & J Sanitation Inc., Big Red Roll Off Inc., Garry L. Jeffords, Darin R. Mueller, Leslie J. Jeffords, Leland J. Jeffords, Bradley Rowan, Great Plains Recycling, Inc., Roma L. Jeffords, Kristie K. Mueller, Sheri L. Jeffords and Betty L. Hargis...................................................... 10.40***+ Asset Purchase Agreement, dated as of September 18, 1998, by and among Waste Connections, Waste Connections of Nebraska, Inc., Affiliated Waste Services, L.L.C., Leroy's Sanitary Service, Inc., Elden's Sanitary Service, Inc., Dennis' Sanitary Service, Inc., LeRoy Hintz and Janice Hintz, Dennis J. Mrsny and Mary Mrsny, and Elden W. Mrsny and Doris Mrsny....................................................... 10.41***+ Asset Purchase Agreement, dated as of September 9, 1998, by and among Waste Connections, Madera Disposal Systems, Inc. and Charles B. Youngclaus................................... 10.42***+ Asset Purchase Agreement, dated as of September 21, 1998, by and among Waste Connections, Waste Connections of Utah, Inc., Country Garbage Service Inc., Jay Mecham, Karl Bankowski, and Robert Lopez................................. 10.43***+ Asset Purchase Agreement, dated as of September 18, 1998, by and among Waste Connections, Waste Connections of Nebraska, Inc., Gary D. Wolff and Elizabeth L. Wolff.................. 10.44***+ Agreement and Plan of Merger, dated as of September 21, 1998, by and among Waste Connections, WCI Acquisition Corporation, Evergreen Waste Systems Inc., Keith H. Alexander and Todd D. Alexander............................. 10.45***+ Asset Purchase Agreement, dated as of September 22, 1998, by and among Waste Connections, Curry Transfer & Recycling, Inc., Harrell's Septic, Ralph Hirt and Renate Hirt.......... 10.46***+ Asset Purchase Agreement, dated as of September 25, 1998, by and among Waste Connections, Curry Transfer & Recycling, Inc., Westlane Disposal, Loren Parker and Roberta Parker.... 10.47***+ Asset Purchase Agreement, dated as of October 15, 1998, by and among Waste Connections, Waste Connections of Idaho, Inc., R&N LLC, Rumsey Sanitation, Inc., NADL Sanitation Inc., Bradley D. Rumsey, Emil Nejdl, and Kathy K. Rumsey....
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EXHIBIT PAGE NUMBER DESCRIPTION OF EXHIBITS NUMBER ------- ----------------------- ------ 10.48***+ Purchase and Sale Agreement, dated as of October 15, 1998, by and between R&N LLC and Waste Connections of Idaho, Inc......................................................... 10.49***+ Agreement and Plan of Merger dated as of October 22, 1998, by and among Waste Connections, WCI Acquisition Corporation I, WCI Acquisition Corporation II, WCI Acquisition Corporation III, WCI Acquisition Corporation IV, Murrey's Disposal Company, Inc., American Disposal Company, Inc., D.M. Disposal Co., Inc., Tacoma Recycling Company, Inc., the Murrey Trust UTA August 5, 1993, as amended, the Bonnie L. Murrey Revocable Trust UTA August 5, 1993, as amended, Donald J. Hawkins and Irmgard R. Wilcox..................... 10.50+ Purchase Agreement dated as of December 11, 1998, by and among Waste Connections, Butler County Landfill, Inc., Kobus Construction, Inc., Tom Kobus and Debbie Kobus.............. 21.1*** Subsidiaries of the Registrant.............................. 23.1 Consent of Shartsis, Friese & Ginsburg LLP (included in Exhibit 5.1)................................................ 23.2 Consent of Ernst & Young LLP, Independent Auditors.......... 23.3 Consent of Grant Thornton LLP, Independent Auditors......... 23.4 Consent of PricewaterhouseCoopers LLP, Independent Auditors.................................................... 23.5 Consent of Williams, Kastner & Gibbs PLLC................... 24.1 Power of Attorney (included in Part II of the Registration Statement under the caption "Signatures")...................
- --------------- * Incorporated by reference to the exhibits filed with the Registrant's Registration Statement on Form S-1, Registration No. 333-48029. ** Incorporated by reference to the exhibits filed with the Registrant's Registration Statement on Form S-4, Registration No. 333-59199. *** Incorporated by reference to the exhibits filed with the Registrant's Registration Statement on Form S-4, Registration No. 333-65615. # Incorporated by reference to the exhibit filed with the Registrant's Form 8-K filed on June 15, 1998. ## Incorporated by reference to the exhibit filed with the Registrant's Form 8-K filed on June 22, 1998. + Incorporated by reference to the exhibit filed with the Registrant's Form 8-K filed on July 1, 1998. ++ Incorporated by reference to the exhibit filed with the Registrant's Form 8-K filed on August 11, 1998. + Filed without exhibits and schedules (to be provided supplementally on request of the Commission). ++ To be filed by amendment. EX-1.1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 3,250,000 Shares WASTE CONNECTIONS, INC. Common Stock ($.01 Par Value) UNDERWRITING AGREEMENT ---------------------- ______________, 1999 BT Alex. Brown Incorporated CIBC Oppenheimer Corp. First Analysis Securities Corporation As Representatives of the Several Underwriters c/o BT Alex. Brown Incorporated One South Street Baltimore, Maryland 21202 Ladies and Gentlemen: Waste Connections, Inc., a Delaware corporation (the "Company"), proposes to sell to the several underwriters (the "Underwriters") named in Schedule I hereto for whom you are acting as representatives (the "Representatives") an aggregate of 3,250,000 shares of the Company's Common Stock, $0.01 par value (the "Firm Shares"). The respective amounts of the Firm Shares to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto. The Company and certain of its shareholders (the "Option Shareholders") also propose to sell at the Underwriters' option an aggregate of up to 487,500 additional shares of the Company's Common Stock (the "Option Shares") as set forth below. The Company and the Option Shareholders are sometimes referred to herein as the "Sellers." The respective amounts of the Firm Shares to be so purchased by the several Underwriters are set forth opposite their names in Schedule I hereto, and the respective amounts of the Option Shares to be sold by the Option Shareholders are set forth opposite their names in Schedule II hereto. As the Representatives, you have advised the Company and the Option Shareholders (a) that you are authorized to enter into this Agreement on behalf of the several Underwriters and (b) that the several Underwriters are willing, acting severally and not jointly, to purchase the 2 numbers of Firm Shares set forth opposite their respective names in Schedule I, plus their pro rata portion of the Option Shares if you elect to exercise the over-allotment option in whole or in part for the accounts of the several Underwriters. The Firm Shares and the Option Shares (to the extent the aforementioned option is exercised) are herein collectively called the "Shares." In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE OPTION SHAREHOLDERS. (a) The Company represents and warrants to each of the Underwriters as follows: (i) A registration statement on Form S-1 (File No. 333-________) with respect to the Shares has been carefully prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended (the "Act"), and the Rules and Regulations (the "Rules and Regulations") of the Securities and Exchange Commission (the "Commission") thereunder and has been filed with the Commission. Copies of such registration statement, including any amendments thereto, the preliminary prospectuses (meeting the requirements of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to you. Such registration statement, together with any registration statement filed by the Company pursuant to Rule 462(b) of the Act, herein referred to as the "Registration Statement," which shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, has become effective under the Act and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. "Prospectus" means (a) the form of prospectus first filed with the Commission pursuant to Rule 424(b) or (b) the last preliminary prospectus included in the Registration Statement filed prior to the time it becomes effective or filed pursuant to Rule 424(a) under the Act that is delivered by the Company to the Underwriters for delivery to purchasers of the Shares, together with any term sheet or abbreviated term sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act. Each preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." (ii) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. Each of the subsidiaries of the Company as listed in Exhibit 21 to Item 16(a) of the Registration Statement (collectively, the "Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement. The Subsidiaries are the only subsidiaries, direct or - 2 - 3 indirect, of the Company. The Company and each of the Subsidiaries are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification and where the failure