-----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, DZb2bflzZqVjV8Hyb0WPyN5JLpwEmOX1fmxNO/qoTaXkO96qIOELgW+i2ziXtY45 utqV6NMFOa0bQXX6/JHuYw== 0000950149-98-001030.txt : 19980520 0000950149-98-001030.hdr.sgml : 19980520 ACCESSION NUMBER: 0000950149-98-001030 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19980519 SROS: NONE 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/A SEC ACT: SEC FILE NUMBER: 333-48029 FILM NUMBER: 98627637 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/A 1 AMENDMENT #3 TO FORM S-1 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 19, 1998. REGISTRATION NO. 333-48029 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 3 TO 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: ROBERT D. EVANS, ESQ. STEPHEN A. RIDDICK, ESQ. SHARTSIS, FRIESE & GINSBURG LLP PIPER & MARBURY L.L.P. ONE MARITIME PLAZA, 18TH FLOOR 36 SOUTH CHARLES STREET SAN FRANCISCO, CALIFORNIA 94111 BALTIMORE, MARYLAND 21201 (415) 421-6500 (410) 539-2530
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 AMOUNT OF OF SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE(1) - --------------------------------------------------------------------------------------------------------------------- Common Stock, $0.01 par value...................... $27,600,000 $8,142.00 =====================================================================================================================
(1) Previously paid. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION MAY 19, 1998 2,000,000 SHARES LOGO COMMON STOCK ------------------ All of the 2,000,000 shares of Common Stock (the "Common Stock") offered hereby are being sold by Waste Connections, Inc. (the "Company"). Prior to this offering, there has been no public market for the Common Stock of the Company. It is currently estimated that the initial public offering price will be between $10.00 and $12.00 per share. For information relating to factors to be considered in determining the initial public offering price, see "Underwriting." The Common Stock has been approved for quotation on the Nasdaq National Market under the symbol "WCNX," subject to notice of issuance. ------------------ SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK. ------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ============================================================================================================ PRICE UNDERWRITING PROCEEDS TO DISCOUNTS AND TO PUBLIC COMMISSIONS COMPANY(1) - ------------------------------------------------------------------------------------------------------------ Per Share................................. $ $ $ - ------------------------------------------------------------------------------------------------------------ Total(2).................................. $ $ $ ============================================================================================================
(1) Before deducting expenses of the offering payable by the Company estimated at $1,200,000. (2) The Company has granted the Underwriters a 30-day option to purchase up to an additional 300,000 shares of Common Stock solely to cover over-allotments, if any. To the extent the option is exercised, the Underwriters will offer the additional shares at the Price to Public shown above. If the option is exercised in full, the total Price to Public, Underwriting Discounts and Commissions and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ------------------ The shares of Common Stock are offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them and subject to the right of the Underwriters to reject any order in whole or in part. It is expected that delivery of the shares of Common Stock will be made at the offices of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about , 1998. BT ALEX. BROWN CIBC OPPENHEIMER THE DATE OF THIS PROSPECTUS IS , 1998. 3 This Prospectus contains registered service marks, trademarks and trade names of the Company, including the Waste Connections, Inc. name and logo. The Company intends to furnish its stockholders with annual reports containing consolidated financial statements audited by its independent auditors and with quarterly reports containing unaudited interim consolidated financial information for each of the first three quarters of each fiscal year. ------------------------ CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN CONNECTION WITH THIS OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and the Financial Statements, including the Notes thereto, appearing elsewhere in this Prospectus. Except as otherwise noted herein, all information in this Prospectus: (i) gives effect to the automatic conversion upon consummation of this offering of all outstanding shares of Series A Preferred Stock into 2,499,998 shares of Common Stock; and (ii) assumes no exercise of the Underwriters' over-allotment option. See "Description of Capital Stock," "Underwriting" and Notes 8 and 9 of Notes to the Company's Financial Statements included elsewhere herein. Unless otherwise specified herein, all references to the "Company" or "Waste Connections" mean Waste Connections, Inc. and its subsidiaries, and all references to "solid waste" mean non-hazardous solid waste. THE COMPANY Waste Connections is a regional, integrated solid waste services company that provides solid waste collection, transfer, disposal and recycling services in secondary markets of the Western U.S. As of May 15, 1998, the Company served more than 139,000 commercial, industrial and residential customers in Washington, California, Idaho, Wyoming and South Dakota. The Company currently owns nine collection operations and operates three transfer stations, one Subtitle D landfill and one recycling facility. See "Business -- Introduction" and "-- Services." Waste Connections was founded in September 1997 to execute an acquisition-based growth strategy in secondary markets of the Western U.S. The Company has acquired ten solid waste services businesses since its formation and has identified more than 300 independent operators of such businesses in the states where it currently operates, many of which it believes may be suitable for acquisition by the Company. In addition, the Company is currently assessing potential acquisitions of solid waste services operations in several other Western States. See "Business -- Acquisition Program." The Company has targeted secondary markets in the Western U.S. because it believes that (i) a large number of independent solid waste services companies suitable for acquisition by the Company are located in these markets; (ii) there is less competition in these markets from large, well-capitalized solid waste services companies; and (iii) these markets have strong projected economic and population growth rates. In addition, the Company's senior management team has extensive experience acquiring and operating solid waste services businesses in the Western U.S. The Company has developed a market-based operating strategy tailored to the competitive and regulatory factors that affect its markets. In certain Western U.S. markets, where waste collection services are governed by exclusive franchise agreements, municipal contracts and governmental certificates (referred to in Washington as "G certificates"), the Company generally intends to pursue a collection-based operating strategy. In these markets, the Company believes that controlling the waste stream by providing collection services under exclusive franchise agreements, municipal contracts and governmental certificates is often more important to a solid waste services company's growth and profitability than owning or operating landfills. In markets where the Company considers ownership of landfills advantageous due to competitive and regulatory factors, the Company generally intends to pursue an integrated, disposal-based strategy. See "Business -- Strategy." The Company's objective is to build a leading solid waste services company in the secondary markets of the Western U.S. by (i) acquiring collection, transfer, disposal and recycling operations in new markets and through "tuck-in" acquisitions in existing markets; (ii) securing additional exclusive franchises, municipal contracts and governmental certificates; (iii) generating internal growth in existing markets by increasing market penetration and adding services to its existing operations; and (iv) enhancing profitability by increasing operating efficiencies of existing and acquired operations. The Company believes that the experience of the members of its senior management team and their knowledge of and reputation in the solid waste industry in the 3 5 Company's targeted markets will provide the Company with competitive advantages as it pursues its growth strategy. See "Business -- Strategy." The Company was incorporated in Delaware in 1997. Its principal executive offices are located at 2260 Douglas Boulevard, Suite 280, Roseville, California 95661, and its telephone number is (916) 772-2221. BACKGROUND In September 1997, the Company joined with two other parties to bid on certain solid waste and recycling businesses offered for sale by Browning-Ferris Industries, Inc. ("BFI"). The Company acquired the stock of Browning-Ferris Industries of Washington, Inc., a provider of solid waste services to more than 78,000 customers through three municipal contracts and one G certificate in and around Clark County, Washington, and the stock of its subsidiary, Fibres International, Inc., a provider of solid waste services to more than 24,000 customers through eight municipal contracts and one G certificate in King and Snohomish Counties, Washington. The acquired companies subsequently changed their names to Waste Connections of Washington, Inc. and Waste Connections International, Inc., respectively. The two other parties acquired selected BFI solid waste collection and transportation assets and operations in Idaho, and BFI's recycling assets and operations in Washington, Idaho and Oklahoma. RECENT DEVELOPMENTS MADERA ACQUISITION Effective February 1, 1998, the Company acquired Madera Disposal Systems, Inc. ("Madera"), an integrated solid waste services company operating in north central California, with 1997 revenues of approximately $7.8 million. In connection with the Madera acquisition, the Company acquired one franchise agreement and one municipal contract, pursuant to which it serves more than 9,000 commercial, industrial and residential customers, and agreements to operate two transfer stations, one Subtitle D landfill (the "Fairmead Landfill") and one recycling facility. The Fairmead Landfill is estimated to have a remaining life of approximately 26 years. IDAHO ACQUISITIONS On January 30, 1998, the Company acquired from affiliates of the Company the stock of Waste Connections of Idaho, Inc., a provider of solid waste collection services to more than 10,000 customers in and around Idaho Falls and Pocatello, Idaho. Waste Connections of Idaho, Inc. was formed in September 1997 by affiliates of the Company for the purpose of acquiring certain assets of Browning-Ferris Industries of Idaho, Inc. See "Certain Transactions." Effective March 1, 1998, the Company acquired certain solid waste collection assets from Hunter Enterprises, Inc., a solid waste services company located in eastern Idaho that serves approximately 2,800 customers. WYOMING ACQUISITIONS On April 8, 1998, the Company acquired solid waste collection assets from A-1 Disposal, Inc. and Jesse's Disposal, which together serve approximately 2,300 customers in northeastern Wyoming. On May 11, 1998, the Company acquired T&T Disposal, Inc., a provider of solid waste and recyclables collection services to more than 500 customers in eastern Wyoming. 4 6 SOUTH DAKOTA ACQUISITIONS On May 8, 1998, the Company acquired Sowers' Sanitation, Inc. and Sunshine Sanitation Incorporated, providers of solid waste and recyclables collection services to an aggregate of more than 7,000 customers in western South Dakota. LETTERS OF INTENT TO ACQUIRE ADDITIONAL OPERATIONS As of May 15, 1998, the Company had entered into nonbinding, preliminary letters of intent relating to the possible acquisition of five collection and transfer companies and one integrated collection and landfill company, which the Company estimates represent aggregate annualized revenues of more than $17.0 million, and which would result in expansion into five new markets. There can be no assurance that actual revenues realized by the Company from the successful acquisition of these potential acquisition candidates will not differ materially from the Company's estimate or that any of these letters of intent will lead to completed acquisitions on the terms currently contemplated. AMENDMENT AND INCREASE OF CREDIT FACILITY On April 21, 1998, the Company received a preliminary letter of commitment to amend and increase its credit facility with a syndicate of banks led by BankBoston, N.A. The amendment is contingent on this offering and will, among other things, increase the Company's borrowing capacity from $25.0 million to $60.0 million, modify certain covenants and lower the Company's borrowing costs. As of May 15, 1998, the aggregate outstanding principal indebtedness under the current credit facility was approximately $20.1 million. THE OFFERING Common Stock offered by the Company.................. 2,000,000 shares Common Stock to be outstanding after this offering... 7,932,724 shares(1) Use of proceeds...................................... Repayment of existing indebtedness and for general corporate purposes, including possible acquisitions and capital expenditures. Nasdaq National Market symbol........................ WCNX
- --------------- (1) Excludes 2,281,600 shares of Common Stock issuable upon the exercise of warrants and options outstanding as of May 15, 1998, at a weighted average exercise price of $3.69 per share. See "Management -- Stock Option Plan," "Certain Transactions" and Note 9 of Notes to the Company's Financial Statements included elsewhere herein. 5 7 WASTE CONNECTIONS, INC. SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PERIOD FROM INCEPTION PRO FORMA AS THREE MONTHS ENDED (SEPTEMBER 9, ADJUSTED MARCH 31, 1998 1997) THROUGH YEAR ENDED ----------------------------- DECEMBER 31, DECEMBER 31, PRO FORMA 1997 1997(1) ACTUAL AS ADJUSTED(1) -------------- ------------ ---------- ---------------- STATEMENTS OF OPERATIONS DATA: Revenues.................................................. $ 6,237 $ 35,013 $ 7,601 $ 8,462 Cost of operations........................................ 4,703 26,114 5,397 6,017 Selling, general and administrative....................... 619 4,252 770 897 Depreciation and amortization............................. 354 2,431 541 623 Start-up and integration.................................. 493 493 -- -- Stock compensation........................................ 4,395 4,395 320 320 ---------- ---------- ---------- ---------- Income (loss) from operations............................. (4,327) (2,672) 573 605 Interest expense.......................................... (1,035) -- (301) -- Other income (expense), net............................... (36) 151 -- 16 ---------- ---------- ---------- ---------- Income (loss) before income taxes......................... (5,398) (2,521) 272 621 Income tax (provision) benefit............................ 332 (781) (237) (377) ---------- ---------- ---------- ---------- Net income (loss)......................................... $ (5,066) $ (3,302) $ 35 $ 244 ========== ========== ========== ========== Redeemable convertible preferred stock accretion.......... $ (531) $ -- $ (572) $ -- ---------- ---------- ---------- ---------- Net loss applicable to common stockholders................ $ (5,597) $ (3,302) $ (537) $ 244 ========== ========== ========== ========== Basic net income (loss) per share......................... $ (2.99) $ (0.45) $ (0.23) $ 0.03 ========== ========== ========== ========== Shares used in calculating basic net income (loss) per share........................................ 1,872,567 7,372,565 2,311,111 7,811,109 Diluted net income per share.............................. $ 0.03 ========== Shares used in calculating diluted net income per share... 8,835,415 Pro forma basic net income (loss) per share(2)............ $ (1.16) $ 0.01 ========== ========== Shares used in calculating pro forma basic net income (loss) per share........................................ 4,372,565 5,811,109 Pro forma diluted net income per share(2)................. $ 0.01 ========== Shares used in calculating pro forma diluted net income per share.................................... 6,835,415
MARCH 31, 1998 DECEMBER 31, -------------------------- 1997 ACTUAL AS ADJUSTED(3) ------------ --------- -------------- BALANCE SHEET DATA: Cash...................................................... $ 820 $ 2,386 $ 5,234 Working capital........................................... 836 988 3,836 Property and equipment, net............................... 4,185 7,316 7,316 Total assets.............................................. 18,880 41,033 43,881 Long-term debt(4)......................................... 6,762 16,289 -- Redeemable convertible preferred stock.................... 7,523 8,095 -- Redeemable common stock(5)................................ -- 7,500 -- Total stockholders' equity (deficit)...................... (551) 1,181 35,913
(see footnotes on following page) 6 8 - --------------- (1) Assumes the Company's acquisitions of Madera Disposal Systems, Inc., Waste Connections of Idaho, Inc. and predecessor and the Company's predecessors occurred on January 1, 1997, adjusted to reflect the sale of the Common Stock offered hereby at an assumed initial public offering price of $11.00 per share and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Unaudited Pro Forma Financial Statements." (2) Adjusted to reflect the conversion of all outstanding shares of redeemable convertible Preferred Stock for the period from inception through December 31, 1997, and the conversion of redeemable convertible Preferred Stock and all outstanding shares of redeemable Common Stock for the three months ended March 31, 1998, as if such conversions had occurred as of the first day of each of the periods presented. See Note 11 of Notes to the Company's Financial Statements included elsewhere herein for an explanation of the pro forma historical per share calculations. (3) Adjusted to reflect the sale of the Common Stock offered by the Company hereby at an assumed initial public offering price of $11.00 per share and the application of the estimated net proceeds therefrom, as described in "Use of Proceeds." (4) Excludes redeemable Common Stock and redeemable convertible Preferred Stock. (5) Common Stock issued in connection with the acquisition of Madera is redeemable in certain circumstances, as defined in the Stock Purchase Agreement between the Company and the Madera shareholders; however, the redemption right expires upon the closing of this offering. See Notes 2 and 9 of Notes to the Company's Financial Statements included elsewhere herein. 7 9 RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its business before purchasing the shares of Common Stock offered by this Prospectus. This Prospectus contains certain forward-looking statements that involve risks and uncertainties. Discussions containing such forward-looking statements may be found in the material set forth under "Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," as well as in the Prospectus generally. The cautionary statements contained in this Prospectus should be read as applying to all related forward-looking statements wherever they appear in this Prospectus. The Company's actual results could differ materially from those discussed here as a result of various factors, including without limitation those discussed below and elsewhere in this Prospectus. Limited Operating History; Integration of Completed Acquisitions. The Company was formed in September 1997 and commenced operations on October 1, 1997. Accordingly, the Company has only a limited operating history upon which to base an evaluation of its business and its prospects. The disclosures regarding the Company contained in this Prospectus must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development. In addition, there can be no assurance that the Company's recently assembled senior management team will be able to manage the Company successfully and implement the Company's operating and growth strategies effectively. The Company's effective integration of acquired businesses into its organization and operations is and will continue to be important to the Company's growth and future financial performance. A part of the Company's strategy is to achieve economies of scale and operating efficiencies by increasing its size through acquisitions. These goals may not be achieved unless the Company effectively combines the operations of acquired businesses with its existing operations. Because of the Company's limited operating history, there can be no assurance that its recently assembled senior management team will succeed in integrating the Company's completed and future acquisitions. Any difficulties the Company encounters in the integration process could have a material adverse effect on its business, financial condition and results of operations. Growth Strategy Implementation; Ability to Manage Growth. The Company's growth strategy includes (i) expanding through acquisitions, (ii) acquiring additional exclusive franchise agreements and municipal contracts and (iii) generating internal growth. The Company's ability to execute its growth strategy will depend on a number of factors, including the success of existing and emerging competition, the availability of acquisition targets, the ability to maintain profit margins in the face of competitive pressures, the ability to continue to recruit, train and retain qualified employees, the strength of demand for the Company's services and the availability of capital to support its growth. If the Company is able to execute its growth strategy, it may experience periods of rapid growth. Such growth, if it occurs, could place a significant strain on the Company's management, operational, financial and other resources. The Company's ability to maintain and manage its growth effectively will require it to expand its management information systems capabilities and its operational and financial systems and controls. Moreover, the Company will need to attract, train, motivate, retain and manage additional senior managers, technical professionals and other employees. Any failure to expand the Company's operational and financial systems and controls or to recruit and integrate appropriate personnel at a pace consistent with the Company's revenue growth would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Strategy." Availability of Acquisition Targets. The Company expects that a substantial part of its future growth will come from acquiring solid waste collection, transfer and disposal operations. While the Company has identified numerous acquisition candidates that it believes are suitable, no assurance 8 10 can be given that the Company will be able to negotiate their acquisition at prices or on terms and conditions favorable to the Company. The Company's failure to implement its acquisition strategy successfully would limit its potential growth. See "Business -- Strategy" and "-- Acquisition Program." The Company competes for acquisition candidates with other entities, some of which have greater financial resources than the Company. Increased competition for acquisition candidates may result in fewer acquisition opportunities being available to the Company, as well as less attractive acquisition terms, including increased purchase prices. These circumstances may increase acquisition costs to levels that are beyond the Company's financial capability or pricing parameters or that may have an adverse effect on the Company's results of operations and financial condition. A significant factor in its ability to consummate acquisitions after completion of this offering will be the relative attractiveness of shares of the Company's Common Stock as consideration for potential acquisition candidates. This attractiveness may depend in large part on the relative market price and capital appreciation prospects of the Common Stock compared to the equity securities of the Company's competitors. If the market price of the Company's Common Stock were to decline materially over a prolonged period of time, the Company's acquisition program could be materially adversely affected. Highly Competitive Industry. The solid waste services industry is highly competitive and fragmented and requires substantial labor and capital resources. Certain of the markets in which the Company competes or will likely compete are served by one or more large, national solid waste companies, as well as by numerous regional and local solid waste companies of varying sizes and resources, some of which have accumulated substantial goodwill. The Company also competes with counties, municipalities and solid waste districts that maintain their own waste collection and disposal operations. These counties, municipalities and solid waste districts may have financial advantages over the Company, because of their access to user fees and similar charges, tax revenues and tax-exempt financing. Certain of the Company's competitors may also be better capitalized, have greater name recognition or be able to provide services at a lower cost than the Company. The Company's inability to compete with governmental service providers and larger and better capitalized companies could have a material adverse effect on the Company's business, financial condition and results of operations. The Company derives a substantial portion of its revenue from exclusive municipal contracts and franchise agreements, of which a significant number will be subject to competitive bidding at some time in the future. See "Business -- Services." The Company intends to bid on additional municipal contracts and franchise agreements as a means of adding customers. There can be no assurance that the Company will be the successful bidder to obtain or retain contracts that come up for competitive bidding. In addition, some of the Company's contracts may be terminated by the customer before the end of the contract term. Municipalities in Washington may by law annex unincorporated territory, which would remove such territory from the area covered by G certificates issued by the Washington Utilities and Transportation Commission. Such annexation could reduce the areas covered by the Company's G certificates and subject more of the Company's Washington operations to competitive bidding in the future. Moreover, the laws governing G Certificates could be amended or repealed by legislative action, which action could have a material adverse effect on the Company. See "Business -- G Certificates." The Company's inability to replace revenues from contracts lost through competitive bidding or early termination or the renegotiation of existing contracts with other revenues within a reasonable time period could have a material adverse effect on the Company's business, financial condition and results of operations. Intense competition exists not only to provide services to customers but also to acquire other businesses within each market. Other companies have adopted or should be expected to adopt the Company's strategy of acquiring and consolidating regional and local businesses to develop a national presence. Increasing consolidation in the solid waste services industry is expected to increase competitive pressures. See "Business -- Competition." 9 11 Potential Inability to Finance the Company's Potential Growth. The Company anticipates that any future business acquisitions will be financed through cash from operations, borrowings under its bank line of credit, the issuance of shares of the Company's Common Stock and/or seller financing. If acquisition candidates are unwilling to accept, or the Company is unwilling to issue, shares of the Company's Common Stock as part of the consideration for such acquisitions, the Company may be required to use more of its available cash resources or borrowings under its credit facility to fund such acquisitions. To the extent that cash from operations and borrowings under the Company's credit facility are insufficient to fund acquisitions, the Company will require additional equity and/or debt financing. Additionally, growth through the development or acquisition of new landfills, transfer stations and other facilities, as well as the ongoing maintenance of such landfills, transfer stations or other facilities, may require substantial capital expenditures. There can be no assurance that the Company will have sufficient existing capital resources or be able to raise sufficient additional capital resources on terms satisfactory to the Company to meet any or all of the foregoing capital requirements. The terms of the Company's credit facility require the Company to obtain the consent of the lending banks prior to consummating acquisitions of other businesses for cash consideration (including all liabilities assumed) in excess of $3.0 million. In addition, the Company may not incur aggregate indebtedness greater than $250,000 to sellers in acquisition transactions without its lenders' consent. The Company's inability to obtain such consent could prevent the Company from completing certain acquisitions, which could inhibit the Company's ability to execute its growth strategy. Furthermore, the Company's credit facility contains various financial covenants predicated on the Company's current and projected financial condition following completion of an acquisition. If the Company is unable to satisfy these financial covenants on a pro forma basis following completion of an acquisition, it would be unable to complete the acquisition without a waiver from its lending banks. Whether or not a waiver is needed, if the results of the Company's future operations differ materially from those that are anticipated, the Company may no longer be able to comply with the covenants in the credit facility. The Company's failure to comply with such covenants may result in a default under the credit facility, which could result in acceleration of the date for repayment of debt incurred under the credit facility and would have a material adverse effect on the Company's business, financial condition and results of operations. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and Note 5 of Notes to the Company's Financial Statements. Dependence on Management. The Company depends significantly on the services of the members of its senior management team, the loss of any of whom may have a material adverse effect on the Company's business, financial condition and results of operations. The Company currently maintains "key man" life insurance with respect to Ronald J. Mittelstaedt, its President, Chief Executive Officer and Chairman, in the amount of $3.0 million. See "Management." Key members of the Company's management have entered into employment agreements with the Company with terms ranging from three to five years. See "Management -- Employment Agreements." No assurance can be given that these agreements would be enforceable by the Company. Geographic Concentration. The Company's operations and customers are located in Washington, California, Idaho, Wyoming and South Dakota, and the Company expects to focus its operations on the Western U.S. for at least the foreseeable future. As of March 31, 1998, approximately 74% of the Company's total annualized revenues were derived from customers located in Washington. Therefore, the Company's business, financial condition and results of operations are susceptible to downturns in the general economy in the Western U.S., particularly in Washington, and other factors affecting the region, such as state regulations affecting the solid waste services industry and severe weather conditions. In addition, the costs and time involved in permitting, and the scarcity of, available landfills in the Western U.S. could make it difficult for the Company to expand vertically in those markets. There can be no assurance that the Company will complete a sufficient number of acquisitions in other markets to lessen its geographic concentration. See "Business -- Strategy." 10 12 Seasonality of Business. Based on historic trends experienced by the businesses acquired by the Company, the Company's results of operations will vary seasonally, with revenues typically lowest in the first quarter of the year, higher in the second and third quarters, and lower in the fourth quarter than in the second and third quarters. This seasonality reflects the lower volume of solid waste generated during the late fall, winter and early spring months, resulting from decreased solid waste volume relating to construction and demolition activities during the winter months in the Western U.S. In addition, certain of the Company's operating costs should be generally higher in the winter months, because adverse winter weather conditions slow waste collection activities, resulting in higher labor costs, and greater precipitation increases the weight of collected waste, resulting in higher disposal costs, which are calculated on a per ton basis. Because a majority of the Company's operating expenses are expected to remain fairly constant throughout the fiscal year, operating income should be expected to be generally lower in the winter months. There can be no assurance that future seasonal and quarterly fluctuations will not have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Government Regulation. The Company is subject to extensive and evolving environmental laws and regulations, the enforcement of which has become increasingly stringent in recent years as a result of greater public interest in protecting the environment. These laws and regulations impose substantial costs on the Company and affect the Company's business in many ways, including as set forth below and under "Business -- Regulation." In addition, the nature and extent to which federal, state and local governments grant rights to and impose restrictions on companies in the solid waste services industry is inherently subject to change, and such changes could have a material adverse effect on the Company. If the Company implements its strategy for landfill ownership and operation, it will be necessary to obtain and maintain in effect one or more licenses or permits, as well as zoning, environmental and/or other land use approvals. These licenses or permits and approvals are difficult and time- consuming to obtain and renew and are frequently subject to opposition by various elected officials or citizens' groups. See "Business -- Legal Proceedings." There can be no assurance that the Company will be successful in obtaining and maintaining in effect the permits and approvals required for the successful ownership or operation (including capacity increases) of any future landfill activities engaged in by the Company, and the failure by the Company to obtain or maintain in effect a permit or approval significant to its landfill business could have a material adverse effect on the Company's results of operations and financial condition. The design, operation and closure of landfills is extensively regulated. These regulations include, among others, the regulations ("Subtitle D Regulations") establishing minimum federal requirements adopted by the U.S. Environmental Protection Agency (the "EPA") in October 1991 under Subtitle D of the Resource Conservation and Recovery Act of 1976 ("RCRA"). Failure to comply with these regulations could require the Company to undertake investigatory or remedial activities, to curtail operations or to close a landfill temporarily or permanently. Future changes to these regulations may require the Company to modify, supplement or replace equipment or facilities at costs that may be substantial. The failure of regulatory agencies to enforce these regulations vigorously or consistently may give an advantage to competitors of the Company whose facilities do not comply with the Subtitle D Regulations or their state counterparts. The Company's financial obligations arising from any failure to comply with these regulations could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Companies in the solid waste services business, including the Company, are frequently subject in the normal course of business to judicial and administrative proceedings involving federal, state or local agencies or citizens' groups. Governmental agencies may seek to impose fines or penalties on the Company or to revoke or deny renewal of the Company's operating permits, franchises or 11 13 licenses for violations or alleged violations of environmental laws or regulations or require the Company to make expenditures to remediate potential environmental problems relating to waste disposed of or stored by the Company or its predecessors, or resulting from its or its predecessors' transportation and collection operations. The Company may also be subject to actions brought by individuals or community groups in connection with the permitting, franchising or licensing of its operations, any alleged violation of such permits, franchises or licenses or other matters. Any adverse outcome in these proceedings could have a material adverse effect on the Company's business, financial condition and results of operations and may subject the Company to adverse publicity. See "Potential Environmental Liability" below and "Business -- Legal Proceedings." Potential Environmental Liability. The Company is subject to liability for any environmental damage that its solid waste facilities may cause, including damage to neighboring landowners or residents, particularly as a result of the contamination of soil, groundwater or surface water, and especially drinking water. The Company's potential liability includes damage resulting from conditions existing prior to the acquisition of such facilities by the Company. The Company may also be subject to liability for any off-site environmental contamination caused by pollutants or hazardous substances whose transportation, treatment or disposal was arranged by the Company or its predecessors. Any substantial liability for environmental damage incurred by the Company could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Regulation." The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA" or "Superfund"), imposes strict, joint and several liability on the present owners and operators of facilities from which a release of hazardous substances into the environment has occurred, as well as any party that owned or operated the facility at the time of disposal of the hazardous substances, regardless of when the hazardous substance was first detected. CERCLA defines the term "hazardous substances" very broadly to include more than 700 substances that are specified under RCRA, have specific hazardous characteristics defined under RCRA or are regulated under any of several other statutes. Similar liability is imposed on the generators of waste that contains hazardous substances and on hazardous substance transporters that select the treatment, storage or disposal site. All such persons, who are referred to as potentially responsible parties ("PRPs"), generally are jointly and severally liable for the expense of waste site investigation, waste site cleanup costs and natural resource damages, regardless of whether they exercised due care and complied with all relevant laws and regulations. These costs can be very substantial. Furthermore, such liability can be based on the existence of even very small amounts of hazardous substances; unlike most of the other statutes that regulate hazardous substances, CERCLA does not require any minimum volume or concentration of a hazardous substance to be present before imposing liability. It is likely that hazardous substances have in the past come to be located in landfills with which the Company is or will become associated. If any of the Company's sites or operations ever experiences environmental problems, the Company could be subject to substantial liability, which could have a material adverse effect on its business, financial condition and results of operations. The Company has not been named as a PRP in any action brought under CERCLA. See "Business -- Regulation." With respect to each business that the Company acquires or has acquired, there may be liabilities that the Company fails or is unable to discover, including liabilities arising from noncompliance with environmental laws by prior owners, and for which the Company, as a successor owner, may be legally responsible. Representations, warranties and indemnities from the sellers of such businesses, if obtained and if legally enforceable, may not cover fully the resulting environmental liabilities, because of their limited scope, amount or duration, the financial limitations of the warrantor or indemnitor or other reasons. Certain environmental liabilities, even though expressly not assumed by the Company, may nonetheless be imposed on the Company under certain legal theories of successor liability, particularly under CERCLA. The Company's insurance program does not cover liabilities associated with any environmental cleanup or 12 14 remediation of the Company's own sites. An uninsured claim against the Company, if successful and of sufficient magnitude, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Acquisition Program." Limitations on Landfill Permitting and Expansion. The Company currently owns no landfills and operates only one landfill. The Company's ability to meet its growth objectives may depend in part, however, on its ability to acquire, lease and expand landfills and develop new landfill sites. As of May 15, 1998, the estimated total remaining permitted disposal capacity of the Fairmead Landfill in Madera County, California operated by the Company was approximately 600,000 tons, with approximately 3.5 million additional tons of disposal capacity in various stages of permitting. There can be no assurance that the Company will be successful in obtaining new landfill sites or expanding the permitted capacity of the Fairmead Landfill once its remaining permitted disposal capacity has been consumed. In some areas in which the Company operates, suitable land for new sites or expansion of existing landfill sites may be unavailable. Landfills in states in which the Company operates are subject to state regulations and practices that generally require operating permits to be renewed at least every five years. The process of obtaining required permits and approvals to build, operate and expand solid waste management facilities, including landfills and transfer stations, has become increasingly difficult and expensive, often taking several years, requiring numerous hearings and compliance with zoning, environmental and other requirements and often subject to resistance from citizen, public interest or other groups. There can be no assurance that the Company will succeed in obtaining or maintaining the permits it requires to expand or that such permits will not contain burdensome terms and conditions. Even when granted, final permits to expand are often not approved until the remaining permitted disposal capacity of a landfill is very low. Furthermore, local laws and ordinances also may affect the Company's ability to obtain permits to expand landfills. If the Company were to exhaust its permitted capacity at a landfill, its ability to expand internally would be limited, and the Company could be required to cap and close that landfill and forced to dispose of collected waste at more distant landfills or at landfills operated by its competitors. The resulting increased costs would have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Services -- Landfills." Alternatives to Landfill Disposal; Waste Reduction Programs. Alternatives to landfill disposal, such as recycling, composting and incineration, are available in some areas in which the Company operates. In addition, state and local authorities increasingly mandate recycling and waste reduction at the source and prohibit the disposal of certain types of wastes, such as yard wastes, at landfills. These developments may result in the volume of waste being reduced in certain areas. For example, California has adopted plans that set goals for percentages of certain solid waste items to be recycled, which are being phased in over the next several years. Increased use of alternatives to landfill disposal may have a material adverse effect on the Company's business, financial condition and results of operations. Potential Inadequacy of Accruals for Closure and Post-Closure Costs. Although the Company currently owns no landfills and operates only one landfill, it may own and/or operate additional landfills in the future. In such case, the Company will have material financial obligations relating to closure and post-closure costs of landfills and any disposal facilities that it owns or operates. The Company will in the future provide accruals for future financial obligations relating to closure and post-closure costs of its owned or operated landfills (generally for a term of 30 years after final closure of a landfill), based on engineering estimates of consumption of permitted landfill airspace over the useful life of any such landfill. There can be no assurance that the Company's financial obligations for closing or post-closing costs will not exceed the amount accrued and reserved or amounts otherwise receivable pursuant to funds or reserves established for such purpose. Such a circumstance could have a material adverse effect on the Company's business, financial condition and results of operation. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Services -- Landfills." 13 15 Incurrence of Charges Related to Capitalized Expenditures. In accordance with generally accepted accounting principles, the Company capitalizes certain expenditures and advances relating to acquisitions, pending acquisitions and landfill development projects. Indirect acquisition costs such as executive salaries, general corporate overhead, public affairs and other corporate services are expensed as incurred. The Company's policy is to charge against earnings any unamortized capitalized expenditures and advances (net of any portion thereof that the Company estimates will be recoverable, through sale or otherwise) relating to any operation that is permanently shut down, any pending acquisition that is not consummated and any landfill development project that is not expected to be completed successfully. Therefore, the Company may be required to incur a charge against earnings in future periods, which charge, depending on its magnitude, could have a material adverse effect on the Company's business, financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Potential Inability to Obtain Performance or Surety Bonds, Letters of Credit or Insurance. Municipal solid waste services contracts and landfill closure obligations may require performance or surety bonds, letters of credit, or other means of financial assurance to secure contractual performance. Ten of the Company's existing 34 solid waste collection and recycling contracts require the Company to obtain performance bonds, which it has obtained. If the Company in the future were unable to obtain performance or surety bonds or letters of credit in sufficient amounts or at acceptable rates, it could be precluded from entering into additional municipal solid waste services contracts or obtaining or retaining landfill operating permits. Any future difficulty in obtaining insurance could also impair the Company's ability to secure future contracts conditioned on the contractor's having adequate insurance coverage. Accordingly, the failure of the Company to obtain performance or surety bonds, letters of credit or other means of financial assurance or to maintain adequate insurance coverage could have a material adverse effect on the Company's business, financial condition and results of operations. See "Business -- Risk Management, Insurance and Performance Bonds." Commodity Risk Upon Resale of Recyclables. The Company provides recycling services to some of its customers. The sale prices of and demand for recyclable waste products, particularly wastepaper, have been, and may continue to be, volatile and subject to changing market conditions. Accordingly, the Company's results of operations may be affected by changing resale prices or demand for certain recyclable waste products, particularly wastepaper. These changes may contribute to variability in the Company's period-to-period results of operations. See "Business -- Services -- Recycling and Other Services." Potential Anti-Takeover Effect of Certain Charter and By-Law Provisions and Delaware Law. The Company's Amended and Restated Certificate of Incorporation (the "Restated Certificate of Incorporation") and Amended and Restated By-Laws (the "Restated By-Laws") provide for the Company's Board of Directors to be divided into three classes of directors serving staggered three-year terms. As a result, beginning in 1998, approximately one-third of the Company's Board will be elected each year. The classified Board is designed to ensure continuity and stability in the Board's composition and policies in the event of a hostile takeover attempt or proxy contest. The classification of the Board would extend the time required to effect any changes in control of the Board and may discourage any hostile takeover bid for the Company. The classified Board may also make the removal of the Company's incumbent management more difficult, even if such removal would be beneficial to stockholders generally, and therefore may discourage certain tender offers. The authorized capital of the Company includes 10,000,000 shares of "blank check" Preferred Stock, of which 2,500,000 shares have been authorized and 2,499,998 shares have been issued as Series A Preferred Stock. All outstanding shares of Series A Preferred Stock automatically convert into shares of Common Stock on a one-for-one basis upon the closing of this offering. The Board of Directors has the authority to issue shares of Preferred Stock and to determine the price, designation, rights, preferences, privileges, restrictions and conditions, including voting and dividend rights, of these shares of Preferred Stock without any further vote or action by the 14 16 stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could make it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. The Company has no present plans to issue any additional Preferred Stock. See "Description of Capital Stock." The Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, prohibits the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years following the time that such stockholder became an interested stockholder. The application of Section 203 also could have the effect of delaying or preventing a change of control of the Company. These provisions, and provisions of the Restated Certificate of Incorporation and Restated By-Laws, may deter hostile takeovers or delay or prevent changes in control or management of the Company, including transactions in which stockholders might otherwise receive a premium for their shares over then current market prices. In addition, these provisions may limit the ability of stockholders to approve transactions that they may deem to be in their best interests. See "Description of Capital Stock -- Preferred Stock" and "-- Certain Statutory, Charter and By-Law Provisions." Shares Eligible for Future Sale; Registration Rights. The sale of substantial amounts of the Company's Common Stock in the public market following this offering (including shares issued on the exercise of outstanding warrants and stock options), or the perception that such sales could occur, could adversely affect prevailing market prices of the Company's Common Stock. All of the shares offered hereby will be freely saleable in the public market after completion of this offering, unless acquired by affiliates of the Company. The remaining 5,932,724 shares of Common Stock held by existing stockholders on completion of this offering will be "restricted securities," as that term is defined in Rule 144 under the Securities Act. Restricted securities may be sold in the public market only if they are registered or if they qualify for an exemption from registration under Rule 144 or 701 promulgated under the Securities Act. All of the shares outstanding prior to completion of this offering are subject to contractual restrictions that prohibit the stockholders from selling or otherwise disposing of such shares for a period of 180 days after the date of this Prospectus without the prior written consent of BT Alex. Brown Incorporated. The Company has also agreed not to sell any shares of Common Stock for 180 days after the date of this Prospectus without the prior written consent of BT Alex. Brown Incorporated, except as consideration for business acquisitions, upon the exercise of currently outstanding stock options or warrants, or upon the issuance of options to employees, consultants and directors under the Company's 1997 Stock Option Plan and the exercise of such options. After this 180-day period expires, 4,749,998 of the shares of Common Stock that are either currently outstanding or will be outstanding on conversion of the currently outstanding Series A Preferred Stock will be eligible for resale in the public market under Rule 144 promulgated under the Securities Act. An additional 1,000,000 of the currently outstanding shares of Common Stock will become saleable in the public market in February 1999, an additional 132,726 of the currently outstanding shares will become saleable in the public market later in 1999, and an additional 50,000 of the currently outstanding shares of Common Stock will become saleable in the public market ratably over three years, in each case subject to the restrictions of Rule 144. In addition, certain stockholders, who after the closing of this offering will own approximately 5,849,998 shares of Common Stock, have the right for the five years after the closing of this offering, subject to certain conditions, to include their shares in future registration statements relating to the Company's securities and to cause the Company to register certain shares of Common Stock owned by them. See "Shares Eligible for Future Sale." After the completion of this offering, the Company intends to file a registration statement under the Securities Act to register all shares issuable on exercise of stock options or other awards granted or to be granted under its existing stock plan. See "Management -- 1997 Stock Option Plan." After the filing of such registration statement and subject to certain restrictions under Rule 144, those shares will be freely saleable in the public market immediately following exercise of such options. 