to so qualify would have a material adverse effect on the Company and the Subsidiaries, taken as a whole. The outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued, are fully paid and non-assessable and, to the extent shown in Exhibit A hereto, are owned by the Company or another Subsidiary free and clear of all liens, encumbrances and equities and claims, except, as set forth in Schedule III hereto; and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into shares of capital stock or ownership interests in the Subsidiaries are outstanding. (iii) The outstanding shares of Common Stock of the Company, including all shares to be sold by the Option Shareholders, have been duly authorized and validly issued and are fully paid and non-assessable; the Shares to be issued and sold by the Company have been duly authorized and when issued and paid for as contemplated herein will be validly issued, fully paid and non-assessable; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue and sale thereof. Neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to the registration of any shares of Common Stock. (iv) The information set forth under the caption "Capitalization" in the Prospectus is true and correct. All of the Shares conform to the description thereof contained in the Registration Statement. The form of certificates for the Shares conforms to the corporate law of the jurisdiction of the Company's incorporation. (v) The Commission has not issued an order preventing or suspending the use of any Prospectus relating to the proposed offering of the Shares nor instituted proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be stated therein by, and will conform to, the requirements of the Act and the Rules and Regulations. The Registration Statement and any amendment thereto do not contain, and will not contain, any untrue statement of a material fact and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus and any amendments and supplements thereto do not contain, and will not contain, any untrue statement of material fact; and do not omit, and will not omit, to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in - 3 - 4 conformity with, written information furnished to the Company by or on behalf of any Underwriter through the Representatives, specifically for use in the preparation thereof. (vi) The financial statements of the Company, its predecessors and certain of the businesses purchased by the Company since the completion of its initial public offering, together with related notes and schedules as set forth in the Registration Statement, present fairly the financial position and the results of operations and cash flows of the Company and the acquired businesses, at the indicated dates and for the indicated periods. Such financial statements and related schedules have been prepared in accordance with generally accepted principles of accounting, consistently applied throughout the periods involved, except as disclosed herein (or as described in the Registration Statement), and all adjustments necessary for a fair presentation of results for such periods have been made. The summary financial and statistical data relating to the Company included in the Registration Statement presents fairly the information shown therein and such data has been compiled on a basis consistent with the financial statements presented therein and the books and records of the Company. The pro forma financial information included in the Registration Statement and the Prospectus present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements, have been properly compiled on the pro forma bases described therein, and, in the opinion of the Company, the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions or circumstances referred to therein. (vii) Ernst & Young LLP, Grant Thornton LLP and PricewaterhouseCoopers LLP, who have certified certain of the financial statements filed with the Commission as part of the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations. (viii) There is no action, suit, claim or proceeding pending or, to the knowledge of the Company, threatened against the Company or any of the Subsidiaries before any court or administrative agency or otherwise which, if determined adversely to the Company or any of its Subsidiaries, might result in any material adverse change in the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and of the Subsidiaries taken as a whole or to prevent the consummation of the transactions contemplated hereby, except as set forth in the Registration Statement. (ix) The Company and the Subsidiaries have good and marketable title to all of the properties and assets reflected in the consolidated financial statements of the Company and the Subsidiaries (or as described in the Registration Statement), subject to no lien, mortgage, pledge, charge or encumbrance of any kind except those reflected in such financial statements (or as described in the Registration Statement) or which are not material in amount. The Company and the Subsidiaries occupy their leased properties under valid and binding leases conforming in all material respects to the description thereof set forth in the Registration Statement. - 4 - 5 (x) The Company and the Subsidiaries have filed all Federal, State and local income tax returns which have been required to be filed and have paid all taxes indicated by said returns and all assessments received by them or any of them to the extent that such taxes have become due and are not being contested in good faith. All tax liabilities have been adequately provided for in the financial statements of the Company. (xi) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole, whether or not occurring in the ordinary course of business, and there has not been any material transaction entered into or any material transaction that is probable of being entered into by the Company or the Subsidiaries, other than transactions in the ordinary course of business and changes and transactions described in the Registration Statement, as it may be amended or supplemented. The Company and the Subsidiaries have no material contingent obligations which are not disclosed in the Company's financial statements which are included in the Registration Statement. The Company is not aware of (i) any material adverse change in or affecting the validity of any of the G Certificates issued to it by the Washington Utilities and Transportation Commission (the "WUTC"), (ii) any material breach of, or noncompliance with, any of its G Certificates (iii) any action or proposed action by the WUTC to cancel or suspend, or which could reasonably be expected to result in the cancellation or suspension of, any of its G Certificates or (iv) any action or proposed action by the State of Washington or any of its municipalities regarding the annexation of previously unincorporated territory covered by any of its G Certificates or any other limitation of or reduction in the scope of the territory covered by any of its G Certificates which action or proposed action would have a material adverse effect on the Company and the Subsidiaries, taken as a whole. (xii) Neither the Company nor any of the Subsidiaries is or with the giving of notice or lapse of time or both, will be, in violation of or in default under its Charter or By-Laws or under any agreement, lease, contract, indenture or other instrument or obligation to which it is a party or by which it, or any of its properties, is bound and which default is of material significance in respect of the condition (financial or otherwise) of the Company and its Subsidiaries taken as a whole or the business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries taken as a whole. The execution and delivery of this Agreement and the consummation of the transactions herein contemplated and the fulfillment of the terms hereof will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which the Company or any Subsidiary is a party, or of the Charter or By-Laws of the Company or any order, rule or - 5 - 6 regulation applicable to the Company or any Subsidiary of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. (xiii) Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the Commission or the National Association of Securities Dealers, Inc. (the "NASD") has been obtained or made and is in full force and effect. (xiv) The Company and each of the Subsidiaries holds all material licenses, certificates and permits from governmental authorities, including G Certificates issued by the WUTC, which are necessary to the conduct of their businesses; and neither the Company nor any of the Subsidiaries has infringed any patents, patent rights, trade names, trademarks or copyrights, which infringement is material to the business of the Company and the Subsidiaries taken as a whole. The Company knows of no material infringement by others of patents, patent rights, trade names, trademarks or copyrights owned by or licensed to the