15 17 The Company currently intends to file a shelf registration statement covering up to an additional 3,000,000 shares of Common Stock under the Securities Act for its use in connection with future acquisitions. Such shares, when issued, could be freely saleable in the public market 180 days after the date of this Prospectus, or earlier on prior written approval of BT Alex. Brown Incorporated by persons not affiliated with the Company, unless the Company contractually restricts their resale. See "Shares Eligible for Future Sale" and "Underwriting." No Prior Public Market; Fluctuations in Quarterly Results; Potential Stock Price Volatility. Prior to this offering, there has been no public market for the Company's Common Stock, and there can be no assurance that an active trading market will develop or be sustained after completion of this offering. The initial public offering price will be determined through negotiations between the Company and the representatives of the Underwriters based on several factors, and may not be indicative of the market price of the Common Stock after completion of this offering. See "Underwriting." The Company believes that period-to-period comparisons of its operating results should not be relied upon as an indication of future performance. Due to a variety of factors, including general economic conditions, government regulatory action, acquisitions, capital expenditures and other costs related to the expansion of operations and services, pricing changes and adverse weather conditions, it is possible that in some future quarter, the Company's operating results will be below the expectations of securities analysts and investors. In such event, the price of the Company's Common Stock would likely be materially adversely affected. The price of the Company's Common Stock may be highly volatile and is likely to be affected by the foregoing and other factors. In addition, the stock market has from time to time experienced significant price and volume fluctuations that have often been unrelated to the operating performance of companies whose securities are publicly traded. These broad market fluctuations, however, may adversely affect the market price of the publicly traded securities of such companies, including the Company's Common Stock. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been commenced against such company. There can be no assurance that such litigation will not occur in the future with respect to the Company. Litigation could result in substantial costs and divert management's attention and resources, which could have a material adverse effect on the Company's business, financial condition and results of operations. Any adverse determination in any such litigation could also subject the Company to significant liabilities. Immediate and Substantial Dilution. Purchasers of shares of Common Stock in this offering will incur an immediate and substantial dilution in the net tangible book value per share of the Common Stock from the initial public offering price. Investors will experience additional dilution as a result of Common Stock being issued upon the exercise of outstanding stock options and warrants. To implement its acquisition strategy, the Company intends to register up to 3,000,000 additional shares of Common Stock for issuance in connection with future acquisitions. If shares of Common Stock are issued in connection with future acquisitions, purchasers of shares of Common Stock in this offering may experience additional dilution. See "Dilution" and "Shares Eligible for Future Sale." No Dividends. The Company does not intend to pay cash dividends on the Common Stock in the foreseeable future and anticipates that future earnings will be retained to finance future operations and expansion. In addition, the terms of the Company's credit facility prohibit the Company from paying dividends or making other payments with respect to its Common Stock without the consent of the lenders. See "Dividend Policy." Impact of the Year 2000. The Company will need to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 ("Year 2000") and thereafter. The Company expects to complete those modifications and upgrades during 1999. The total Year 2000 project cost is estimated to be approximately $100,000. To date, the Company has not incurred any costs related to the Year 2000 project. The Company does not believe that its expenditures relating to the Year 2000 project will be material. However, if the required Year 2000 modifications and conversions are not made or are not completed in a timely manner, the Year 2000 issue could materially affect the Company's operations. 16 18 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,000,000 shares of Common Stock offered hereby (after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company) are estimated to be $19.3 million ($22.3 million if the Underwriters' overallotment option is exercised in full), assuming an initial public offering price of $11.00 per share. The Company intends to use the net proceeds to reduce outstanding indebtedness under its credit facility with BankBoston, N.A. Approximately $20.1 million was outstanding under that facility as of May 15, 1998. The Company's credit facility provides for borrowing capacity of up to $25.0 million, presently bears interest based on either an adjusted prime rate or the Eurodollar rate plus 2.0% to 2.75% per annum (the applicable rate was 8.4% as of the date of this Prospectus) and will mature on January 30, 2001. The credit facility was obtained primarily to fund acquisitions and to refinance debt incurred in connection with the acquisition the Company completed in September 1997. The terms of the credit facility permit the Company to redraw on the credit facility as needed for future acquisitions and capital expenditures (subject to certain restrictions) and general corporate purposes. On April 21, 1998, the Company received a preliminary letter of commitment from its lender to amend and increase its credit facility. The amendment is contingent on the completion of this offering and will, among other things, increase the Company's borrowing capacity to $60.0 million, modify certain covenants and lower the Company's borrowing costs. The balance of the estimated net offering proceeds, if any, will be used for acquisitions, capital expenditures and working capital. Pending specific application of the net proceeds, the Company intends to invest unused net proceeds in short-term, interest-bearing securities. The Company continually evaluates potential acquisition candidates and intends to continue to pursue acquisition opportunities that may become available. DIVIDEND POLICY The Company has never paid cash dividends on its Common Stock, and the Company does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. The Company intends to retain all earnings for use in the operation and expansion of its business. In addition, the Company's credit facility contains restrictions on the payment of cash dividends. The Series A Preferred Stock provides for cumulative dividends, which the Company intends to pay in cash prior to the conversion of the Series A Preferred Stock into Common Stock upon consummation of this offering. 17 19 CAPITALIZATION The following table sets forth, as of March 31, 1998, (i) the long-term debt and capitalization of the Company on an historical basis, and (ii) such long-term debt and capitalization as adjusted to give effect to the sale by the Company of the 2,000,000 shares offered hereby, at an assumed initial public offering price of $11.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses, after conversion of all outstanding shares of redeemable Common Stock and redeemable convertible Preferred Stock into 1,000,000 and 2,499,998 shares of Common Stock, respectively, after payment of $123,000 in accumulated Preferred Stock dividends, and after the application of a portion of the estimated net offering proceeds to repay indebtedness as described under "Use of Proceeds." This table should be read in conjunction with the Company's Financial Statements and Notes thereto and the Unaudited Pro Forma Financial Statements and Notes thereto, which are included elsewhere in this Prospectus. See "Description of Capital Stock."
MARCH 31, 1998 ------------------------- (IN THOUSANDS) ACTUAL AS ADJUSTED(1) ------- -------------- Long-term debt, net......................................... $16,289 $ -- ------- ------- Redeemable Convertible Preferred Stock, $.01 par value, 2,500,000 shares authorized; 2,499,998 shares issued and outstanding actual; no shares issued and outstanding as adjusted.................................................. 8,095 -- Redeemable Common Stock, $.01 par value; 1,000,000 shares issued and outstanding actual; no shares issued and outstanding as adjusted(2)................................ 7,500 -- Stockholder's equity: Preferred Stock, $.01 par value, 7,500,000 shares authorized; no shares issued and outstanding actual and as adjusted............................................ -- -- Common Stock, $.01 par value, 50,000,000 shares authorized; 2,350,000 shares issued and outstanding actual; 7,849,998 shares issued and outstanding as adjusted(3)............................................ 24 79 Additional paid-in capital................................ 8,114 42,791 Stockholder notes receivable.............................. (82) (82) Deferred stock compensation(4)............................ (741) (741) Accumulated deficit....................................... (6,134) (6,134) ------- ------- Total stockholders' equity (deficit)...................... 1,181 35,913 ------- ------- Total capitalization.............................. $33,065 $35,913 ======= =======
- --------------- (1) A portion of the estimated net proceeds from this offering will be used to repay all of the Company's then outstanding indebtedness. (2) Common Stock issued in connection with the acquisition of Madera is redeemable in certain circumstances. Upon completion of this offering, these shares will no longer be redeemable. See Notes 2 and 9 of Notes to the Company's Financial Statements included elsewhere herein. (3) Excludes 2,276,300 shares issuable on the exercise of options and warrants outstanding at March 31, 1998, at a weighted average exercise price of $3.68 per share. See "Management -- 1997 Stock Option Plan," "Certain Transactions" and Note 9 of Notes to the Company's Financial Statements included elsewhere herein. (4) Deferred stock compensation relates to stock options granted to employees with exercise prices below the estimated fair value of the stock on the date of grant. Deferred stock compensation is being amortized to stock compensation expense over the vesting periods of the respective stock options. See Notes 1 and 9 of Notes to the Company's Financial Statements included elsewhere herein. 18 20 DILUTION The negative net tangible book value of the Company's Common Stock as of March 31, 1998, was $(9.0) million, or $(1.54) per share. Net tangible book value per share represents the amount of the Company's total tangible assets, less its total liabilities (excluding redeemable Common Stock and redeemable convertible Preferred Stock), divided by the total number of shares of Common and Preferred Stock (including redeemable stock) outstanding immediately prior to this offering. After giving effect to the sale by the Company of 2,000,000 shares of Common Stock in this offering at an assumed public offering price of $11.00 per share (and after deduction of the underwriting discounts and commissions and estimated offering expenses), the Company's net tangible book value as of March 31, 1998, would have been approximately $10.2 million, or $1.30 per share of Common Stock. This represents an immediate increase in net tangible book value of approximately $2.84 per share to existing stockholders and an immediate dilution of net tangible book value of approximately $9.70 per share to new investors purchasing Common Stock in this offering, as illustrated in the following table: Assumed initial public offering price per share............. $11.00 Negative net tangible book value per share prior to this offering......................................... $(1.54) Increase in net tangible book value per share attributable to new investors......................... 2.84 ------ Net tangible book value per share after this offering....... 1.30 ------ Dilution in net tangible book value per share to new investors................................................. $ 9.70 ======
The following table sets forth, as of March 31, 1998, the difference between existing stockholders and new investors purchasing shares of Common Stock in this offering with respect to the number of shares purchased from the Company (before deduction of the underwriting discounts and commissions and estimated offering expenses), the total consideration paid and the average price per share paid:
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE -------------------- ---------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- --------- Existing stockholders.............. 5,849,998 74.5% $14,663,000 40.0% $ 2.51 New investors...................... 2,000,000 25.5 22,000,000 60.0 $ 11.00 --------- ----- ----------- ----- Total.................... 7,849,998 100.0% $36,663,000 100.0% ========= ===== =========== =====
As of March 31, 1998, the Company had outstanding stock options and warrants exercisable for 2,276,300 shares of Common Stock at a weighted average exercise price of $3.68 per share. If these options and warrants are exercised, further dilution to new investors will occur. The Company may also issue additional shares to effect future business acquisitions or upon exercise of stock options granted in the future or other equity awards, which could result in additional dilution to then existing stockholders. See "Management -- Executive Compensation -- Stock Options and Warrants." 19 21 SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA The following table presents selected historical and pro forma consolidated statements of operations and balance sheet data of the Company and its predecessors for the periods indicated. The entities the Company acquired in September 1997 from BFI are collectively referred to herein as the Company's predecessors. BFI acquired the predecessor operations at various times during 1995 and 1996, and prior to being acquired by BFI, the predecessors operated as separate stand-alone businesses. The selected financial information of the Company's predecessors as of December 31, 1996, for the nine months ended September 30, 1997, and for the years ended December 31, 1995 and 1996 has been derived from audited financial statements included elsewhere in this Prospectus. The selected financial information of the Company as of December 31, 1997, and for the period from inception (September 9, 1997) through December 31, 1997, has been derived from audited financial statements included elsewhere in this Prospectus. The selected financial information of the Company's predecessors as of December 31, 1993, 1994 and 1995, and for the years ended December 31, 1993 and 1994 has been derived from financial statements that have not been audited. The selected financial information as of March 31, 1998 and for the three months ended March 31, 1997 and 1998 has been derived from unaudited financial statements included elsewhere in this Prospectus. In the opinion of the Company's management, the unaudited financial data include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial position and results of operations for the unaudited periods. The Company's operating results for the three months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. Various factors affect the year-to-year comparability of the amounts presented herein. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Basis of Presentation" and "-- Results of Operations" for additional information concerning the Company and its predecessor operations. The selected pro forma financial information for the three months ended March 31, 1998 and for the year ended December 31, 1997, gives effect to this offering and the Company's acquisitions of Waste Connections of Idaho, Inc., Madera Disposal Systems, Inc. and the Company's predecessors as of the dates and for the periods indicated, and has been derived from unaudited pro forma financial statements included elsewhere in this Prospectus. The pro forma financial information does not purport to represent what the Company's results actually would have been if such events had occurred at the dates indicated, nor does such information purport to project the results of the Company for any future period. The selected historical and pro forma financial information should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations, the audited and unaudited Financial Statements and Notes thereto of the Company and its predecessors, and the Unaudited Pro Forma Financial Statements and Notes thereto included elsewhere in this Prospectus. 20 22 WASTE CONNECTIONS, INC. AND PREDECESSORS SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FIBRES INTERNATIONAL, INC. FIBRES THE DISPOSAL FIBRES THE DISPOSAL PERIOD FROM INTERNATIONAL, GROUP INTERNATIONAL, GROUP JANUARY 1, INC. COMBINED INC. COMBINED 1995 YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, NOVEMBER 30, 1993 1993 1994 1994 1995 -------------- ------------ -------------- ------------ -------------- STATEMENTS OF OPERATIONS DATA(1): Revenues............................... $3,787 $20,794 $5,610 $22,004 $7,340 Cost of operations..................... 2,737 16,775 4,432 18,298 5,653 Selling, general and administrative.... 553 3,559 552 3,320 823 Depreciation and amortization.......... 428 520 642 606 715 ------ ------- ------ ------- ------ Income (loss) from operations.......... 69 (60) (16) (220) 149 Interest expense....................... (78) (390) (191) (548) (162) Other income (expense), net............ 1 684 (2) 871 98 ------ ------- ------ ------- ------ Income (loss) before income taxes...... (8) 234 (209) 103 85 Income tax (provision) benefit......... -- (77) -- -- (29) ------ ------- ------ ------- ------ Net income (loss)...................... $ (8) $ 157 $ (209) $ 103 $ 56 ====== ======= ====== ======= ====== THE DISPOSAL GROUP COMBINED PERIOD THE DISPOSAL FROM PREDECESSORS PREDECESSORS GROUP JANUARY 1, COMBINED ONE MONTH COMBINED 1996 PERIOD ENDED YEAR ENDED THROUGH ENDED DECEMBER 31, DECEMBER 31, JULY 31, DECEMBER 31, 1995 1995 1996 1996 ------------ ------------ ---------- ------------ STATEMENTS OF OPERATIONS DATA(1): Revenues............................... $595 $19,660 $8,738 $13,422 Cost of operations..................... 527 16,393 6,174 11,420 Selling, general and administrative.... 72 3,312 2,126 1,649 Depreciation and amortization.......... 74 628 324 962 ---- ------- ------ ------- Income (loss) from operations.......... (78) (673) 114 (609) Interest expense....................... (1) (206) (12) (225) Other income (expense), net............ 5 -- 2,661 (147) ---- ------- ------ ------- Income (loss) before income taxes...... (74) (879) 2,763 (981) Income tax (provision) benefit......... -- 298 (505) -- ---- ------- ------ ------- Net income (loss)...................... $(74) $ (581) $2,258 $ (981) ==== ======= ====== =======
WASTE CONNECTIONS, INC. PERIOD FROM PREDECESSORS PREDECESSORS INCEPTION COMBINED WASTE CONNECTIONS, INC. COMBINED (SEPTEMBER 9, PRO FORMA AS THREE THREE MONTHS ENDED NINE MONTHS 1997) ADJUSTED MONTHS MARCH 31, 1998 ENDED THROUGH YEAR ENDED ENDED --------------------------- SEPTEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31, PRO FORMA 1997 1997 1997(2) 1997 ACTUAL AS ADJUSTED(2) ------------- ----------------- ------------ ------------ ---------- -------------- STATEMENTS OF OPERATIONS DATA(1): Revenues......................... $18,114 $ 6,237 $ 35,013 $5,694 $ 7,601 $ 8,462 Cost of operations............... 14,753 4,703 26,114 4,674 5,397 6,017 Selling, general and 3,009 619 4,252 715 770 897 administrative................. Depreciation and amortization.... 1,083 354 2,431 378 541 623 Start-up and integration......... -- 493 493 -- -- -- Stock compensation............... -- 4,395 4,395 -- 320 320 ------- ---------- ---------- ------ ---------- ---------- Income (loss) from operations.... (731) (4,327) (2,672) (73) 573 605 Interest expense................. (456) (1,035) -- (152) (301) -- Other income (expense), net...... 14 (36) 151 -- -- 16 ------- ---------- ---------- ------ ---------- ---------- Income (loss) before income (1,173) (5,398) (2,521) (225) 272 621 taxes.......................... Income tax (provision) benefit... -- 332 (781) -- (237) (377) ------- ---------- ---------- ------ ---------- ---------- Net income (loss)................ $(1,173) $ (5,066) $ (3,302) $ (225) $ 35 $ 244 ======= ========== ========== ====== ========== ========== Redeemable convertible preferred (531) -- (572) -- stock accretion................ ---------- ---------- ---------- ---------- Net income (loss) applicable to $ (5,597) $ (3,302) $ (537) $ 244 common stockholders............ ========== ========== ========== ========== Basic net income (loss) per $ (2.99) $ (0.45) $ (0.23) $ 0.03 share.......................... ========== ========== ========== ========== Shares used in calculating basic 1,872,567 7,372,565 2,311,111 7,811,109 net income (loss) per share.... Diluted net income per share..... $ 0.03 ========== Shares used in calculating 8,835,415 diluted net income per share... Pro forma basic net income (loss) $ (1.16) $ 0.01 per share(3)................... ========== ========== Shares used in calculating pro 4,372,565 5,811,109 forma basic net income (loss) per share...................... Proforma diluted net income per $ 0.01 share(3)....................... ========== Shares used in calculating pro 6,835,415 forma diluted net income per share..........................
(see footnotes on following page) 21 23
FIBRES THE DISPOSAL FIBRES THE DISPOSAL THE DISPOSAL INTERNATIONAL, GROUP INTERNATIONAL, GROUP PREDECESSORS GROUP PREDECESSORS INC. COMBINED INC. COMBINED COMBINED COMBINED COMBINED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, 1993 1993 1994 1994 1995 1995 1996 -------------- ------------ -------------- ------------ ------------ ------------ ------------ BALANCE SHEET DATA(1): Cash and equivalents....... $ 3 $ 196 $ 321 $ 203 $ 184 $ 961 $ 102 Working capital..... 494 (1,497) 155 (4,279) 90 2,498 695 Property and equipment, net.... 1,454 2,440 3,810 2,771 4,035 2,221 5,069 Total assets........ 3,325 7,455 6,317 7,318 9,151 6,942 15,291 Long-term debt(5)... 1,167 1,258 2,353 90 149 6,890 89 Redeemable convertible preferred stock... -- -- -- -- -- -- -- Redeemable common stock(6).......... -- -- -- -- -- -- -- Total stockholders' equity (deficit)......... 991 (163) 3,045 (1,486) -- (2,067) -- WASTE CONNECTIONS, INC. ---------------------------------------------- MARCH 31, 1998 DECEMBER 31, -------------------------- 1997 ACTUAL AS ADJUSTED(4) ----------------- --------- -------------- BALANCE SHEET DATA(1): Cash and equivalents....... $ 820 $ 2,386 $ 5,234 Working capital..... 836 988 3,836 Property and equipment, net.... 4,185 7,316 7,316 Total assets........ 18,880 41,033 43,881 Long-term debt(5)... 6,762 16,289 -- Redeemable convertible preferred stock... 7,523 8,095 -- Redeemable common stock(6).......... -- 7,500 -- Total stockholders' equity (deficit)......... (551) 1,181 35,913
- --------------- (1) The entities the Company acquired in September 1997 from BFI are collectively referred to herein as the Company's predecessors. BFI acquired the predecessor operations at various times during 1995 and 1996, and prior to being acquired by BFI, the predecessors operated as separate stand-alone businesses. Various factors affect the year-to-year comparability of the amounts presented. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Basis of Presentation" and "-- Results of Operations" for additional information concerning the Company and its predecessor operations. (2) Assumes the Company's acquisitions of Waste Connections of Idaho, Inc., Madera Disposal Systems, Inc. and the Company's predecessors occurred on January 1, 1997, adjusted to reflect the sale of the Common Stock offered hereby at an assumed initial public offering price of $11.00 per share, and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Unaudited Pro Forma Financial Statements." (3) Adjusted to reflect the conversion of all outstanding shares of redeemable convertible Preferred Stock for the period from inception through December 31, 1997, and the conversion of redeemable convertible Preferred Stock and all outstanding shares of redeemable Common Stock for the three months ended March 31, 1998, as if such conversions had occurred as of the first day of each of the periods presented. See Note 11 of Notes to the Company's Financial Statements included elsewhere herein for an explanation of the pro forma historical per share calculations. (4) Adjusted to reflect the sale of the Common Stock offered hereby at an assumed initial public offering price of $11.00 per share, and the application of the estimated net proceeds therefrom. See "Use of Proceeds" and "Unaudited Pro Forma Financial Statements." (5) Excludes redeemable Common Stock and redeemable convertible Preferred Stock. (6) Common stock issued in connection with the acquisition of Madera is redeemable in certain circumstances, as defined in the Stock Purchase Agreement between the Company and the Madera shareholders; however, the redemption right expires upon the closing of this offering. See Notes 2 and 9 of Notes to the Company's Financial Statements included elsewhere herein. 22 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Unaudited Pro Forma Financial Statements and Notes thereto, the audited and unaudited Financial Statements and Notes thereto of the Company and its predecessors, Madera's audited Financial Statements and Notes thereto, and other financial information included elsewhere in this Prospectus. This Prospectus contains forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including without limitation those set forth in "Risk Factors" and the matters set forth in this Prospectus generally. OVERVIEW Waste Connections is a regional, integrated solid waste services company that provides solid waste collection, transfer, disposal and recycling services in secondary markets of the Western U.S. As of May 15, 1998, the Company served more than 139,000 commercial, industrial and residential customers in Washington, California, Idaho, Wyoming and South Dakota. The Company currently owns nine collection operations and operates three transfer stations, one Subtitle D landfill and one recycling facility. The Company generally intends to pursue an acquisition-based growth strategy and has acquired ten companies since its inception in September 1997. All of these acquisitions were accounted for as purchases. Accordingly, the results of operations of these acquired businesses have been included in the Company's financial statements only from the respective dates of acquisition. The Company anticipates that a substantial part of its future growth will come from acquiring additional solid waste collection, transfer and disposal businesses and, therefore, it is expected that additional acquisitions could continue to affect period-to-period comparisons of the Company's operating results. In connection with the Company's growth strategy, the Company expects to invest in collection vehicles and equipment, maintenance of existing equipment, and management information systems, which should enable the Company to expand internally and through acquisitions based on its existing infrastructure. The Company anticipates that any future business acquisitions will be financed through cash from operations, borrowings under its bank line of credit, the issuance of shares of the Company's Common Stock and/or seller financing. In September 1997, the Company joined with two other parties to bid on certain solid waste and recycling businesses offered for sale by BFI. The Company acquired the stock of Browning-Ferris Industries of Washington, Inc., a provider of solid waste services to more than 78,000 customers through three municipal contracts and one G certificate in and around Clark County, Washington, and the stock of its subsidiary, Fibres International, Inc., a provider of solid waste services to more than 24,000 customers through eight municipal contracts and one G certificate in King and Snohomish Counties, Washington. The acquired companies subsequently changed their names to Waste Connections of Washington, Inc. and Waste Connections International, Inc., respectively. The two other parties acquired selected BFI solid waste collection and transportation assets and operations in Idaho, and BFI's recycling assets and operations in Washington, Idaho and Oklahoma. On January 30, 1998, the Company acquired the stock of Waste Connections of Idaho, Inc., a provider of solid waste collection services to more than 10,000 customers in and around Idaho Falls and Pocatello, Idaho through subscription agreements with residential customers and seven municipal contracts. Waste Connections of Idaho, Inc., was formed in September 1997 by affiliates of the Company for the purpose of acquiring certain assets of Browing-Ferris Industries of Idaho, Inc. Effective February 1, 1998, the Company acquired Madera, an integrated solid waste services company operating in north central California, with 1997 revenues of approximately $7.8 million. In connection with the Madera acquisition, the Company acquired one franchise agreement and one municipal contract, pursuant to which it serves more than 9,000 commercial, industrial and 23 25 residential customers, and agreements to operate two transfer stations, one Subtitle D landfill and one recycling facility. Effective March 1, 1998, the Company acquired certain solid waste collection assets from Hunter Enterprises, Inc., a solid waste services company located in eastern Idaho. These assets "tuck in" to the Company's Idaho operations and serve approximately 2,800 residential and commercial customers. On April 8, 1998, the Company acquired solid waste collection assets from A-1 Disposal, Inc. and Jesse's Disposal, both operating in northeastern Wyoming, and together serving approximately 2,300 residential and commercial customers. On May 8, 1998, the Company acquired Sowers' Sanitation, Inc. and Sunshine Sanitation Incorporated, providers of solid waste and recyclables collection services to an aggregate of more than 7,000 customers in western South Dakota. On May 11, 1998, the Company acquired T&T Disposal, Inc., a provider of solid waste and recyclables collection services to more than 500 customers in eastern Wyoming. The entities the Company acquired in September 1997 from various subsidiaries of BFI are collectively referred to herein as the Company's predecessors. BFI acquired the predecessor operations at various times during 1995 and 1996, and prior to being acquired by BFI, the predecessors operated as separate stand-alone businesses. GENERAL The Company's revenues are attributable primarily to fees charged to customers for solid waste collection, transfer, disposal and recycling services. The Company derives a substantial portion of its collection revenues from commercial, industrial and residential services, which are frequently performed under service agreements or pursuant to franchise agreements with counties or municipal contracts. County franchise agreements and municipal contracts generally last from one to ten years. The Company's existing franchise agreement and all of its existing municipal contracts give the Company the exclusive right to provide specified waste services in the specified territory during the contract term. Such exclusive arrangements are awarded, at least initially, on a competitive bid basis and thereafter on a bid or negotiated basis. Some of the Company's residential collection services are also performed on a subscription basis with individual households. A substantial portion of the Company's collection business in Washington is performed under G certificates awarded by the Washington Utilities and Transportation Commission, which grant the Company collection rights in certain areas. These rights are generally perpetual and exclusive. See "Business -- G Certificates." Contracts with counties and municipalities and G certificates provide relatively consistent cash flow during the term of the contracts. Because most residential customers on a subscription basis are billed quarterly, subscription agreements also are a stable source of revenues for the Company. The Company's collection business also generates revenues from the sale of recyclable commodities. Transfer station and landfill customers are charged a tipping fee on a per ton basis for disposing of their solid waste at the transfer stations and disposal facility operated by the Company under contract with the County of Madera. The majority of the Company's transfer and landfill customers are under one to ten year disposal contracts, most of which provide for annual cost of living increases. The Company's prices for its solid waste services are typically determined by the collection frequency and level of service, route density, volume, weight and type of waste collected, type of equipment and containers furnished, the distance to the disposal or processing facility, the cost of disposal or processing, and prices charged by competitors for similar services. The Company's ability to pass on price increases is sometimes limited by the terms of its contracts. Long-term solid waste 24 26 collection contracts typically contain a formula, generally based on a predetermined published price index, for automatic adjustment of fees to cover increases in some, but not all, operating costs. Costs of operations include labor, fuel, equipment maintenance and tipping fees paid to third party disposal facilities, worker's compensation and vehicle insurance, the cost of materials purchased to be recycled, third party transportation expense, district and state taxes, host community fees and royalties. The Company operates three transfer stations, which reduce the Company's costs by improving its utilization of collection personnel and equipment and by consolidating the waste stream to gain more favorable disposal rates. Selling, general and administrative ("SG&A") expenses include management, clerical and administrative compensation and overhead costs associated with the Company's marketing and sales force, professional services and community relations expense. Depreciation and amortization expense includes depreciation of fixed assets over the estimated useful life of the assets using the straight line method and the amortization of goodwill and other intangible assets using the straight line method. The Company capitalizes certain third party expenditures related to pending acquisitions or development projects, such as legal and engineering expenses. Indirect acquisition costs, such as executive and corporate overhead, public relations and other corporate services, are expensed as incurred. The Company's policy is to charge against net income any unamortized capitalized expenditures and advances (net of any portion thereof that the Company estimates to be recoverable, through sale or otherwise) relating to any operation that is permanently shut down, any pending acquisition that is not consummated and any landfill development project that is not successfully completed. At March 31, 1998, the Company had no such capitalized costs. The Company routinely evaluates all capitalized costs, and expenses those related to projects the Company believes are not likely to be successful. Because it does not currently own any landfills, the Company does not accrue for estimated landfill closure and post-closure maintenance costs. Under regulations pursuant to which the permit for the Fairmead Landfill was issued, the Company and Madera County, as operator and owner, respectively, are jointly liable for closure and post-closure liabilities with respect to the landfill. The Company has not accrued for such liabilities because Madera County, as required by state law, has established a special fund, into which a designated portion of tipping fee surcharges are deposited, to pay such liabilities. Consequently, management of the Company does not believe Madera had any financial obligation for closure and post-closure costs for the Fairmead Landfill as of March 31, 1998. The Company will have material financial obligations relating to closure and post-closure costs of any disposal facilities it may own or operate in the future, and in such case the Company will provide accruals for future financial obligations relating to closure and post-closure costs of its landfills (generally for a term of 30 years after final closure of a landfill), based on engineering estimates of consumption of permitted landfill airspace over the useful life of any such landfill. BASIS OF PRESENTATION The entities the Company acquired in September 1997 from BFI are collectively referred to herein as the Company's predecessors. BFI acquired the predecessor operations at various times during 1995 and 1996, and prior to being acquired by BFI, the predecessors operated as separate stand-alone businesses. During the periods in which the Company's predecessors operated as wholly owned subsidiaries of BFI, they maintained intercompany accounts with BFI for recording intercompany charges for costs and expenses, intercompany purchases of equipment and additions under capital leases and intercompany transfers of cash, among other transactions. It is not feasible to ascertain the amount of related interest expense that would have been recorded in the historical financial statements had the predecessors been operated as stand-alone entities. Charges for interest expense 25 27 were allocated to the Company's predecessors by BFI as disclosed in the statement of operations data. The interest expense allocations from BFI are based on formulas that do not necessarily correspond to the balances in the related intercompany accounts. Moreover, the financial position and results of operations of the predecessors during this period may not necessarily be indicative of the financial position or results of operations that would have been realized had the predecessors been operated as stand-alone entities. For the periods in which the predecessors operated as wholly owned subsidiaries of BFI, the statements of operations include amounts allocated by BFI to the predecessors for selling, general and administrative expenses based on certain allocation methodologies. During the periods prior to their acquisition by BFI, the Company's predecessors operated as separate stand-alone businesses. The acquisitions of the predecessors by BFI were accounted for using the purchase method of accounting, and the respective purchase prices were allocated to the fair values of the assets acquired and liabilities assumed. Similarly, the Company's acquisitions of the predecessors from BFI in September 1997 were accounted for using the purchase method of accounting, and the purchase price was allocated to the fair value of the assets acquired and liabilities assumed. Consequently, the amounts of depreciation and amortization included in the statements of operations for the periods presented reflect the changes in basis of the underlying assets that were made as a result of the changes in ownership that occurred during the periods presented. In addition, because the predecessor companies operated independently and were not under common control or management during these periods, and because different tax strategies may have influenced their results of operations, the data may not be comparable to or indicative of their operating results after their acquisition by BFI. 26 28 RESULTS OF OPERATIONS The financial information for the Company and its predecessors included in this section and in the audited financial statements included elsewhere herein relates to the following entities for the periods indicated: 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. Due to the fact that the predecessor operations existed for different periods, year-to-year comparisons are not meaningful and therefore discussions of SG&A, depreciation and amortization and interest expense have not been included in this Prospectus. Waste Connections, Inc. -- Three Months Ended March 31, 1998 vs. Predecessors Combined -- Three Months Ended March 31, 1997 Revenue. Total revenues increased $1.9 million, or 33.5%, to $7.6 million in 1998 from $5.7 million in 1997. The increase was primarily attributable to the inclusion of two months of the Idaho operations acquired January 30, 1998 and the Madera operations acquired February 1, 1998 and growth in the base business. Cost of Operations. Total cost of operations increased $723,000, or 15.5%, to $5.4 million in 1998 from $4.7 million in 1997. The increase was primarily attributable to the inclusion of two months of the Idaho operations and the Madera operations and a decline in expenses in the existing business as a result of cost reduction measures. 27 29 1997 vs. 1996 Revenue. The Company's total revenue for 1997 was $6.2 million. The total revenue was attributable to the purchase of the Company's predecessors on September 30, 1997. Revenues related to the Company's Predecessors Combined for the nine months ended September 30, 1997 were $18.1 million. The Company's Predecessors Combined for the period ended December 31, 1996 had revenues of $13.4 million. The Disposal Group Combined had revenues of $8.7 million for the period from January 1, 1996 to July 31, 1996. The monthly revenue run rate for the Company and the Company's Predecessors Combined remained relatively unchanged in 1997 versus 1996. Cost of Operations. The Company's total cost of operations in 1997 was $4.7 million, or 75.4% of revenue. The total cost of operations was attributable to the purchase of the Company's predecessors on September 30, 1997. Cost of operations of the Company's Predecessors Combined for the nine months ended September 30, 1997 was $14.8 million, or 81.4% of revenue. The Company's Predecessors Combined for the period ended December 31, 1996 had cost of operations of $11.4 million, or 85.1% of revenue. The Disposal Group during the period from January 1, 1996 to July 31, 1996 had cost of operations of $6.2 million, or 70.7% of revenue. The Company's cost of operations as a percentage of revenue in 1997 declined from the Company's Predecessors Combined cost of operations as a percentage of revenues in 1997 and 1996, due to price increases in the fourth quarter of 1997 and operating cost savings in lease expense, environmental accrual fee allocations from BFI, franchise fees and amortization of loss contract accrual. The Company's Predecessors Combined cost of operations as a percentage of revenue for the nine months ended September 30, 1997 declined from 1996 due to the rollover effect of the acquisition of The Disposal Group in 1996, which had generally higher margins than the existing businesses. 1996 vs. 1995 Revenue. The Company's Predecessors Combined total revenue for 1996 was $13.4 million. The Disposal Group Combined total revenue for the period from January 1, 1996 to July 31, 1996 was $8.7 million. The Company's Predecessors Combined had revenues of $595,000 for the period ended December 31, 1995. The Disposal Group Combined had revenues of $19.7 million for the year ended December 31, 1995. Fibres International, Inc. had revenues of $7.3 million for the period from January 1, 1995 to November 30, 1995. The monthly revenue run rate for all of the Company's predecessors declined in 1996 from 1995 because of the expiration of a municipal contract and a reduction in revenue from sales of recyclable materials due to a reduction in prices of recyclable materials. Cost of Operations. The Company's Predecessors Combined total cost of operations for 1996 was $11.4 million, or 85.1% of revenue, and The Disposal Group Combined cost of operations for the period from January 1, 1996 to July 31, 1996 was $6.2 million, or 70.7% of revenue. Cost of operations of the Company's Predecessors Combined for the period ended December 31, 1995 was $527,000 or 88.6% of revenue. Cost of operations of The Disposal Group Combined for the year ended December 31, 1995 was $16.4 million, or 83.4% of revenue. Cost of operations of Fibres International, Inc. for the period from January 1, 1995 to November 30, 1995 was $5.7 million, or 77.0% of revenue. Changes in cost of operations as a percentage of revenue were impacted by reductions in prices of recyclable materials in 1996, offset by the expiration of a low margin municipal contract in 1995. Madera General Effective February 1, 1998, the Company acquired Madera, an integrated solid waste services company operating in north central California, with 1997 revenues of approximately $7.8 million. In connection with the Madera acquisition, the Company acquired one franchise agreement and one municipal contract, pursuant to which it serves more than 9,000 commercial, industrial and 28 30 residential customers, and agreements to operate two transfer stations, one Subtitle D landfill and one recycling facility. Selected historical financial data for Madera follows (in thousands):