Company. (xv) Neither the Company, nor to the Company's best knowledge, any of its affiliates, has taken or may take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. (xvi) Neither the Company nor any Subsidiary is an "investment company" within the meaning of such term under the Investment Company Act of 1940, as amended (the "1940 Act") and the rules and regulations of the Commission thereunder. (xvii) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (xviii) The Company and each of its Subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as is adequate for the conduct of their respective businesses and the value of their respective properties. - 6 - 7 (xix) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder ("ERISA"); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "pension plan" for which the Company would have any liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (xx) Except as described in the Prospectus, no labor dispute with the employees of the Company or any of its Subsidiaries exists, or to the knowledge of the Company, is threatened other than such disputes which would not individually or in the aggregate, have a material adverse effect upon the condition (financial or otherwise), business, management, properties, assets, rights, operations or prospects of the Company. (b) Each of the Option Shareholders represent and warrant as follows: (i) Such Option Shareholder now has and at the Option Closing Date (as such date is hereinafter defined) will have good and marketable title to the Option Shares to be sold by such Option Shareholder, free and clear of any liens, encumbrances, equities and claims, and full right, power and authority to effect the sale and delivery of such Option Shares and upon the delivery of, against payment for, such Option Shares pursuant to this Agreement, the Underwriters will acquire good and marketable title thereto, free and clear of any liens, encumbrances, equities and claims. (ii) Such Option Shareholder has full right, power and authority to execute and deliver this Agreement and to perform its obligations under this Agreement. The execution and delivery of this Agreement and the consummation by such Option Shareholder of the transactions herein contemplated and the fulfillment by such Option Shareholder of the terms hereof will not require any consent, approval, authorization, or other order of any court, regulatory body, administrative agency or other governmental body (except as may be required under the Act) and will not result in a breach of any of the terms and provisions of, or constitute a default under, any indenture, mortgage, deed of trust or other agreement or instrument to which such Option Shareholder is a party, or of any order, rule or regulation applicable to such Option Shareholder of any court or of any regulatory body or administrative agency or other governmental body having jurisdiction. - 7 - 8 (iii) Such Option Shareholder has not taken and will not take, directly or indirectly, any action designed to, or which has constituted, or which might reasonably be expected to cause or result in the stabilization or manipulation of the price of the Common Stock of the Company and, other than as permitted by the Act, the Option Shareholder will not distribute any prospectus or other offering material in connection with the offering of the Shares. (iv) Without having undertaken to determine independently the accuracy or completeness of either the representations and warranties of the Company contained herein or the information contained in the Registration Statement, such Option Shareholder has no reason to believe that the representations and warranties of the Company contained in this Section 1 are not true and correct, is familiar with the Registration Statement and has no knowledge of any material fact, condition or information not disclosed in the Registration Statement which has adversely affected or may adversely affect the business of the Company or any of the Subsidiaries; and the sale of the Option Shares by such Option Shareholder pursuant hereto is not prompted by any information concerning the Company or any of the Subsidiaries which is not set forth in the Registration Statement. The information pertaining to such Option Shareholder under the captions "Principal and Selling Shareholders" and "Underwriting" in the Prospectus is complete and accurate in all material respects. 2. PURCHASE, SALE AND DELIVERY OF THE SHARES. (a) On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Company agrees to sell to the Underwriters and each Underwriter agrees, severally and not jointly, to purchase, at a price of $_________ per share, the number of Firm Shares set forth opposite the name of each Underwriter in Schedule I hereof, subject to adjustments in accordance with Section 9 hereof. (b) Certificates in negotiable form for the total number of Option Shares to be sold by the Option Shareholders have been placed in custody with BankBoston, N.A., c/o Boston EquiServe, L.P., the Company's transfer agent, as custodian (the "Custodian"). The Option Shareholders specifically agree that the Option Shares represented by the certificates held in custody for the Option Shareholders are subject to the interests of the Underwriters hereunder, that the arrangements made by the Option Shareholders for such custody are to that extent irrevocable and that the obligations of the Option Shareholders hereunder shall not be terminable by any act or deed of the Option Shareholders (or by any other person, firm or corporation including the Company, the Custodian or the Underwriters) or by operation of law (including the death of an individual Option Shareholder or the dissolution of a corporate Option Shareholder) or by the occurrence of any other event or events. If any such event should occur prior to the delivery to the Underwriters of the Option Shares hereunder, certificates for the Option Shares shall be delivered by the Custodian in accordance with the terms and conditions of this Agreement as if such event had not occurred. - 8 - 9 (c) Payment for the Firm Shares to be sold hereunder is to be made in same day funds via wire transfer to the order of the Company against delivery thereof to the Representatives for the several accounts of the Underwriters. Such payment and delivery are to be made at the offices of BT Alex. Brown Incorporated, 1 South Street, Baltimore, Maryland, at 10:00 a.m., Baltimore time, on the third business day after the date of this Agreement or at such other time and date not later than five business days thereafter as you and the Company shall agree upon, such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the New York Stock Exchange is open for trading and on which banks in New York are open for business and are not permitted by law or executive order to be closed.) (d) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Option Shareholders listed on Schedule II hereto hereby grant an option to the several Underwriters to purchase the Option Shares at the price per share as set forth in the first paragraph of this Section 2. The option granted hereby may be exercised in whole or in part by giving written notice (i) at any time before the Closing Date and (ii) only once thereafter within 30 days after the date of this Agreement, by you, as Representatives of the several Underwriters, to the Custodian setting forth the number of Option Shares as to which the several Underwriters are exercising the option, the names and denominations in which the Option Shares are to be registered and the time and date at which such certificates are to be delivered. If the option granted hereby is exercised in part, the respective number of Option Shares to be sold by each of the Option Shareholders listed in Schedule II hereto shall be determined on a pro rata basis in accordance with the percentages set forth opposite their names on Schedule II hereto, adjusted by you in such manner as to avoid fractional shares. The time and date at which certificates for Option Shares are to be delivered shall be determined by the Representatives but shall not be earlier than three nor later than 10 full business days after the exercise of such option, nor in any event prior to the Closing Date (such time and date being herein referred to as the "Option Closing Date"). If the date of exercise of the option is three or more days before the Closing Date, the notice of exercise shall set the Closing Date as the Option Closing Date. The number of Option Shares to be purchased by each Underwriter shall be in the same proportion to the total number of Option Shares being purchased as the number of Firm Shares being purchased by such Underwriter bears to 3,250,000, adjusted by you in such manner as to avoid fractional shares. The option with respect to the Option Shares granted hereunder may be exercised only to cover over-allotments in the sale of the Firm Shares by the Underwriters. You, as Representatives of the several Underwriters, may cancel such option at any time prior to its expiration by giving written notice of such cancellation to the Custodian. To the extent, if any, that the option is exercised, payment for the Option Shares shall be made on the Option Closing Date in same day funds via wire transfer to the order of the Company against delivery of certificates therefor at the offices of BT Alex. Brown Incorporated, 1 South Street, Baltimore, Maryland. The Custodian is authorized to receive and acknowledge receipt of the proceeds of the sale of the Option Shares held by it against delivery of such Option Shares. - 9 - 10 (e) If on the Option Closing Date, any Option Shareholder fails to sell the Option Shares which such Option Shareholder has agreed to sell on such date as set forth in Schedule II hereto, the Company agrees that it will sell or arrange for the sale of that number of shares of Common Stock to the Underwriters which represents Option Shares which the Option Shareholder has failed to so sell, as set forth in Schedule II hereto, or such lesser number as may be requested by the Representatives. 