YEARS ENDED DECEMBER 31, ----------------------------- 1995 1996 1997 ------- ------- ------- STATEMENTS OF INCOME DATA: Revenues.................................................. $ 7,008 $ 7,770 $ 7,845 Operating expenses: Cost of operations...................................... 5,288 5,512 5,289 Selling, general and administrative..................... 996 969 1,041 Depreciation and amortization........................... 467 585 627 ------- ------- ------- Income from operations.................................... 257 704 888 Interest expense.......................................... (237) (259) (280) Other income, net......................................... 68 113 173 ------- ------- ------- Net income................................................ $ 88 $ 558 $ 781 ======= ======= ======= Pro forma income taxes(1)................................. $ (30) $ (208) $ (295) ------- ------- ------- Pro forma net income(1)................................... $ 58 $ 350 $ 486 ======= ======= =======
DECEMBER 31, ------------------ 1996 1997 ------- ------- BALANCE SHEET DATA: Cash and equivalents...................................... $ 1,064 $ 1,527 Working capital........................................... 622 942 Property and equipment, net............................... 3,800 3,636 Total assets.............................................. 6,004 6,297 Long-term obligations, net of current portion............. 2,194 1,894 Total shareholders' equity................................ 2,264 2,800
- --------------- (1) Prior to its acquisition by the Company, Madera operated under Subchapter S of the Internal Revenue Code and was not subject to corporate federal and state income tax. The Subchapter S election was terminated upon its acquisition by the Company. Had Madera filed federal and state income tax returns as a regular corporation for 1995, 1996 and 1997, income tax expense under the provisions of Financial Accounting Standards No. 109 would have been $30, $208 and $295, respectively. See Note 7 of Notes to Madera's Financial Statements included elsewhere herein. Madera 1997 vs. 1996 Revenue. Total revenues increased $75,000, or 1.0%, to $ 7.8 million in 1997 from $7.8 million in 1996. Exclusive of Madera's Professional Cleaning Division ("PCD"), which ceased operations in July, 1997, revenues increased $667,000, or 9.5%, to $7.7 million in 1997 from $7.0 million in 1996. This increase was primarily attributable to increased landfill and collection volumes resulting from existing franchise contracts, partially offset by a reduction in landfill construction revenues. Cost of Operations. Total cost of operations decreased $223,000 to $5.3 million in 1997 from $5.5 million in 1996. The decrease was principally due to the elimination of PCD, which was offset by increased operating cost associated with increased volumes of waste from existing contracts. Cost of operations as a percentage of revenues decreased to 67.4% from 70.9% in 1996. The percentage decrease was primarily due to the elimination of PCD. SG&A. SG&A expenses increased approximately $72,000 to $1.0 million in 1997 from $969,000 in 1996. As a percentage of revenues, SG&A increased to 13.3% from 12.5% in 1996. Depreciation and Amortization. Depreciation and amortization expense increased approximately $42,000 to $627,000 in 1997 from $585,000 in 1996. Depreciation and amortization increased as a percentage of revenues to 8.0% from 7.5%. 29 31 Interest Expense. Interest expense increased approximately $21,000 to $280,000 in 1997 from approximately $259,000 in 1996. Interest expense as a percentage of revenues increased to 3.6% in 1997 from 3.3% in 1996. Madera 1996 vs. 1995 Revenue. Total revenues increased $762,000, or 10.9%, to $7.8 million in 1996 from $7.0 million in 1995. Exclusive of PCD, revenues increased $508,000, or 7.8%, to $7.0 million in 1996 from $6.5 million in 1995. This increase was primarily attributable to increased landfill and collection volumes resulting from existing franchise contracts and landfill construction revenues. This was partially offset by decreased revenue from sales of recyclable materials due to a decrease in the pricing associated with recyclable materials. Cost of Operations. Total cost of operations increased $224,000 to $5.5 million in 1996 from $5.3 million in 1995. The principal reason for the increase was the start up of the PCD. Cost of operations as a percentage of revenues decreased to 70.9% from 75.5% in 1996. The decrease was primarily due to the increased volume of proportionately higher margin services. SG&A. SG&A expenses decreased approximately $27,000 to $969,000 in 1996 from $996,000 in 1995. As a percentage of revenues, SG&A decreased to 12.5% from 14.2% in 1996 due to improved economies of scale in the Company's landfill and collections operations as a result of additional volumes from existing customers. Depreciation and Amortization. Depreciation and amortization expense increased approximately $118,000 to $585,000 in 1996 compared to $467,000 in 1995. Depreciation and amortization increased as a percentage of revenues to 7.5% in 1996 from 6.7% in 1995. Interest Expense. Interest expense increased approximately $22,000 to $259,000 in 1996 from approximately $237,000 in 1995. Interest expense as a percentage of revenues decreased to 3.3% in 1996 from 3.4% in 1995. LIQUIDITY AND CAPITAL RESOURCES The Company's business is capital intensive. The Company's capital requirements include acquisitions and fixed asset purchases and are expected in the future to include capital expenditures for landfill cell construction, landfill development and landfill closure activities. The Company plans to meet its capital needs through various financing sources, including internally generated funds and debt and equity financing. As of March 31, 1998, the Company had working capital of $965,000, including cash and cash equivalents of $2.4 million. The Company's strategy in managing its working capital is generally to apply the cash generated from its operations that remains available after satisfying its working capital and capital expenditure requirements to reduce its indebtedness under its bank revolving credit facility and to minimize its cash balances. The Company finances its working capital requirements from internally generated funds and bank borrowings. At inception, the Company sold 2,300,000 shares of Common Stock at $0.01 per share to its founders and 2,499,998 shares of Series A Preferred Stock at $2.80 per share. As of May 15, 1998, the Company had sold or issued an additional 1,132,726 shares of Common Stock at a weighted average value of $7.55 per share, and granted options and warrants to purchase 2,281,600 shares of Common Stock at a weighted average exercise price of $3.69 per share. The weighted average value at which shares were issued, and the weighted average exercise price of the outstanding options and warrants, are significantly below the assumed initial public offering price per share of Common Stock. The Company's liquidity and capital resources would be greater if the Company had sold shares at higher prices and issued options and warrants with higher exercise prices. In addition, the Company's results of operations on a per share basis would be more favorable if there were fewer shares outstanding. See "Risk Factors -- Immediate and Substantial Dilution" and "Dilution." 30 32 The Company has a $25.0 million revolving credit facility with BankBoston, N.A., which is secured by all assets of the Company, including the Company's interest in the equity securities of its subsidiaries. The credit facility matures in 2001. It requires the Company to maintain certain financial ratios and satisfy other predetermined requirements, such as minimum net worth, net income and limits on capital expenditures. The credit facility also requires the lenders' approval of acquisitions in certain circumstances. See "Risk Factors -- Potential Inability to Finance the Company's Potential Growth." As of March 31, 1998, an aggregate of approximately $17.0 million was outstanding under the revolving line of credit. The interest rate on outstanding borrowings under the BankBoston facility was 8.4% as of March 31, 1998. The Company has obtained a preliminary letter of commitment from a syndicate of banks led by BankBoston, contingent on the closing of this offering, to increase the credit facility to $60.0 million. The credit facility will be used for: (i) refinancing any existing debt; (ii) permitted acquisitions; (iii) capital expenditures; (iv) working capital; (v) standby letters of credit; and (vi) general corporate purposes. The facility will mature three years from the closing of this offering and will be secured by substantially all the assets of the Company. The expanded credit facility will bear interest at a rate per annum equal to, at the Company's discretion, either: (i) the BankBoston Base Rate; or (ii) the Eurodollar Rate plus applicable margin. The expanded credit facility is expected to allow the Company to continue its acquisition-based growth strategy. For the three months ended March 31, 1998, net cash provided by operations was approximately $713,000 and was primarily provided by net income for the period. For the period from inception to December 31, 1997, net cash provided by operations was $2.6 million. This was primarily the result of the net loss for the period offset by non-cash charges for stock compensation expenses and cash provided by changes in operating assets and liabilities. For example, accounts payable increased as vendors extended credit to the Company. This was offset by a decline in accounts receivable as the Company collected outstanding receivables. For the three months ended March 31, 1998, net cash used in investing activities was $9.2 million. Of this, $8.8 million was used to fund the cash portion of the acquisitions of Madera, Waste Connections of Idaho and Hunter Enterprises. The remaining cash was primarily invested in MIS systems, trucks and containers. For the period from inception to December 31, 1997, net cash used in investing activities was $11.9 million. Of this, $11.5 million was used for the acquisition of the Company's predecessor operations from BFI. The remainder was primarily invested in additional trucks, MIS systems and property improvements. For the three months ended March 31, 1998, net cash provided by financing activities was $10.0 million, which was provided by net borrowings under the Company's various debt arrangements. For the period from inception to December 31, 1997, net cash provided by financing activities was $10.1 million, which was provided by net borrowings of $3.2 million and sales of Preferred Stock for $7.0 million. At March 31, 1998, the Company had approximately $17.0 million of long-term debt outstanding. The Company recorded an income tax benefit of $332,000 for the period from inception (September 9, 1997) through December 31, 1997. The income tax benefit was recognized because of the likelihood that it will be utilized through the reversal of existing temporary differences. Capital expenditures for 1998 are currently expected to be approximately $1.3 million, of which approximately $1.1 million is expected to be utilized for vehicle and equipment additions and replacements. The Company intends to fund its planned 1998 capital expenditures principally through internally generated funds, proceeds from this offering and borrowings under existing credit facilities. In addition, the Company anticipates that it may require substantial additional capital expenditures to facilitate its growth strategy of acquiring solid waste collection and disposal businesses. If the Company is successful in acquiring landfill disposal facilities, the Company may also be required to make significant expenditures to bring any such newly acquired disposal facilities into compliance with applicable regulatory requirements, obtain permits for any such 31 33 newly acquired disposal facilities or expand the available disposal capacity at any such newly acquired disposal facilities. The amount of these expenditures cannot be currently determined, because they will depend on the nature and extent of any acquired landfill disposal facilities, the condition of any facilities acquired and the permitted status of any acquired sites. The Company believes that the credit facility, the funds expected to be generated from operations, and the anticipated net proceeds of the offering will provide adequate cash to fund the Company's working capital and other cash needs for the foreseeable future. The Company derives a substantial portion of its revenues from exclusive municipal contracts and franchise agreements. Its single largest contract, with the City of Vancouver, accounted for approximately 18.1% of the Company's revenues during the period from inception (September 9, 1997) through December 31, 1997, and 15.8% during the three months ended March 31, 1998. There are approximately nine years remaining under that contract. No other single contract or customer accounted for more than 7.1% of the Company's revenues during the period from inception (September 9, 1997) through December 31, 1997, or 6.0% during the three months ended March 31, 1998 or is material to its liquidity and cash flow. The weighted average life, based on revenues, of the municipal contracts and franchise agreement is approximately seven years. INFLATION To date, inflation has not had a significant effect on the Company's operations. Consistent with industry practice, many of the Company's contracts provide for a pass-through of certain costs, including increases in landfill tipping fees and, in some cases, fuel costs. The Company believes, therefore, that it should be able to implement price increases to offset many cost increases resulting from inflation. However, competitive pressures may require the Company to absorb at least part of these cost increases, particularly during periods of high inflation. SEASONALITY Based on historic trends experienced by the businesses the Company has acquired, the Company's results of operations should be expected to vary seasonally, with revenues typically lowest in the first quarter, higher in the second and third quarters and lower in the fourth quarter than in the second and third quarters. This seasonality reflects the lower volume of solid waste generated during the late fall, winter and early spring months, resulting from decreased solid waste volume relating to construction and demolition activities during the winter months in the Western U.S. In addition, certain of the Company's operating costs should be expected to be generally higher in the winter months; winter weather conditions slow waste collection activities, resulting in higher labor costs, and greater precipitation increases the weight of collected waste, resulting in higher disposal costs (which are calculated per ton). Because a majority of the Company's operating expenses are expected to remain fairly constant throughout the fiscal year, operating income should be expected to be generally lower during the winter. IMPACT OF YEAR 2000 The Company will need to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 ("Year 2000") and thereafter. The Company expects to complete those modifications and upgrades during 1999. The total Year 2000 project cost is estimated to be approximately $100,000, which includes approximately $40,000 for the purchase of new software that will be capitalized and approximately $60,000 that will be expensed as incurred. To date, the Company has not incurred any costs related to the Year 2000 project. The Company does not believe that its expenditures relating to the Year 2000 project will be material. However, if the required Year 2000 modifications and conversions are not made or are not completed in a timely manner, the Year 2000 issue could materially affect the Company's operations. 32 34 BUSINESS INTRODUCTION Waste Connections is a regional, integrated solid waste services company that provides solid waste collection, transfer, disposal and recycling services in secondary markets of the Western U.S. As of May 15, 1998, the Company served more than 139,000 commercial, industrial and residential customers in Washington, California, Idaho, Wyoming and South Dakota. The Company currently owns nine collection operations and operates three transfer stations, one Subtitle D landfill and one recycling facility. Waste Connections was founded in September 1997 to execute an acquisition-based growth strategy in secondary markets of the Western U.S. The Company has acquired ten solid waste services businesses since its formation and has identified more than 300 independent operators of such businesses in the states where is currently operates, many of which it believes may be suitable for acquisition by the Company. In addition, the Company is currently assessing potential acquisitions of solid waste services operations in Kansas, Montana, Nebraska, Oklahoma, Oregon and Texas. The Company has targeted secondary markets in the Western U.S. because it believes that: (i) a large number of independent solid waste services companies suitable for acquisition by the Company are located in these markets; (ii) there is less competition in these markets from large, well-capitalized solid waste services companies; and (iii) these markets have strong projected economic and population growth rates. In addition, the Company's senior management team has extensive experience acquiring and operating solid waste services businesses in the Western U.S. INDUSTRY OVERVIEW According to Waste Age, an industry trade publication, the U.S. solid waste services industry generated estimated revenues of $36.9 billion in 1997. The solid waste services industry has undergone significant consolidation and integration since 1990. The Company believes that, particularly in the Western U.S., this consolidation and integration have been caused primarily by: (i) stringent environmental regulation and enforcement, resulting in increased capital requirements for collection companies and landfill operators; (ii) the evolution of an industry competitive model that emphasizes integrating collection and disposal capabilities; (iii) the ability of larger integrated operators to achieve certain economies of scale; and (iv) the existence of a regulatory framework that allows the acquisition of exclusive, long-term waste collection rights through franchise agreements, municipal contracts and governmental certificates. Increased Regulatory Impact. Stringent industry regulations, such as the Subtitle D regulations, have resulted in rising operating and capital costs and have accelerated consolidation and acquisition activities in the solid waste collection and disposal industry. Many smaller industry participants have found these costs difficult to bear and have decided to either close their operations or sell them to larger operators. In addition, Subtitle D requires more stringent engineering of solid waste landfills, including liners, leachate collection and monitoring and gas collection and monitoring. These ongoing costs are combined with increased financial reserve requirements for solid waste landfill operators relating to closure and post-closure monitoring. As a result, the number of solid waste landfills is declining while the size of solid waste landfills is increasing. Integrating Collection and Disposal Operations. The evolution of the industry competitive model is forcing operators to become more efficient by establishing an integrated network of solid waste collection operations and transfer stations, through which they secure solid waste streams for disposal. Operators have adopted a variety of disposal strategies, including owning landfills, establishing strategic relationships to secure access to landfills and otherwise capturing significant waste stream volumes, to gain leverage in negotiating lower landfill fees and securing long-term, most-favored-pricing contracts with high capacity landfills. 33 35 Economies of Scale. Larger integrated operators achieve economies of scale through vertical integration of their operations. These integrated companies have increased their acquisition activity to expand the breadth of services and density in their market areas. Control of the waste stream in these market areas, combined with access to significant financial resources to make acquisitions, has allowed larger solid waste collection and disposal companies to be more cost-effective and competitive. Despite the considerable consolidation and integration that has occurred in the solid waste industry since 1990, the industry remains primarily regional in nature and highly fragmented. Based on published industry sources, approximately 27% of the total revenues of the U.S. solid waste industry is accounted for by more than 5,000 private, predominantly small, collection and disposal businesses, approximately 41% by publicly traded solid waste companies and approximately 32% by municipal governments that provide collection and disposal services. The Company expects the current consolidation trends in the solid waste industry to continue, because many independent landfill and collection operators lack the capital resources, management skills and technical expertise necessary both to operate in compliance with stringent environmental and other governmental regulations and to compete with larger, more efficient integrated operators. The Company believes that the fragmented nature of the industry presents substantial consolidation and growth opportunities for companies with disciplined acquisition programs, decentralized operating strategies and access to financial resources. Regulatory Framework. In the Western U.S., waste collection services are provided largely under three types of contractual arrangements: certificates or permits, franchise agreements and municipal contracts. Certificates or permits, such as G certificates awarded to waste collection service providers in unincorporated areas and electing municipalities of Washington by the Washington Utilities and Transportation Commission, typically grant the certificate holder the right, which is generally perpetual and exclusive, to provide specific residential, commercial and industrial waste services in a specified area. See "G Certificates" below. Franchise agreements typically provide an exclusive service period of five to ten years or longer and specify the service territory, a broad range of services to be provided, and rates for the services. They also often give the service provider a right of first refusal to extend the term of the agreement. Municipal contracts typically provide a shorter service period and a more limited scope of services than franchise agreements and generally require competitive bidding at the end of the contract term. Unless customers within the areas covered by certain permits or certificates (including G certificates), franchise agreements and municipal contracts elect not to receive any waste collection services, they are required to pay collection fees to the company providing such services in their area. The Company operates one landfill and may acquire or operate others in the future. The Company believes, however, that in those secondary markets of the Western U.S. where waste collection services are provided under exclusive certificates, franchises or contracts, or where waste disposal is municipally funded or available from multiple sources, controlling the waste stream by providing collection services under exclusive arrangements is often more important to a waste services company's growth and profitability than owning or operating landfills. Several other characteristics of secondary markets in the Western U.S. limit the economic attractiveness of owning or operating landfills in those markets. For example, certain state and local regulations in the Western U.S. restrict the amount of waste that may be accepted from specific geographic areas. In addition, the relatively expansive geographic area of many western states increases the cost of interstate and long haul disposal, which heightens the effects of state and local regulations limiting the type and origin of waste that may be accepted at a landfill and makes it more difficult for a landfill to achieve the disposal volume necessary to operate profitably, given its capital and operating costs. The Company believes that significant opportunities exist for a well-capitalized company operating in secondary markets of the Western U.S., and that the highly fragmented nature of this industry should allow the Company to consolidate existing solid waste services businesses in this region. 