3. OFFERING BY THE UNDERWRITERS. It is understood that the several Underwriters are to make a public offering of the Firm Shares as soon as the Representatives deem it advisable to do so. The Firm Shares are to be initially offered to the public at the public offering price set forth in the Prospectus. The Representatives may from time to time thereafter change the public offering price and other selling terms. To the extent, if at all, that any Option Shares are purchased pursuant to Section 2 hereof, the Underwriters will offer them to the public on the foregoing terms. It is further understood that you will act as the Representatives for the Underwriters in the offering and sale of the Shares in accordance with a Master Agreement Among Underwriters entered into by you and the several other Underwriters. 4. COVENANTS OF THE COMPANY AND THE OPTION SHAREHOLDERS. (a) The Company covenants and agrees with the several Underwriters that: (i) The Company will (A) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Rules and Regulations is followed, to prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations and (B) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations. (ii) The Company will advise the Representatives promptly (A) when the Registration Statement or any post-effective amendment thereto shall have become effective, (B) of receipt of any comments from the Commission, (C) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information and (D) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance - 10 - 11 of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. (iii) The Company will cooperate with the Representatives in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (iv) The Company will deliver to, or upon the order of, the Representatives, from time to time, as many copies of any Preliminary Prospectus as the Representatives may reasonably request. The Company will deliver to, or upon the order of, the Representatives during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representatives may reasonably request. The Company will deliver to the Representatives at or before the Closing Date, four signed copies of the Registration Statement and all amendments thereto including all exhibits filed therewith, and will deliver to the Representatives such number of copies of the Registration Statement (including such number of copies of the exhibits filed therewith that may reasonably be requested), and of all amendments thereto, as the Representatives may reasonably request. (v) The Company will comply with the Act and the Rules and Regulations, and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. - 11 - 12 (vi) The Company will make generally available to its security holders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earning statement (which need not be audited) in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earning statement shall satisfy the requirements of Section 11(a) of the Act and Rule 158 of the Rules and Regulations and will advise you in writing when such statement has been so made available. (vii) The Company will, for a period of five years from the Closing Date, deliver to the Representatives copies of annual reports and copies of all other documents, reports and information furnished by the Company to its stockholders or filed with any securities exchange pursuant to the requirements of such exchange or with the Commission pursuant to the Act or the Exchange Act. The Company will deliver to the Representatives similar reports with respect to significant subsidiaries, as that term is defined in the Rules and Regulations, which are not consolidated in the Company's financial statements. (viii) No offering, sale, short sale, transfer, hypothecation, pledge or other disposition of any shares of Common Stock of the Company or other securities convertible into or exchangeable or exercisable for shares of Common Stock or derivative of Common Stock (or agreement for such) will be made for a period of 90 days after the date of this Agreement, directly or indirectly, by the Company otherwise than hereunder, except as consideration for business acquisitions, upon exercise of certain of the currently outstanding options or warrants, upon the issuance of options to employees, consultants and directors under the Company's 1997 Stock Option Plan, and the exercise of such options or with the prior written consent of BT Alex. Brown Incorporated. (ix) The Company will use its best efforts to have the Shares approved for quotation on The Nasdaq National Market. (x) The Company has caused each officer, director and certain shareholders of the Company to furnish to you, on or prior to the date of this agreement, a letter or letters, in form and substance satisfactory to the Underwriters, pursuant to which each such person has agreed not to offer, sell, sell short, transfer, hypothecate, pledge or otherwise dispose of any shares of Common Stock of the Company or other capital stock of the Company, or any other securities convertible, exchangeable or exercisable for Common Stock or derivative of Common Stock owned by such person or request the registration for the offer or sale of any of the foregoing (or as to which such person has the right to direct the disposition of) for a period of 60 days after the date of this Agreement, directly or indirectly, except with the prior written consent of BT Alex. Brown Incorporated ("Lockup Agreements"). - 12 - 13 (xi) The Company shall not invest, or otherwise use the proceeds received by the Company from its sale of the Shares in such a manner as would require the Company or any of the Subsidiaries to register as an investment company under the 1940 Act. (xii) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Common Stock. (xiii) The Company will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. (b) The Option Shareholders covenant and agree with the several Underwriters that: (i) No offering, sale, short sale, transfer, hypothecation, pledge or other disposition of any shares of Common Stock of the Company or other capital stock of the Company or other securities convertible, exchangeable or exercisable for Common Stock or derivative of Common Stock owned by the Option Shareholder, either of record or beneficially, or request for registration for the offer or sale of any of the foregoing (or as to which the Option Shareholder has the right to direct the disposition of) will be made for a period of 60 days after the date of this Agreement, directly or indirectly, by the Option Shareholder, other than gifts of shares of Common Stock if the donee agrees in writing to be bound by the terms of this Section 4(b)(i), otherwise than hereunder or with the prior written consent of BT Alex. Brown Incorporated. (ii) In order to document the Underwriters' compliance with the reporting and withholding provisions of the Tax Equity and Fiscal Responsibility Act of 1982 and the Interest and Dividend Tax Compliance Act of 1983 with respect to the transactions herein contemplated, the Option Shareholders agree to deliver to you prior to or at the Closing Date a properly completed and executed United States Treasury Department Form W-9 (or other applicable form or statement specified by Treasury Department regulations in lieu thereof). (iii) The Option Shareholders will not take, directly or indirectly, any action designed to cause or result in, or that has constituted or might reasonably be expected to constitute, the stabilization or manipulation of the price of any securities of the Company. 