34 36 STRATEGY The Company's objective is to build a leading integrated solid waste services company in secondary markets of the Western U.S. The Company's strategy for achieving this objective is to: (i) acquire collection, transfer, disposal and recycling operations in new markets and through "tuck-in" acquisitions in existing markets; (ii) secure additional franchises, municipal contracts and governmental certificates; (iii) generate internal growth in existing markets by increasing market penetration and adding services to its existing operations; and (iv) enhance profitability by increasing operating efficiencies of existing and acquired operations. The Company's ability to implement this strategy is enhanced by the experience of the members of its senior management team and their knowledge of and reputation in the solid waste services industry in the Company's targeted markets. The Company intends to implement its strategy as follows: Expansion Through Acquisitions The Company intends to expand significantly the scope of its operations by: (i) acquiring solid waste collection, transfer, disposal and recycling operations in new markets; and (ii) acquiring solid waste collection, transfer, disposal and recycling operations in existing and adjacent markets through "tuck-in" acquisitions. The Company intends to follow a regional expansion strategy by entering new markets through acquisitions. An initial acquisition in a new market is used as an operating base for the Company in that area. The Company then seeks to strengthen the acquired operation's presence in that market by providing additional services, adding new customers and making tuck-in acquisitions. The Company can then broaden its regional presence by adding additional operations in markets adjacent to the new location. The Company is currently examining opportunities to expand its presence in the Western U.S. in states other than Washington, California, Idaho, Wyoming and South Dakota and is assessing potential acquisitions of solid waste services operations in Kansas, Montana, Nebraska, Oklahoma, Oregon and Texas. The Company believes that numerous "tuck-in" acquisition opportunities exist within its current and targeted market areas. For example, the Company has identified more than 300 independent entities that provide collection and disposal services in California, Washington and Idaho. The Company believes that throughout the Western U.S., many independent entities are suitable for acquisition by the Company and would provide the Company opportunities to improve market share and route density. Franchise Agreements, Municipal Contracts and Governmental Certificates The Company intends to devote significant resources to securing additional franchise agreements and municipal contracts through competitive bidding and additional governmental certificates through the acquisition of other companies. In bidding for franchises and municipal contracts and evaluating the acquisition of companies holding governmental certificates, the Company's management team draws on its experience in the waste industry and its knowledge of local service areas in existing and target markets. The Company's district managers manage relationships with local governmental officials within their respective service areas, and sales representatives may be assigned to cover specific municipalities. These personnel focus on maintaining, renewing and renegotiating existing franchise agreements and municipal contracts and on securing additional agreements, contracts and governmental certificates. Internal Growth To generate continued internal growth, the Company will focus on increasing market penetration in its current and adjacent markets, soliciting new commercial, industrial, and residential customers in markets where such customers may elect whether or not to receive waste collection services, marketing upgraded or additional services (such as compaction or automated 35 37 collection) to existing customers and, where appropriate, raising prices. Where possible, the Company intends to leverage its franchise-based platforms to expand its customer base beyond its exclusive market territories. As customers are added in existing markets, the Company's revenue per routed truck increases, which generally increases the Company's collection efficiencies and profitability. In markets in which it has exclusive contracts, franchises and certificates, the Company expects internal growth to at least track population and business growth. The Company expects to use transfer stations as an important part of its internal growth strategy, by extending the direct-haul reach of the Company and linking disparate collection operations with Company-owned, operated or contracted disposal capacity. The Company currently operates three transfer stations. By operating transfer stations, the Company also engages in direct communications with municipalities and private operators that deliver waste to its transfer stations. This better positions the Company to gain additional business in its markets in the event any municipality privatizes its solid waste operations or rebids existing contracts, and it increases the Company's opportunities to acquire private collection operations. Operating Enhancements The Company has developed company-wide operating standards, which are tailored for each of its markets based on industry standards and local conditions. Using these standards, the Company tracks collection and disposal routing efficiency and equipment utilization. It also implements cost controls and employee training and safety procedures, and establishes a sales and marketing plan for each market. The Company has installed a wide area network, implemented advanced management information systems and financial controls, and consolidated accounting functions, customer service, productivity reporting and dispatching systems. The Company believes that by establishing operating standards, closely monitoring performance and streamlining certain administrative functions, it can improve the profitability of existing operations. To improve an acquired business' operational productivity, administrative efficiency and profitability, the Company applies the same operating standards, information systems and financial controls to acquired businesses as are employed at the Company's existing operations. Moreover, if the Company is able to internalize the waste stream of acquired operations, it can further increase operating efficiencies and improve capital utilization. Where not restricted by exclusive agreements, contracts, permits or certificates, the Company also solicits new commercial, industrial and residential customers in areas within and surrounding the markets served by acquired collection operations, as a means of further improving operating efficiencies and increasing the volume of solid waste collected by the acquired operations. ACQUISITION PROGRAM The Company currently operates in Washington, California, Idaho, Wyoming and South Dakota and believes that these and other markets in the Western U.S. with similar characteristics offer significant opportunities for achieving its objective. The Company focuses on markets that are generally characterized by: (i) a geographically dispersed population, which the Company believes deters competition from larger, established waste management companies; (ii) a potential revenue base of at least $15 million; (iii) the opportunity for the Company to acquire a significant market share; (iv) the availability of adequate disposal capacity, either through acquisition by the Company or through agreements with third parties; (v) a favorable regulatory environment; or (vi) strong projected economic or population growth rates. The Company believes that these market characteristics provide significant growth opportunities for a well-capitalized market entrant and create economic and operational barriers to entry by new competitors. The Company believes that its experienced management, decentralized operating strategy, financial strength and size make it an attractive buyer to certain solid waste collection and disposal acquisition candidates. The Company has developed a set of financial, geographic and management 36 38 criteria to assist management in evaluating acquisition candidates. These criteria evaluate a variety of factors, including, but not limited to: (i) the candidate's historical and projected financial performance; (ii) the candidate's internal rate of return, return on assets and return on revenue; (iii) the experience and reputation of the candidate's management and customer service providers, their relationships with local communities and their willingness to continue as employees of the Company; (iv) the composition and size of the candidate's customer base and whether the customer base is served under franchise agreements, municipal contracts, governmental certificates or other exclusive arrangements; (v) whether the geographic location of the candidate will enhance or expand the Company's market area or ability to attract other acquisition candidates; (vi) whether the acquisition will augment or increase the Company's market share or help protect the Company's existing customer base; (vii) any potential synergies that may be gained by combining the candidate with the Company's existing operations; and (viii) the liabilities of the candidate. Before completing an acquisition, the Company performs extensive environmental, operational, engineering, legal, human resources and financial due diligence. All acquisitions are subject to initial evaluation and approval by the Company's management before being recommended to the Executive Committee of the Board of Directors. The Company seeks to integrate each acquired business promptly and to minimize disruption to the ongoing operations of both the Company and the acquired business, and generally attempts to retain the senior management of acquired businesses. The Company believes its senior management team has a proven track record in integrating acquisitions. Recent Acquisition Developments On January 30, 1998, the Company acquired from affiliates of the Company the stock of Waste Connections of Idaho, Inc., a provider of solid waste collection services to more than 10,000 customers in and around Idaho Falls and Pocatello, Idaho through subscription agreements with residential customers and seven municipal contracts. Waste Connections of Idaho, Inc. was formed in September 1997 by affiliates of the Company for the purpose of acquiring certain assets of Browning-Ferris Industries of Idaho, Inc. See "Certain Transactions." Effective February 1, 1998, the Company acquired Madera Disposal Systems, Inc. ("Madera"), an integrated solid waste services company operating in north central California, with 1997 revenues of approximately $7.8 million. In connection with the Madera acquisition, the Company acquired one franchise agreement and one municipal contract, pursuant to which it serves more than 9,000 commercial, industrial and residential customers, and agreements to operate two transfer stations, one Subtitle D landfill (the "Fairmead Landfill") and one recycling facility. The operating agreement for the Fairmead Landfill has a remaining term of approximately 11 years. As of April 15, 1998, the Fairmead Landfill is estimated to have a remaining life of approximately 26 years. Approximately 45% of the solid waste disposed of at the Fairmead Landfill in 1997 was delivered by Madera. Effective March 1, 1998, the Company acquired certain solid waste collection assets from Hunter Enterprises, Inc., a solid waste services company located in eastern Idaho. These assets "tuck in" to the Company's Idaho operations and serve approximately 2,800 residential and commercial customers. On April 8, 1998, the Company acquired certain solid waste collection assets from A-1 Disposal, Inc. and Jesse's Disposal, both unrelated parties operating in northeastern Wyoming, and together serving approximately 2,300 customers. On May 8, 1998, the Company acquired Sowers' Sanitation, Inc. and Sunshine Sanitation Incorporated, providers of solid waste and recyclables collection services to an aggregate of more than 7,000 customers in western South Dakota. 37 39 On May 11, 1998, the Company acquired T&T Disposal, Inc., a provider of solid waste and recyclables collection services to more than 500 customers in eastern Wyoming. Letters of Intent to Acquire Additional Operations As of May 15, 1998, the Company had entered into nonbinding, preliminary letters of intent relating to the possible acquisition of five collection and transfer companies and one integrated collection and landfill company (five new service markets), which the Company estimates represent aggregate annualized revenues of more than $17.0 million. There can be no assurance that actual revenues realized by the Company from the successful acquisition of these potential acquisition candidates will not differ materially from the Company's estimate or that any of these letters of intent will lead to completed acquisitions on the terms currently contemplated. SERVICES Commercial, Industrial and Residential Waste Services The Company serves more than 139,000 commercial, industrial and residential customers. Of these, more than 49,000 are served under G certificates that grant the Company rights, which are generally perpetual and exclusive, to provide services within specified areas, approximately 6,600 are served under an exclusive franchise agreement with a remaining term of 11 years, and approximately 64,000 are served under exclusive municipal contracts with shorter contract terms. The Company's commercial and industrial services that are not performed under G certificates, franchise agreements or municipal contracts are provided under one to five year service agreements. Fees under these agreements are determined by such factors as collection frequency, level of service, route density, the type, volume and weight of the waste collected, type of equipment and containers furnished, the distance to the disposal or processing facility, the cost of disposal or processing and prices charged in its markets for similar service. Collection of larger volumes associated with commercial and industrial waste streams generally helps improve the Company's operating efficiencies, and consolidation of these volumes allows the Company to negotiate more favorable disposal prices. The Company's commercial and industrial customers use portable containers for storage, enabling the Company to service many customers with fewer collection vehicles. Commercial and industrial collection vehicles normally require one operator. The Company provides one to eight cubic yard containers to commercial customers, 10 to 50 cubic yard containers to industrial customers, and 30 to 95 gallon carts to residential customers. For an additional fee, stationary compactors that compact waste prior to collection are installed on the premises of a substantial number of large volume customers. No single commercial or industrial contract is material to the Company's results of operations. The Company's residential waste services that are not performed under G certificates, franchise agreements or municipal contracts are provided under contracts with homeowners' associations, apartment owners or mobile home park operators, or on a subscription basis with individual households. Residential contract fees are based primarily on route density, the frequency and level of service, the distance to the disposal or processing facility, the cost of disposal or processing and prices charged in that market for similar services. Collection fees are paid either by the municipalities from tax revenues or directly by the residents receiving the services. Transfer Station Services The Company has an active program to acquire, develop, own and operate transfer stations in markets proximate to its operations. Currently, the Company operates two transfer stations in California and one transfer station in Washington which receive, compact, and transfer solid waste to larger vehicles for transport to landfills. The Company believes that the transfer stations benefit the Company by: (i) concentrating the waste stream from a wider area, which increases the volume of 38 40 disposal at Company-operated landfills and gives the Company greater leverage in negotiating for more favorable disposal rates at other landfills; (ii) improving utilization of collections personnel and equipment; and (iii) building relationships with municipalities and private operators that deliver waste, which can lead to additional growth opportunities. Landfills The Company operates one Subtitle D landfill, the Fairmead Landfill, under an operating agreement with Madera County with a remaining term of 11 years. In fiscal 1997, approximately 45% of the solid waste disposed of at the Fairmead Landfill was delivered by Madera. As of May 15, 1998, the Fairmead Landfill consisted of 160 total acres, of which 20 acres were permitted for disposal. As of that date, the Fairmead Landfill had approximately 600,000 tons of unused permitted capacity remaining, with approximately 3.5 million additional tons of capacity in various stages of permitting, and was estimated to have a remaining life of 26 years. The Fairmead Landfill is currently permitted to accept up to 395 tons per day of municipal solid waste. The Company monitors the available permitted in-place disposal capacity of the Fairmead Landfill on an ongoing basis and evaluates whether to seek to expand this capacity. In making this evaluation, the Company considers various factors, including the volume of waste projected to be disposed of at the landfill, the size of the unpermitted acreage included in the landfill, the likelihood that the Company will be successful in obtaining the necessary approvals and permits required for the expansion and the costs that would be involved in developing the additional capacity. The Company also regularly considers whether it is advisable, in light of changing market conditions and/or regulatory requirements, to seek to expand or change the permitted waste streams or to seek other permit modifications. The Company is actively engaged in identifying solid waste landfill acquisition candidates to achieve vertical integration in markets where the economic and regulatory environment makes such acquisitions attractive. The Company believes that in some markets, acquiring landfills would provide opportunities to vertically integrate its collection, transfer and disposal operations while improving operating margins. The Company evaluates landfill candidates by determining, among other things, the amount of waste that could be diverted to the landfill in question, whether access to the landfill is economically feasible from the Company's existing market areas either directly or through transfer stations, the expected life of the landfill, the potential for expanding the landfill, and current disposal costs compared to the cost of acquiring the landfill. Where the acquisition of a landfill is not attractive, the Company pursues long term disposal contracts with facilities located in proximity to its markets. Recycling and Other Services The Company offers municipal, commercial, industrial and residential customers recycling services for a variety of recyclable materials, including cardboard, office paper, plastic containers, glass bottles and ferrous and aluminum metals. The Company operates one recycling processing facility and sells other collected recyclable materials to third parties for processing before resale. The profits from the Company's resale of recycled materials are often shared between the Company and the other parties to its recycling contracts. For example, certain of the Company's municipal recycling contracts in Washington and Idaho, which were negotiated before the Company acquired those businesses, specify certain benchmark resale prices for recycled commodities. To the extent the prices the Company actually receives for the processed recycled commodities collected under the contract exceed the prices specified in the contract, the Company shares the excess with the municipality, after recovering any previous shortfalls resulting from actual market prices falling below the prices specified in the contract. In an effort to reduce its exposure to commodity price risk with respect to recycled materials, the Company has adopted a pricing strategy of charging collection and processing fees for recycling volume collected from third parties. The Company believes that recycling will continue to be an important component of local and state solid waste 39 41 management plans, due to the public's increasing environmental awareness and expanding regulations that mandate or encourage recycling. The Company also provides other waste management services, most of which are project-based, including transporting and disposing of non-hazardous contaminated soils and similar materials, transporting special waste products, including asbestos, and arranging for the transportation of construction and demolition waste and disposal of soil and special waste products. OPERATIONS The Company is managed on a decentralized basis, which places decision-making authority close to the customer, enabling the Company to identify customers' needs quickly and to address those needs in a cost-effective manner. The Company believes that decentralization provides a low-overhead, highly efficient operational structure that allows the Company to expand into geographically contiguous markets and operate in relatively small communities that larger competitors may not find attractive. The Company believes that this structure gives the Company a strategic competitive advantage, given the relatively rural nature of much of the Western U.S., and makes the Company an attractive buyer to many potential acquisition candidates. The Company currently delivers its services from nine operating locations serving six market areas, or districts. Each district has a district manager, who has autonomous service and decision-making authority for that district and is responsible for maintaining service quality, promoting safety in the district's operations, implementing marketing programs, and overseeing day-to-day operations, including contract administration. District managers also assist in identifying acquisition candidates. Once the Company begins the acquisition process, business development managers, under the supervision of district and executive managers, obtain the permits and other governmental approvals required for the Company to operate the acquired business, including those related to zoning, environmental and land use. The Company's financial management, accounting, management information systems, environmental compliance, risk management and certain personnel functions are centralized and shared among locations to improve productivity, lower operating costs and stimulate internal growth. The Company has installed a Company-wide management information system that assists district personnel in making decisions based on centralized, real-time financial, productivity, maintenance and customer information. While district management operates with a high degree of autonomy, the Company's senior officers monitor district operations and require adherence to the Company's accounting, purchasing, marketing and internal control policies, particularly with respect to financial matters. The Company's executive officers review the performance of district managers and operations on a regular basis. G CERTIFICATES A substantial portion of the Company's collection business in Washington is performed under G certificates awarded by the Washington Utilities and Transportation Commission (the "WUTC"). G certificates apply only to unincorporated areas of Washington and municipalities that have elected to have their solid waste collection overseen by the WUTC. G certificates generally grant the holder the perpetual right to provide specified solid waste collection and transportation services in a specified territory. The WUTC has repeatedly determined that, in enacting the statute authorizing G certificates, the Washington Legislature intended to favor grants of exclusive, rather than overlapping, service rights for conventional solid waste services. Accordingly, most G certificates currently grant exclusive solid waste collection and transportation rights for conventional solid waste services in their specified territories. G certificates have generally been construed by the WUTC and the Washington Legislature as conferring vested property rights that may be defeated, diminished or cancelled only upon the occurrence of specified events of default, the demonstrated lack of fitness of the certificate holder, or 40 42 municipalities' annexation of territory covered by a certificate. Thus, a certificate holder is entitled to due process in challenging any action that affects its rights. In addition, legislation passed in 1997 requires a municipality that annexes territory covered by a G certificate either to grant the certificate holder an exclusive franchise, generally with a minimum term of seven years, to continue to provide services in the affected area, or to negotiate with the certificate holder some other compensation for the collection rights in the affected area. The statute expressly permits the certificate holder to sue the annexing municipality for measurable damages that exceed the value of a seven-year franchise agreement to provide services in the affected area. Under one of the contracts with a municipality in Washington acquired by a predecessor of the Company, the predecessor purported to waive its rights to compensation or damages under the statute in return for the right to service any current or prospectively annexed areas formerly covered by its G certificate. In addition to awarding G certificates, the WUTC is required by statute to establish just, reasonable and compensatory rates to customers of regulated solid waste collection companies. The WUTC is charged with balancing the needs of service providers to earn fair and sufficient returns on their investments in plant and equipment against the needs of commercial and residential customers to receive adequate and reasonably priced services. Over the past decade, the WUTC has employed a ratemaking methodology known as the "Lurito-Gallagher" method. This method calculates rates based on the income statements and balance sheets of each service provider, with the goal of establishing rates that reflect the costs of providing service and that motivate service providers to invest in equipment that improves operating efficiency in a cost-effective manner. The Lurito-Gallagher rate-setting methodology was adjusted in the early 1990's to better reflect the costs of providing recycling services, by accounting for providers' increasing use of automated equipment and adjusting for the cyclicality of the secondary recyclables markets. This has often resulted in more frequent rate adjustments in response to material cost shifts. SALES AND MARKETING In most of the Company's existing markets, waste collection, transfer and disposal services are provided to municipalities and governmental authorities under exclusive franchise agreements, municipal contracts and G certificates; service providers do not contract directly with individual customers. In addition, because the Company's growth to date has primarily been through acquisitions, the Company has generally assumed existing franchise agreements, municipal contracts and G certificates from the acquired companies, rather than obtaining new contracts. For these reasons, the Company's sales and marketing efforts to date have been narrowly focused. The Company expects to add sales and marketing personnel as necessary to: (i) solicit new customers in markets where it is not the exclusive provider of solid waste services; (ii) expand its presence into areas adjacent to or contiguous with its existing markets; and (iii) market additional services to existing customers. The Company has a diverse customer base. Its largest single contract, with the City of Vancouver, accounted for approximately 18.1% of the Company's revenues during the period from inception (September 9, 1997) through December 31, 1997, and 15.8% during the three months ended March 31, 1998. Under this contract, the Company serves more than 34,000 residential and commercial customers. There are approximately nine years remaining under that contract. No other single contract or customer accounted for more than 7.1% of the Company's revenues during the period from inception (September 9, 1997) through December 31, 1997 or 6.0% during the three months ended March 31, 1998. The weighted average life of the Company's municipal contracts and franchise agreement, based on revenues, is approximately seven years. COMPETITION The solid waste services industry is highly competitive and fragmented and requires substantial labor and capital resources. The industry presently includes five large national waste companies: Allied Waste Industries, Inc., Browning-Ferris Industries, Inc., Republic Industries, Inc., USA Waste Services, Inc. and Waste Management, Inc. (which has announced an impending merger with USA 41 43 Waste Services, Inc.) Several other public companies have annual revenues in excess of $100 million, including American Disposal Services, Inc., Casella Waste Systems, Inc., Eastern Environmental Services, Inc., Superior Services, Inc. and Waste Industries, Inc. Certain of the markets in which the Company competes or will likely compete are served by one or more large, national solid waste companies, as well as by numerous regional and local solid waste companies of varying sizes and resources, some of which have accumulated substantial goodwill in their markets. The Company also competes with operators of alternative disposal facilities, including incinerators, and with counties, municipalities, and solid waste districts that maintain their own waste collection and disposal operations. Public sector operations may have financial advantages over the Company, because of their access to user fees and similar charges, tax revenues and tax-exempt financing. The Company competes for collection, transfer and disposal volume based primarily on the price and quality of its services. From time to time, competitors may reduce the price of their services in an effort to expand their market shares or service areas or to win competitively bid municipal contracts. These practices may cause the Company to reduce the price of its services or, if it elects not to do so, to lose business. The Company provides a substantial portion of its residential, commercial and industrial collection services under exclusive franchise and municipal contracts and certificates, some of which are subject to periodic competitive bidding. The balance of the Company's services are provided under subscription agreements with individual households and one to five year service contracts with commercial and industrial customers. Intense competition exists not only for collection, transfer and disposal volume, but also for acquisition candidates. The Company generally competes for acquisition candidates with publicly owned regional and large national waste management companies. REGULATION Introduction The Company is subject to extensive and evolving federal, state and local environmental laws and regulations, the enforcement of which has become increasingly stringent in recent years. The environmental regulations affecting the Company are administered by the EPA and other federal, state and local environmental, zoning, health and safety agencies. A substantial portion of the Company's collection business in Washington is performed under G certificates awarded by the Washington Utilities and Transportation Commission, which generally grant the Company perpetual and exclusive collection rights in certain areas. The Company is currently in substantial compliance with applicable federal, state and local environmental laws, permits, orders and regulations, and it does not currently anticipate any material environmental costs necessary to bring its operations into compliance (although there can be no assurance in this regard). The Company anticipates that regulation, legislation and regulatory enforcement actions related to the solid waste services industry will continue to increase. The Company attempts to anticipate future regulatory requirements and to plan in advance as necessary to comply with them. To transport solid waste, the Company must possess and comply with one or more permits from state or local agencies. These permits also must be periodically renewed and may be modified or revoked by the issuing agency. The principal federal, state and local statutes and regulations that apply to the Company's operations are described below. The Resource Conservation and Recovery Act of 1976 ("RCRA") RCRA regulates the generation, treatment, storage, handling, transportation and disposal of solid waste and requires states to develop programs to ensure the safe disposal of solid waste. RCRA divides solid waste into two groups, hazardous and nonhazardous. Wastes are generally classified as hazardous if they either (i) are specifically included on a list of hazardous wastes, or (ii) exhibit 42 44 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 modelled on some or all of the Subtitle C provisions issued by the EPA. Some state regulations impose different, additional and more stringent obligations, and may regulate certain materials as hazardous wastes that are not so regulated under the federal Subtitle C Regulations. From the date of inception through March 31, 1998, the Company did not, to its knowledge, transport hazardous wastes in volumes that would subject the Company to hazardous waste regulations under RCRA. In October 1991, the EPA adopted the Subtitle D Regulations governing solid waste landfills. The Subtitle D Regulations, which generally became effective in October 1993, include location restrictions, facility design standards, operating criteria, closure and post-closure requirements, financial assurance requirements, groundwater monitoring requirements, groundwater remediation standards and corrective action requirements. In addition, the Subtitle D Regulations require that new landfill sites meet more stringent liner design criteria (typically, composite soil and synthetic liners or two or more synthetic liners) intended to keep leachate out of groundwater and have extensive collection systems to carry away leachate for treatment prior to disposal. Groundwater monitoring wells must also be installed at virtually all landfills to monitor groundwater quality and, indirectly, the effectiveness of the leachate collection system. The Subtitle D Regulations also require, where certain regulatory thresholds are exceeded, that facility owners or operators control emissions of methane gas generated at landfills in a manner intended to protect human health and the environment. Each state is required to revise its landfill regulations to meet these requirements or such requirements will be automatically imposed by the EPA on landfill owners and operators in that state. Each state is also required to adopt and implement a permit program or other appropriate system to ensure that landfills in the state comply with the Subtitle D Regulations. Various states in which the Company operates or in which it may operate in the future have adopted regulations or programs as stringent as, or more stringent than, the Subtitle D Regulations. The Federal Water Pollution Control Act of 1972, as amended (the "Clean Water Act") The Clean Water Act regulates the discharge of pollutants from a variety of sources, including solid waste disposal sites and transfer stations, into waters of the United States. If run-off from the Company's transfer stations or run-off or collected leachate from the Company's owned or operated landfills is discharged into streams, rivers or other surface waters, the Clean Water Act would require the Company to apply for and obtain a discharge permit, conduct sampling and monitoring and, under certain circumstances, reduce the quantity of pollutants in such discharge. Also, virtually all landfills are required to comply with the EPA's storm water regulations issued in November 1990, which are designed to prevent contaminated landfill storm water runoff from flowing into surface waters. The Company believes that its facilities comply in all material respects with the Clean Water Act requirements. Various states in which the Company operates or in which it may operate in the future have been delegated authority to implement the Clean Water Act permitting requirements, and some of these states have adopted regulations that are more stringent than the federal 43 45 requirements. For example, states often require permits for discharges to ground water as well as surface water. The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") CERCLA established a regulatory and remedial program intended to provide for the investigation and cleanup of facilities where or from which a release of any hazardous substance into the environment has occurred or is threatened. CERCLA's primary mechanism for remedying such problems is to impose strict joint and several liability for cleanup of facilities on current owners and operators of the site, former owners and operators of the site at the time of the disposal of the hazardous substances, any person who arranges for the transportation, disposal or treatment of the hazardous substances, and the transporters who select the disposal and treatment facilities. CERCLA also imposes liability for the cost of evaluating and remedying any damage to natural resources. The costs of CERCLA investigation and cleanup can be very substantial. Liability under CERCLA does not depend on the existence or disposal of "hazardous waste" as defined by RCRA; it can also be based on the existence of even very small amounts of the more than 700 "hazardous substances" listed by the EPA, many of which can be found in household waste. In addition, the definition of "hazardous substances" in CERCLA incorporates substances designated as hazardous or toxic under the federal Clean Water Act, Clear Air Act and Toxic Substances Control Act. If the Company were found to be a responsible party for a CERCLA cleanup, the enforcing agency could hold the Company, or any other generator, transporter or the owner or operator of the contaminated facility, responsible for all investigative and remedial costs, even if others were also liable. CERCLA also authorizes the imposition of a lien in favor of the United States on all real property subject to, or affected by, a remedial action for all costs for which a party is liable. CERCLA gives a responsible party the right to bring a contribution action against other responsible parties for their allocable shares of investigative and remedial costs. The Company's ability to obtain reimbursement from others for their allocable shares of such costs would be limited by the Company's ability to find other responsible parties and prove the extent of their responsibility and by the financial resources of such other parties. The Clean Air Act The Clean Air Act generally, through state implementation of federal requirements, regulates emissions of air pollutants from certain landfills based on the date of the landfill construction and volume per year of emissions of regulated pollutants. Larger landfills and landfills located in areas that do not comply with certain requirements of the Clean Air Act may be subject to even more extensive air pollution controls and emission limitations. In addition, the EPA has issued standards regulating the disposal of asbestos-containing materials. Air permits to construct may be required for gas collection and flaring systems, and operating permits may be required, depending on the estimated volume of emissions. All of the federal statutes described above contain provisions authorizing, under certain circumstances, the institution of lawsuits by private citizens to enforce the provisions of the statutes. In addition to a penalty award to the United States, some of those statutes authorize an award of attorneys' fees to parties successfully advancing such an action. 44 46 The Occupational Safety and Health Act of 1970 (the "OSH Act") The OSH Act is administered by the Occupational Safety and Health Administration ("OSHA"), and in many states by state agencies whose programs have been approved by OSHA. The OSH Act establishes employer responsibilities for worker health and safety, including the obligation to maintain a workplace free of recognized hazards likely to cause death or serious injury, to comply with adopted worker protection standards, to maintain certain records, to provide workers with required disclosures and to implement certain health and safety training programs. Various OSHA standards may apply to the Company's operations, including standards concerning notices of hazards, safety in excavation and demolition work, the handling of asbestos and asbestos-containing materials, and worker training and emergency response programs. Flow Control/Interstate Waste Restrictions Certain permits and approvals, as well as certain state and local regulations, may limit a landfill to accepting waste that originates from specified geographic areas, restrict the importation of out-of-state waste or otherwise discriminate against out-of-state waste. These restrictions, generally known as flow control restrictions, are controversial, and some courts have held that some flow control schemes violate constitutional limits on state or local regulation of interstate commerce. From time to time, federal legislation is proposed that would allow some local flow control restrictions. Although no such federal legislation has been enacted to date, if such federal legislation should be enacted in the future, states in which the Company operates landfills could act to limit or prohibit the importation of out-of-state waste or direct that wastes be handled at specified facilities. Such state actions could adversely affect the Company's landfills. These restrictions may also result in higher disposal costs for the Company's collection operations. If the Company were unable to pass such higher costs through to its customers, the Company's business, financial condition and results of operations could be adversely affected. Even in the absence of federal legislation, certain state and local jurisdictions may seek to enforce flow control restrictions through local legislation or contractually and, in certain cases, the Company may elect not to challenge such restrictions based on various considerations. These restrictions could result in the volume of waste going to landfills being reduced in certain areas, which may adversely affect the Company's ability to operate its landfills at their full capacity and/or reduce the prices that the Company can charge for landfill disposal services. These restrictions may also result in higher disposal costs for the Company's collection operations. If the Company were unable to pass such higher costs through to its customers, the Company's business, financial condition and results of operations could be adversely affected. State and Local Regulation Each state in which the Company now operates or may operate in the future has laws and regulations governing the generation, storage, treatment, handling, transportation and disposal of solid waste, occupational safety and health, water and air pollution and, in most cases, the siting, design, operation, maintenance, closure and post-closure maintenance of landfills and transfer stations. In addition, many states have adopted statutes comparable to, and in some cases more stringent than, CERCLA. These statutes impose requirements for investigation and cleanup of contaminated sites and liability for costs and damages associated with such sites, and some provide for the imposition of liens on property owned by responsible parties. Furthermore, many municipalities also have ordinances, local laws and regulations affecting Company operations. These include zoning and health measures that limit solid waste management activities to specified sites or activities, flow control provisions that direct the delivery of solid wastes to specific facilities, laws that grant the right to establish franchises for collection services and then put such franchises out for bid, and bans or other restrictions on the movement of solid wastes into a municipality. 