5. COSTS AND EXPENSES. The Company will pay all costs, expenses and fees incident to the performance of the obligations of the Sellers under this Agreement, including, without limiting the generality of the foregoing, the following: accounting fees of the Company; the fees and disbursements of counsel for the Company and the Option Shareholders; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, - 13 - 14 the Prospectus and this Agreement; the Underwriters' Invitation Letter; the filing fees of the Commission; the filing fee of the NASD; and the Listing Fee of The Nasdaq National Market. To the extent, if at all, that any of the option shareholders engage special legal counsel to represent them in connection with this offering, the fees and expenses of such counsel shall be borne by such option shareholder. Any transfer taxes imposed on the sale of the Shares to the several Underwriters will be paid by Sellers pro rata. The Sellers shall not, however, be required to pay for any of the Underwriters' expenses (other than those related to qualification under NASD regulation) except that, if this Agreement shall not be consummated because the conditions in Section 6 hereof are not satisfied, or because this Agreement is terminated by the Representatives pursuant to Section 11 hereof, or by reason of any failure, refusal or inability on the part of the Sellers to perform any undertaking or satisfy any condition of this Agreement or to comply with any of the terms hereof on its part to be performed, unless such failure to satisfy said condition or to comply with said terms be due to the default or omission of any Underwriter, then the Sellers shall reimburse the several Underwriters for their reasonable out-of-pocket expenses, including fees and disbursements of counsel, reasonably incurred in connection with investigating, marketing and proposing to market the Shares or in contemplation of performing their obligations hereunder; but the Sellers shall not in any event be liable to any of the several Underwriters for damages on account of loss of anticipated profits from the sale by them of the Shares. 6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS. The several obligations of the Underwriters to purchase the Firm Shares on the Closing Date and the Option Shares, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company and the Option Shareholders contained herein, and to the performance by the Company and the Option Shareholders of their covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement and all post-effective amendments thereto shall have become effective and any and all filings required by Rule 424 and Rule 430A of the Rules and Regulations shall have been made, and any request of the Commission for additional information (to be included in the Registration Statement or otherwise) shall have been disclosed to the Representatives and complied with to their reasonable satisfaction. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the knowledge of the Company or the Option Shareholders, shall be contemplated by the Commission and no injunction, restraining order or order of any nature by a Federal or state court of competent jurisdiction shall have been issued as of the Closing Date which would prevent the issuance of the Shares. - 14 - 15 (b) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinions of Shartsis, Friese & Ginsburg LLP, counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Delaware, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; each of the Subsidiaries has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, with corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; the Company and each of the Subsidiaries are duly qualified to transact business in all jurisdictions in which the conduct of their business requires such qualification, and in which the failure to qualify would have a materially adverse effect upon the business of the Company and the Subsidiaries taken as a whole; and the outstanding shares of capital stock of each of the Subsidiaries have been duly authorized and validly issued and are fully paid and non-assessable and are owned by the Company or a Subsidiary; and, to the best of such counsel's knowledge, except as set forth in Schedule III hereto, the outstanding shares of capital stock of each of the Subsidiaries is owned free and clear of all liens, encumbrances and equities and claims; and no options, warrants or other rights to purchase, agreements or other obligations to issue or other rights to convert any obligations into any shares of capital stock or of ownership interests in the Subsidiaries are outstanding. (ii) The Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the authorized shares of the Company's Common Stock, including the Shares to be sold by the Option Shareholders, have been duly authorized; the outstanding shares of the Company's Common Stock have been duly authorized and validly issued and are fully paid and non-assessable; all of the Shares conform to the description thereof contained in the Prospectus; the certificates for the Shares, assuming they are in the form filed with the Commission, are in due and proper form; the shares of Common Stock, including the Option Shares, if any, to be sold by the Company pursuant to this Agreement have been duly authorized and will be validly issued, fully paid and non-assessable when issued and paid for as contemplated by this Agreement; and no preemptive rights of stockholders exist with respect to any of the Shares or the issue or sale thereof. (iii) Except as described in or contemplated by the Prospectus, to the knowledge of such counsel, there are no outstanding securities of the Company convertible or exchangeable into or evidencing the right to purchase or subscribe for any shares of capital stock of the Company and there are no outstanding or authorized options, warrants or rights of any character obligating the Company to issue any shares of its capital stock or any securities convertible or - 15 - 16 exchangeable into or evidencing the right to purchase or subscribe for any shares of such stock; and except as described in the Prospectus, to the knowledge of such counsel, no holder of any securities of the Company or any other person has the right, contractual or otherwise, which has not been satisfied or effectively waived, to cause the Company to sell or otherwise issue to them, or to permit them to underwrite the sale of, any of the Shares or the right to have any Common Stock or other securities of the Company included in the Registration Statement or the right, as a result of the filing of the Registration Statement, to require registration under the Act of any shares of Common Stock or other securities of the Company. (iv) The Registration Statement has become effective under the Act and, to the best of the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act. (v) The Registration Statement, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the applicable rules and regulations thereunder (except that such counsel need express no opinion as to the financial statements and related schedules therein). (vi) The statements under the captions "Business--Regulation (except that such counsel need express no opinion as to matters of Washington Law)," "Management-Employment Agreements," "Certain Transactions," "Description of Capital Stock" and "Shares Eligible for Future Sale" in the Prospectus, insofar as such statements constitute a summary of documents referred to therein or matters of law, fairly summarize in all material respects the information called for with respect to the Act. (vii) Such counsel does not know of any contracts or documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus which are not so filed or described as required, and such contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. (viii) Such counsel knows of no material legal or governmental proceedings pending or threatened against the Company or any of the Subsidiaries except as set forth in the Prospectus. (ix) The execution and delivery of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of any of the terms or provisions of, or constitute a default under, the Charter or By-Laws of the Company, or any agreement or instrument known to such counsel to which the Company or any of the Subsidiaries is a party or by which the Company or any of the Subsidiaries may be bound. - 16 - 17 (x) This Agreement has been duly authorized, executed and delivered by the Company. (xi) No approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body is necessary in connection with the execution and delivery of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD as to which such counsel need express no opinion) except such as have been obtained or made, specifying the same. (xii) The Company is not, and will not become, as a result of the consummation of the transactions contemplated by this Agreement, and application of the net proceeds therefrom as described in the Prospectus, required to register as an investment company under the 1940 Act. (xiii) This Agreement has been duly authorized, executed and delivered by or on behalf of the Option Shareholders. (xiv) Each Option Shareholder has full legal right, power and authority, and any approval required by law, to sell, assign, transfer and deliver the portion of the Shares to be sold by the Option Shareholder. (xv) The Underwriters (assuming that they are bona fide purchasers within the meaning of the Uniform Commercial Code) have acquired good and marketable title to the Shares being sold by the Option Shareholders on the Option Closing Date, free and clear of all liens, encumbrances, equities and claims. In rendering such opinion Shartsis, Friese & Ginsburg LLP may rely as to matters governed by the laws of states other than Delaware or Federal laws on local counsel in such jurisdictions, provided that in each case Shartsis, Friese & Ginsburg LLP shall state that they believe that they and the Underwriters are justified in relying on such other counsel. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, at the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to - 17 - 18 financial statements, schedules and statistical information therein). With respect to such statement, Shartsis, Friese & Ginsburg LLP may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (c) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Williams, Kastner & Gibbs PLLC, special counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Underwriters (and stating that it may be relied upon by counsel to the Underwriters) to the effect that: (i) Based on an examination of the appropriate documents, the Company holds the G Certificates awarded to it (or to its predecessors) by the WUTC, as referenced in the Registration Statement or the Prospectus as necessary to conduct regulated solid waste services in the State of Washington as described in the Prospectus. (ii) Pursuant to the Company's G Certificates, the Company has the exclusive right, by virtue of the issuance by the WUTC of the Company's G Certificates to transport solid waste, as defined by applicable Washington regulation, in various areas of the State of Washington, subject only to (1) the right of municipalities to annex previously unincorporated territory covered by the G certificates; (2) cancellation or suspension by order of the WUTC after complaint and hearing processes; (3) overlapping authority, if any, granted by the WUTC, if existing service is found not to be to the satisfaction of the WUTC, which standard has been construed as a difficult threshold to be met for overlapping authority to be issued; and (4) action by the state or federal legislatures which revises, alters or eliminates the underlying intrastate solid waste certificate scheme. (iii) Such counsel has no reason to believe that any of the Company's G Certificates will be suspended or canceled. (iv) The statements under the captions "Risk Factors--Highly Competitive Industry," "Management's Discussion and Analysis of Financial Condition and Results of Operations--General," "Business--Industry Overview," "-- G Certificates" and "Regulation-- Introduction" in the Prospectus, insofar as such statements constitute a summary of documents referred to therein or matters of law relating to G Certificates issued by the WUTC, are accurate summaries and fairly and correctly present the information called for with respect to the Act. (d) The Representatives shall have received from Piper & Marbury L.L.P., counsel for the Underwriters, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect specified in subparagraphs (ii), (iii), (iv) and (x) of Paragraph (b) of this Section 6, and that the Company is a duly organized and validly existing corporation under the laws of the State of Delaware. In rendering such opinion, Piper & Marbury L.L.P. may rely as - 18 - 19 to all matters governed other than by the laws of the State of Delaware or Federal laws on the opinions of counsel referred to in Paragraphs (b) and (c) of this Section 6. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that (i) the Registration Statement, or any amendment thereto, as of the time it became effective under the Act (but after giving effect to any modifications incorporated therein pursuant to Rule 430A under the Act) as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (ii) the Prospectus, or any supplement thereto, on the date it was filed pursuant to the Rules and Regulations and as of the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact, necessary in order to make the statements, in the light of the circumstances under which they are made, not misleading (except that such counsel need express no view as to financial statements, schedules and statistical information therein). With respect to such statement, Piper & Marbury L.L.P. may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (e) You shall have received, on each of the dates hereof, the Closing Date and the Option Closing Date, as the case may be, a letter dated the date hereof, the Closing Date or the Option Closing Date, as the case may be, in form and substance satisfactory to you, of each of Ernst & Young LLP, Grant Thornton LLP and PricewaterhouseCoopers LLP confirming that they are independent public accountants within the meaning of the Act and the applicable published Rules and Regulations thereunder and stating that, in their opinion, the financial statements and schedules examined by them and included in the Registration Statement comply in form in all material respects with the applicable accounting requirements of the Act and the related published Rules and Regulations; and containing such other statements and information as is ordinarily included in accountants' "comfort letters" to Underwriters with respect to the financial statements and certain financial and statistical information contained in the Registration Statement and Prospectus. (f) The Representatives shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them severally represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to his knowledge, contemplated by the Commission; (ii) The representations and warranties of the Company contained in Section 1 hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be; - 19 - 20 (iii) All filings required to have been made pursuant to Rules 424 or 430A under the Act have been made; (iv) He has carefully examined the Registration Statement and the Prospectus and, in his opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were true and correct, and such Registration Statement and Prospectus did not omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading, and since the effective date of the Registration Statement, no event has occurred which should have been set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment; and (v) Since the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and the Subsidiaries taken as a whole, whether or not arising in the ordinary course of business. (g) The Company and the Option Shareholders shall have furnished to the Representatives such further certificates and documents confirming the representations and warranties, covenants and conditions contained herein and related matters as the Representatives may reasonably have requested. (h) The Firm Shares and Option Shares, if any, have been approved for designation upon notice of issuance on The Nasdaq National Market. (i) The Lockup Agreements described in Section 4(a)(x) are in full force and effect. The opinions and certificates mentioned in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all material respects satisfactory to the Representatives and to Piper & Marbury L.L.P., counsel for the Underwriters. If any of the conditions hereinabove provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Underwriters hereunder may be terminated by the Representatives by notifying the Company and the Custodian of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Company, the Option Shareholders and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). - 20 - 21 7. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS. The obligations of the Sellers to sell and deliver the portion of the Shares required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. INDEMNIFICATION. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made; and will reimburse each Underwriter and each such controlling person upon demand for any legal or other expenses reasonably incurred by such Underwriter or such controlling person in connection with investigating or defending any such loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry related to the offering of the Shares, whether or not such Underwriter or controlling person is a party to any action or proceeding; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) The Option Shareholders agree to indemnify the Underwriters and each person, if any, who controls any Underwriter within the meaning of the Act, against any losses, claims, damages or liabilities to which such Underwriter or any such controlling person may become subject under the Act or otherwise to the same extent as indemnity is provided by the Company pursuant to Section 8(a) above. In no event, however, shall the liability of the Option Shareholders for indemnification under this Section 8(b) exceed the proceeds received by the Option Shareholders from the Underwriters in the offering. This indemnity obligation will be in addition to any liability which the Option Shareholders may otherwise have. - 21 - 22 (c) Each Underwriter, severally and not jointly, will indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement, the Option Shareholders and each person, if any, who controls the Company within the meaning of the Act, against any losses, claims, damages or liabilities to which the Company or any such director, officer, Option Shareholder or controlling person may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which they were made; and will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, Option Shareholder or controlling person upon demand for any legal or other expenses reasonably incurred by the Company or any such director, officer, Option Shareholder or controlling person in connection with investigating or defending any such loss, claim, damage or liability, action or proceeding or in responding to a subpoena or governmental inquiry relating to the offering of the Shares, whether or not the Company or any such director, officer, Option Shareholder or controlling person is a party to any action or proceeding; provided, however, that each Underwriter will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representatives specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which such Underwriter may otherwise have. (d) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Section 8, such person (the "indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a), (b) or (c) shall be available to any party who shall fail to give notice as provided in this Section 8(d) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was materially prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a), (b) or (c). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, - 22 - 23 any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred (or within 30 days of presentation) the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel, (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them, or (iii) the indemnifying party shall have failed to assume the defense and employ counsel acceptable to the indemnified party within a reasonable period of time after notice of commencement of the action. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by you in the case of parties indemnified pursuant to Section 8(a) or (b) and by the Company and the Option Shareholders in the case of parties indemnified pursuant to Section 8(c). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. In addition, the indemnifying party will not, without the prior written consent of the indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding of which indemnification may be sought hereunder (whether or not any indemnified party is an actual or potential party to such claim, action or proceeding) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action or proceeding. (e) If the indemnification provided for in this Section 8 is unavailable or insufficient to hold harmless an indemnified party under Section 8(a), (b) or (c) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Option Shareholders on the one hand and the - 23 - 24 Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company and the Option Shareholders on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company and the Option Shareholders on the one hand and the Underwriters on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company and the Option Shareholders bear to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or the Option Shareholders on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Option Shareholders and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(e) were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(e). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(e) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (e), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter, (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation, and (iii) the Option Shareholders shall not be required to contribute any amount in excess of the lesser of (A) that proportion of the total of such losses, claims, damages or liabilities indemnified or contributed against equal to the proportion of the total Shares sold hereunder which are being sold by the Option Shareholders or (B) the proceeds received by the Option Shareholders from the Underwriters in the offering. The Underwriters' obligations in this Section 8(e) to contribute are several in proportion to their respective underwriting obligations and not joint. (f) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him, her or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him, her or it as an additional defendant in any such proceeding in which such other contributing party is a party. (g) Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 8 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are - 24 - 25 incurred. The indemnity and contribution agreements contained in this Section 8 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, any Option Shareholder or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 8. 9. Default By Underwriters. If on the Closing Date or the Option Closing Date, as the case may be, any Underwriter shall fail to purchase and pay for the portion of the Shares which such Underwriter has agreed to purchase and pay for on such date (otherwise than by reason of any default on the part of the Company or the Option Shareholders), you, as Representatives of the Underwriters, shall use your reasonable efforts to procure within 36 hours thereafter one or more of the other Underwriters, or any others, to purchase from the Company or the Option Shareholders such amounts as may be agreed upon and upon the terms set forth herein, the Firm Shares or Option Shares, as the case may be, which the defaulting Underwriter or Underwriters failed to purchase. If during such 36 hours you, as such Representatives, shall not have procured such other Underwriters, or any others, to purchase the Firm Shares or Option Shares, as the case may be, agreed to be purchased by the defaulting Underwriter or Underwriters, then (a) if the aggregate number of shares with respect to which such default shall occur does not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the other Underwriters shall be obligated, severally, in proportion to the respective numbers of Firm Shares or Option Shares, as the case may be, which they are obligated to purchase hereunder, to purchase the Firm Shares or Option Shares, as the case may be, which such defaulting Underwriter or Underwriters failed to purchase or (b) if the aggregate number of Firm Shares or Option Shares, as the case may be, with respect to which such default shall occur exceeds 10% of the Firm Shares or Option Shares, as the case may be, covered hereby, the Company and the Option Shareholders or you as the Representatives of the Underwriters will have the right, by written notice given within the next 36-hour period to the parties to this Agreement, to terminate this Agreement without liability on the part of the non-defaulting Underwriters, the Company or the Option Shareholders, except to the extent provided in Section 8 hereof. In the event of a default by any Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or Option Closing Date, as the case may be, may be postponed for such period, not exceeding seven days, as you, as Representatives, may determine in order that the required changes in the Registration Statement or in the Prospectus or in any other documents or arrangements may be effected. The term "Underwriter" includes any person substituted for a defaulting Underwriter. Any action taken under this - 25 - 26 Section 9 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. 10. NOTICES. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telecopied or telegraphed and confirmed as follows: if to the Underwriters, to BT Alex. Brown Incorporated, 1 South Street, Baltimore, Maryland 21202, Attention: David M. Gray, Managing Director; with a copy to BT Alex. Brown Incorporated, 1 South Street, Baltimore, Maryland 21202, Attention: General Counsel; if to the Company, to Waste Connections, Inc., 2260 Douglas Boulevard, Suite 280, Roseville, California 95661, Attention: Ronald J. Mittelstaedt, President and Chief Executive Officer; with a copy to Shartsis, Friese & Ginsburg LLP, One Maritime Plaza, 18th Floor, San Francisco, California 94111, Attention: Robert D. Evans, Esquire; and if to the Option Shareholders, to _________________ 11. TERMINATION. This Agreement may be terminated by you by notice to the Sellers as follows: (a) at any time prior to the earlier of (i) the time the Shares are released by you for sale by notice to the Underwriters or (ii) 11:30 a.m. on the date of this Agreement; (b) at any time prior to the Closing Date if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole or the earnings, business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole, whether or not arising in the ordinary course of business; (ii) any outbreak or escalation of hostilities or declaration of war or national emergency or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, escalation, declaration, emergency, calamity, crisis or change on the financial markets of the United States would, in your reasonable judgment, make it impracticable to market the Shares or to enforce contracts for the sale of the Shares; (iii) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange or The Nasdaq National Market; (iv) the enactment, publication, decree or other promulgation of any statute, regulation, rule or order of any court or other governmental authority which in your opinion materially and adversely affects or may materially and adversely affect the business or operations of the Company; (v) declaration of a banking moratorium by United States or New York State authorities; (vi) any downgrading in the rating of the Company's debt securities by any "nationally recognized statistical rating - 26 - 27 organization" (as defined for purposes of Rule 436(g) under the Exchange Act); (vii) the suspension of trading of the Company's Common Stock on The Nasdaq National Market; or (viii) the taking of any action by any governmental body or agency in respect of its monetary or fiscal affairs which in your reasonable opinion has a material adverse effect on the securities markets in the United States; or (c) as provided in Sections 6 and 9 of this Agreement. 12. SUCCESSORS. This Agreement has been and is made solely for the benefit of the Underwriters, the Company and the Option Shareholders and their respective successors, executors, administrators, heirs and assigns, and the officers, directors and controlling persons referred to herein, and no other person will have any right or obligation hereunder. No purchaser of any of the Shares from any Underwriter shall be deemed a successor or assign merely because of such purchase. 13. INFORMATION PROVIDED BY UNDERWRITERS. The Company, the Option Shareholders and the Underwriters acknowledge and agree that the only information furnished or to be furnished by any Underwriter to the Company for inclusion in any Prospectus or the Registration Statement consists of the legends required by Item 502(d) of Regulation S-K under the Act and the information under the caption "Underwriting" in the Prospectus. 14. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its directors or officers and (c) delivery of and payment for the Shares under this Agreement. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware. If the foregoing letter is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding - 27 - 28 agreement among the Company, the Option Shareholders and the several Underwriters in accordance with its terms. Very truly yours, WASTE CONNECTIONS, INC. By:___________________________________________ Ronald J. Mittelstaedt, President and Chief Executive Officer OPTION SHAREHOLDERS By:___________________________________________ Attorney-In-Fact The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. BT ALEX. BROWN INCORPORATED CIBC OPPENHEIMER CORP. FIRST ANALYSIS SECURITIES CORPORATION As Representatives of the several Underwriters listed on Schedule I By: BT Alex. Brown Incorporated By:__________________________ Authorized Officer - 28 - 29 SCHEDULE I SCHEDULE OF UNDERWRITERS Number of Firm Shares Underwriter to be Purchased - ----------- --------------------- BT Alex. Brown Incorporated CIBC Oppenheimer Corp. First Analysis Securities Corporation Total 3,250,000 ========= - 29 - 30 SCHEDULE II SCHEDULE OF OPTION SHARES Maximum Number Percentage of of Option Shares Total Number of Name of Seller to be Sold Option Shares - -------------------------------------------------------------------------------- Waste Connections, Inc. ------- --- Total 487,500 100% ======= === - 30 - 31 SCHEDULE III SCHEDULE OF ENCUMBRANCES The Company has pledged 100% of the capital stock of the Subsidiaries (other than W.C. International and Oregon Waste) to BankBoston, N.A., as agent, for the benefit of the lenders under the Company's Amended and Restated Revolving Credit Agreement. - 31 - 32 EXHIBIT A - 32 - EX-23.2 3 CONSENT OF ERNST & YOUNG LLP 1 EXHIBIT 23.2 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the reference to our firm under the caption "Experts" and to the use of our report dated March 6, 1998, with respect to the consolidated financial statements of Waste Connections, Inc. and Predecessors included in the Registration Statement (Form S-1) and related Prospectus of Waste Connections, Inc. for the registration of 3,737,500 shares of common stock. Our audits also included the financial statement schedule of Waste Connections, Inc. and Predecessors listed in Item 16(b). This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. We also consent to the reference to our firm under the caption "Experts" and to the use of our report dated October 2, 1998 (except for Note 12, as to which the date is October 22, 1998) with respect to the combined financial statements of the Murrey Companies included in the Registration Statement (Form S-1) and related Prospectus of Waste Connections, Inc. for the registration of 3,737,500 shares of its common stock. We also consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 20, 1998, with respect to the financial statements of Madera Disposal Systems, Inc. included in the Registration Statement (Form S-1) and related Prospectus of Waste Connections, Inc. for the registration of 3,737,500 shares of its common stock. We also consent to the reference to our firm under the caption "Experts" and to the use of our report dated July 8, 1998, with respect to the financial statements of Arrow Sanitary Service, Inc. included in the Registration Statement (Form S-1) and related Prospectus of Waste Connections, Inc. for the registration of 3,737,500 shares of its common stock. We also consent to the reference to our firm under the caption "Experts" and to the use of our report dated August 26, 1998, with respect to the financial statements of Contractor's Waste Removal, L.C., included in the Registration Statement (Form S-1) and related Prospectus of Waste Connections, Inc. for the registration of 3,737,500 shares of its common stock. We also consent to the reference to our firm under the caption "Experts" and to the use of our report dated July 31, 1998, with respect to the financial statements of Curry Transfer and Recycling, Inc., included in the Registration Statement (Form S-1) and related Prospectus of Waste Connections, Inc. for the registration of 3,737,500 shares of its common stock. We also consent to the reference to our firm under the caption "Experts" and to the use of our report dated December 30, 1998, with respect to the financial statements of Butler County Landfill, Inc. and Kobus Construction, Inc., included in the Registration Statement (Form S-1) and related Prospectus of Waste Connections, Inc. for the registration of 3,737,500 shares of its common stock. ERNST & YOUNG LLP Sacramento, California January 6, 1999 EX-23.3 4 CONSENT OF GRANT THORNTON LLP 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our reports dated August 24, 1998, October 1, 1998 and October 7, 1998, accompanying the financial statements of Shrader Refuse and Recycling Service Company, B&B Sanitation, and J & J Sanitation, respectively. These reports and financial statements are contained in the Registration Statement and Prospectus of Waste Connections, Inc. We consent to the use of the aforementioned reports in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption "Experts." GRANT THORNTON LLP Lincoln, Nebraska January 7, 1999 EX-23.4 5 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23.4 CONSENT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT AUDITORS We consent to the inclusion in this registration statement on Form S-1 and the related prospectus of Waste Connections Inc. for the registration of 3,737,500 shares of common stock of our report dated December 30, 1998, on our audit of the combined financial statements of Amador Disposal Services, Inc. and Mother Lode Sani-Hut, Inc. We also consent to the reference to our firm under the caption "Experts". /s/ PricewaterhouseCoopers LLP Sacramento, California January 7, 1999 EX-23.5 6 CONSENT OF WILLIAMS, KASTNER & GIBBS PLLC 1 EXHIBIT 23.5 CONSENT OF WILLIAMS, KASTNER & GIBBS PLLC We consent to the reference to our firm under the caption "Legal Matters" in the Registration Statement (Form S-1 No. 333- ) and related Prospectus of Waste Connections, Inc. for the registration of up to 3,737,500 shares of its Common Stock. WILLIAMS, KASTNER & GIBBS PLLC Seattle, Washington January 6, 1999 -----END PRIVACY-ENHANCED MESSAGE-----