45 47 Permits or other land use approvals with respect to a landfill, as well as state or local laws and regulations, may specify the quantity of waste that may be accepted at the landfill during a given time period, and/or specify the types of waste that may be accepted at the landfill. Once an operating permit for a landfill is obtained, it must generally be renewed periodically. There has been an increasing trend at the state and local level to mandate and encourage waste reduction at the source and waste recycling, and to prohibit or restrict the disposal of certain types of solid wastes, such as yard wastes, leaves and tires, in landfills. The enactment of regulations reducing the volume and types of wastes available for transport to and disposal in landfills could affect the Company's ability to operate its facilities at their full capacity. Some state and local authorities enforce certain federal laws in addition to state and local laws and regulations. For example, in some states, RCRA, the OSH Act, parts of the Clean Air Act and parts of the Clean Water Act are enforced by local or state authorities instead of by the EPA, and in some states those laws are enforced jointly by state or local and federal authorities. Public Utility Regulation The rates that landfill operators may charge are regulated in many states by public authorities. The rates that the Company may charge at its Fairmead Landfill for the disposal of municipal solid waste are regulated by the Madera County Board of Supervisors. The adoption of rate regulation or the reduction of current rates in states in which the Company owns or operates landfills could have an adverse effect on the Company's business, financial condition and results of operations. Solid waste collection services in all unincorporated areas of Washington and in electing municipalities in Washington are provided under G certificates awarded by the Washington Utilities and Transportation Commission. The WUTC also sets rates for regulated solid waste collection services in Washington. RISK MANAGEMENT, INSURANCE AND PERFORMANCE BONDS The Company maintains an environmental and other risk management programs appropriate for its business. The Company's environmental risk management program includes evaluating existing facilities and potential acquisitions for environmental law compliance. The Company does not presently expect environmental compliance costs to increase above current levels, but the Company cannot predict whether future acquisitions will result in an increase in such costs. The Company also maintains a worker safety program that encourages safe practices in the workplace. Operating practices at all Company operations emphasize minimizing the possibility of environmental contamination and litigation. The Company's facilities comply in all material respects with applicable federal and state regulations. The Company carries a broad range of insurance, which the Company's management considers adequate to protect the Company's assets and operations. The coverage includes general liability, comprehensive property damage, workmen's compensation and other coverage customary in the industry. These policies generally exclude coverage for damages associated with environmental conditions. Because of the limited availability and high cost of environmental impairment liability insurance, and in light of the Company's limited landfill operations, the Company has not obtained such coverage. If the Company were to incur liability for environmental cleanups, corrective action or damage, its financial condition could be materially and adversely affected. The Company will continue to investigate the possibility of obtaining environmental impairment liability insurance, particularly if it acquires landfills or operates landfills other than the Fairmead Landfill. The Company believes that most other landfill operators do not carry such insurance. Municipal solid waste collection contracts may require performance bonds or other means of financial assurance to secure contractual performance. Certain environmental regulations also require demonstrated financial assurance to meet closure and post-closure requirements for 46 48 landfills. The Company has not experienced difficulty in obtaining performance bonds or letters of credit for its current operations. At May 15, 1998, the Company had provided customers and various regulatory authorities with bonds and letters of credit in the aggregate amount of approximately $800,000 to secure its obligations. The Company's credit facility provides for the issuance of letters of credit in an amount up to $5 million, but any letters of credit issued reduce the availability of borrowings for acquisitions and other general corporate purposes. If the Company were unable to obtain surety bonds or letters of credit in sufficient amounts or at acceptable rates, it could be precluded from entering into additional municipal solid waste collection contracts or obtaining or retaining landfill operating permits. PROPERTY AND EQUIPMENT The Company leases the real estate, buildings and other physical properties for its solid waste operations. These leases include a lease of approximately 5,500 square feet of office space in Roseville, California for the Company's principal executive offices, which lease expires in November 2002. The Company also leases real property in Issaquah, Washington under a lease expiring in 2008 and in Maltby, Washington, Idaho Falls and Pocatello, Idaho, under leases expiring at the end of 1999. The Company subleases real property in Vancouver, Washington under a lease expiring in 2001, with an option to extend the term for five years. The Company leases real property in Deadwood, South Dakota and Converse County, Wyoming under leases expiring in 2003 and late 1998, respectively. Under its agreement with the County of Madera to operate Fairmead Landfill, the Company is permitted to maintain an equipment yard and office on the landfill premises without charge. In connection with two recent acquisitions in Wyoming, the Company acquired ownership of real estate formerly used by one of the collection operations and assumed a lease that terminates in August 1998. The Company expects to renew this lease and consolidate its operations in Gillette, Wyoming, at the leased facility and to dispose of the real estate that it acquired in connection with those acquisitions. In connection with recent acquisitions in Wyoming and South Dakota, the Company also acquired real estate in Wright, Wyoming and Butte County, South Dakota. At May 15, 1998, the Company owned or leased approximately 170 pieces of equipment, including waste collection vehicles and related support vehicles, as well as bulldozers, compactors, earth movers and related heavy equipment used in landfill operations, and had more than 62,000 carts and containers in use, with such carts ranging in size from 30 to 95 gallons and such containers ranging from one to 50 cubic yards. The Company has a regular maintenance program for its vehicles, equipment and operating properties. However, the Company expects to make substantial investments in additional equipment and property for expansion and replacement of assets and in connection with future acquisitions. EMPLOYEES At May 15, 1998, the Company employed approximately 266 full-time employees, including approximately 30 persons classified as professionals or managers, approximately 209 employees involved in collection, transfer, disposal and recycling operations, and approximately 27 sales, clerical, data processing or other administrative employees. Approximately 55 drivers and mechanics at the Company's Vancouver, Washington operation are represented by the Teamsters Union, with which Browning-Ferris Industries of Washington, Inc., the Company's predecessor in Vancouver, entered a four-year collective bargaining agreement in January 1997. In addition, in July 1997, the employees at the Company's facility in Issaquah, Washington, adopted a measure to select a union to represent them in labor negotiations with management. The union and management are currently operating under a one-year negotiating agreement, and, if those negotiations are unsuccessful, the earliest date on which the union would be permitted to take additional action is July 27, 1998. Such additional action includes calling a strike or, if the Company agrees, continuing to negotiate or commencing arbitration of the 47 49 outstanding issues. The Company is not aware of any other organizational efforts among its employees and believes that its relations with its employees are good. LEGAL PROCEEDINGS In the normal course of its business and as a result of the extensive governmental regulation of the solid waste industry, the Company may periodically become subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines on the Company or to revoke or deny renewal of an operating permit held by the Company. From time to time, the Company may also be subject to actions brought by citizens' groups or adjacent landowners or residents in connection with the permitting and licensing of landfills and transfer stations, or alleging environmental damage or violations of the permits and licenses pursuant to which the Company operates. In addition, the Company may become party to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of a waste management business. However, there is no current proceeding or litigation involving the Company that the Company believes will have a material adverse impact on the Company's business, financial condition, results of operations or cash flows. 48 50 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information concerning the Company's executive officers and directors as of May 1, 1998:
NAME AGE POSITIONS ---- --- --------- Ronald J. Mittelstaedt(1).............. 35 President, Chief Executive Officer and Chairman Steven F. Bouck........................ 41 Executive Vice President and Chief Financial Officer Eugene V. Dupreau...................... 50 Vice President -- Madera; Director Charles B. Youngclaus.................. 58 Vice President -- Madera; Advisory Director Darrell W. Chambliss................... 33 Vice President -- Operations; Secretary Michael R. Foos........................ 32 Vice President and Corporate Controller Eric J. Moser.......................... 31 Treasurer and Assistant Corporate Controller Michael W. Harlan(1)(2)................ 37 Director William J. Razzouk(1)(3)............... 50 Director
- --------------- (1) Member of the Executive Committee. (2) Member of the Audit Committee, upon consummation of the offering. (3) Member of the Compensation Committee, upon consummation of the offering. Ronald J. Mittelstaedt has been President, Chief Executive Officer and a director of the Company since it was formed, and was elected Chairman in January 1998. He also served as a consultant to the Company in August and September 1997. Mr. Mittelstaedt has more than ten years of experience in the solid waste industry. He served as a consultant to United Waste Systems, Inc., with the title of Executive Vice President, from January 1997 to August 1997, where he was responsible for corporate development for all states west of Colorado. As Regional Vice President of USA Waste Services, Inc. (including Sanifill, Inc., which was acquired by USA Waste Services, Inc.) from November 1993 to January 1997, he was responsible for all operations in 16 states and Canada. Mr. Mittelstaedt held various positions at Browning-Ferris Industries, Inc. from August 1987 to November 1993, most recently as Division Vice President in northern California, overseeing the San Jose market. Previously he was the District Manager responsible for BFI's operations in Sacramento and the surrounding areas. He holds a B.S. in Finance from the University of California at Santa Barbara. Steven F. Bouck has been Executive Vice President and Chief Financial Officer of the Company since February 1998. Mr. Bouck held various positions with First Analysis Corporation from 1986 to 1998, including most recently as Managing Director coordinating corporate finance. In that capacity, he provided merger and acquisition advisory services to companies in the environmental industry. Mr. Bouck was also responsible for assisting in investing venture capital funds focussed on the environmental industry that were managed by First Analysis. In connection with those investments, he served on the boards of directors of several companies. While at First Analysis, Mr. Bouck also provided analytical research coverage of a number of publicly traded environmental services companies. Mr. Bouck holds B.S. and M.S. degrees in mechanical engineering from Rensselaer Polytechnic Institute and an M.B.A. in Finance from the Wharton School. He has been a Chartered Financial Analyst since 1990. Eugene V. Dupreau has been Vice President -- Madera and a director of the Company since February 23, 1998. Mr. Dupreau served as President and a director of Madera Disposal Systems, Inc. beginning in 1981 and 1985, respectively, and held both positions until the Company acquired Madera in 1998. Mr. Dupreau holds a B.S. in Business Administration from Fresno State University 49 51 and has completed advanced coursework in waste management. He serves as a director of several civic and charitable organizations in Madera County. Charles B. Youngclaus has been Vice President -- Madera and an advisory director of the Company since February 23, 1998. Mr. Youngclaus founded Madera Disposal Systems, Inc. in 1981 and was its Chief Operating Officer and Vice President before its acquisition by the Company in 1998. Mr. Youngclaus owned and operated Madera's predecessor company, Madera County Disposal, from 1965 to 1981. Mr. Youngclaus holds a B.S. from Fresno State University and has completed advanced coursework in waste management, including certification in clay liner construction by the University of Texas in 1992. Mr. Youngclaus is a Board Member of the California Refuse Removal Council and is incoming Treasurer of the Northern California chapter. Darrell W. Chambliss has been Vice President -- Operations and Secretary of the Company since October 1, 1997. Mr. Chambliss held various management positions at USA Waste Services, Inc. (including Sanifill, Inc. and United Waste, Inc., both of which were acquired by USA Waste Services, Inc.) from April 1995 to September 1997, including most recently Division Manager in Corning, California, where he was responsible for the operations of 19 operating companies as well as supervising and integrating acquisitions. From July 1989 to April 1995, he held various management positions with Browning-Ferris Industries, Inc., including serving as Assistant District Manager in San Jose, California, where he was responsible for a significant hauling operation, and serving as District Manager in Tucson, Arizona for more than three years. Mr. Chambliss holds a B.S. in Business Administration from the University of Arkansas. Michael R. Foos has been Vice President and Corporate Controller of the Company since October 1, 1997. Mr. Foos served as Division Controller of USA Waste Services, Inc. (including Sanifill, Inc., which was acquired by USA Waste Services, Inc.) from October 1996 to September 1997, where he was responsible for financial compilation and reporting and acquisition due diligence for a seven-state region. Mr. Foos served as Assistant Regional Controller at USA Waste Services, Inc. from August 1995 to September 1996, where he was responsible for internal financial reporting for operations in six states and Canada. Mr. Foos also served as District Controller for Waste Management, Inc. from February 1990 to July 1995, and was a member of the audit staff of Deloitte & Touche from 1987 to 1990. Mr. Foos holds a B.S. in Accounting from Ferris State University. Eric J. Moser has been the Company's Treasurer and Assistant Corporate Controller since October 1, 1997. From August 1995 to September 1997, Mr. Moser held various finance positions at USA Waste Services, Inc. (including Sanifill, Inc., which was acquired by USA Waste Services, Inc.), most recently as Controller of the Ohio Division, where he was responsible for internal financial compilation and reporting and acquisition due diligence. Previously Mr. Moser was Controller of the Michigan Division of USA Waste Services, Inc., where he was responsible for internal financial reporting. Mr. Moser served as Controller for Waste Management, Inc. from June 1993 to August 1995, where he was responsible for internal financial reporting for a hauling company, landfill and transfer station. Mr. Moser holds a B.S. in Accounting from Illinois State University. Michael W. Harlan has been a director of the Company since January 30, 1998. From November 1997 to January 30, 1998, Mr. Harlan served as a consultant to the Company on various financial matters. Since March 1997, Mr. Harlan has been Vice President and Chief Financial Officer of Apple Orthodontix, Inc., a publicly traded company that provides practice management services to orthodontic practices in the U.S. and Canada. From April 1991 to December 1996, Mr. Harlan held various positions in the finance and acquisition departments of USA Waste Services, Inc. (including Sanifill, Inc., which was acquired by USA Waste Services, Inc.), including serving as Treasurer and Assistant Secretary beginning in September 1993. From May 1982 to April 1991, Mr. Harlan held various positions in the tax and corporate financial consulting services division of Arthur Andersen LLP, where he was a Manager since July 1986. Mr. Harlan is a Certified Public Accountant and holds a B.A. from the University of Mississippi. 50 52 William J. Razzouk has been a director of the Company since January 30, 1998. Mr. Razzouk owns a management consulting business and an investment company that focuses on identifying strategic acquisitions. From September 1997 until April 1998, he was also the President, Chief Operating Officer and a director of Storage USA, Inc., a publicly traded real estate investment trust that owns and operates more than 350 mini storage warehouses. He served as the President and Chief Operating Officer of America Online from February 1996 to June 1996. From 1983 to 1996, Mr. Razzouk held various management positions at Federal Express Corporation, most recently as Executive Vice President, World Wide Customer Operations, with full worldwide profit and loss responsibility. Mr. Razzouk previously held management positions at ROLM Corporation, Philips Electronics and Xerox Corporation. He is a member of the Board of Directors of La Quinta Motor Inns and Fritz Companies, Inc. and previously was a director of Sanifill, Inc. and Cordis Corp. He holds a Bachelor of Journalism degree from the University of Georgia. CLASSIFICATION OF BOARD OF DIRECTORS The Board of Directors is divided into three classes. The term of office of the first class (currently comprised of Eugene V. Dupreau) will expire at the annual meeting of stockholders following the fiscal year ending December 31, 1998, the term of office of the second class (currently comprised of Michael W. Harlan and William J. Razzouk) will expire at the annual meeting of stockholders following the fiscal year ending December 31, 1999, and the term of office of the third class (currently comprised of Ronald J. Mittelstaedt) will expire at the annual meeting of stockholders following the fiscal year ending December 31, 2000. At each annual meeting of stockholders, successors to directors of the class whose term expires at such meeting will be elected to serve for three-year terms and until their successors are elected and qualified. See "Description of Capital Stock -- Certain Charter and By-Law Provisions -- Classified Board of Directors." COMMITTEES OF THE BOARD The Board of Directors has established an Executive Committee and has authorized an Audit Committee and a Compensation Committee to become operative upon the closing of this offering. A majority of the members of the Executive Committee are, and both members of each of the Audit and Compensation Committees will be, independent directors who are not employees of the Company or one of its subsidiaries. COMPENSATION OF DIRECTORS Directors do not currently receive any compensation for attending meetings of the Board of Directors. After completion of this offering, each independent director will receive a fee of $1,500 for attendance at each Board meeting and each committee meeting (unless held on the same day as the full Board meeting), in addition to reimbursement of reasonable expenses. Each independent director who has not been an employee of the Company at any time during the 12 months preceding his initial election and appointment to the Board is granted an option to purchase 15,000 shares of the Company's Common Stock at the time of his or her initial election or appointment. The Company has granted to each of Messrs. Harlan and Razzouk options to purchase 15,000 shares of Common Stock at $3.00 per share, exercisable on October 1, 1998. Commencing in 1999, the Company will grant each independent director, on February 1 of each year during which such person serves on the Board, an option to purchase 7,500 shares of the Company's Common Stock. All such options will have an exercise price equal to the fair market value of the Common Stock on the grant date, will vest in full on the grant date, and will expire upon the earlier to occur of ten years after the grant date or one year after the director ceases to be a member of the Board. 51 53 EXECUTIVE COMPENSATION Summary Compensation Information The Company was incorporated in September 1997. The following table sets forth information with respect to the annual and long-term compensation earned in 1997 by the Chief Executive Officer. The Chief Executive Officer has been compensated in accordance with the terms of his Employment Agreement described below. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------------------------ SHARES ANNUAL COMPENSATION UNDERLYING ---------------------------- RESTRICTED OPTIONS/ WARRANTS ALL OTHER SALARY(1) BONUS(1) OTHER STOCK GRANTED(2) COMPENSATION(3) --------- -------- ----- ---------- ----------------- --------------- Ronald J. Mittelstaedt......... $39,903 $25,000 -- $0 200,000 $10,000
- --------------- (1) Salary and bonus figures reflect employment from October 1, 1997 through December 31, 1997. Bonus figure reflects portion earned during 1997; such bonus is payable in 1998. (2) See "Option and Warrant Grants" below. (3) Consists of consulting fees for services rendered prior to the Company's formation. Stock Options and Warrants Option and Warrant Grants. The following table contains information concerning the grant of options and warrants to purchase shares of the Company's Common Stock to the Company's Chief Executive Officer during the period from inception (September 9, 1997) through December 31, 1997: 1997 OPTION AND WARRANT GRANTS
POTENTIAL REALIZABLE VALUE AT ASSUMED NUMBER OF ANNUAL RATES OF SHARES % OF TOTAL STOCK PRICE UNDERLYING OPTIONS AND APPRECIATION FOR OPTIONS WARRANT OPTION/WARRANT AND GRANTED TO TERM(2) NAME OF WARRANT EMPLOYEES IN EXERCISE PRICE ----------------------- BENEFICIAL OWNER GRANTED 1997 PER SHARE(1) EXPIRATION DATE 5% 10% ---------------- ---------- ------------ -------------- --------------- ---------- ---------- Ronald J. Mittelstaedt... 100,000(3) 15.9% $2.80 Dec. 14, 2007 $1,512,000 $2,573,000 100,000(4) 15.9% $2.80 Dec. 14, 2002 $1,124,000 $1,492,000
- --------------- (1) The options and warrant were granted at or above fair market value as determined by the Board of Directors on the date of grant. (2) Amounts reported in these columns represent amounts that may be realized on exercise of options and warrant immediately prior to the expiration of their term assuming the specified assumed rates of stock price appreciation (5% and 10%) on the Company's Common Stock over the term of the options and warrant, assuming an initial public offering price of $11.00 per share. The potential realizable values set forth above do not take into account applicable tax and expense payments that may be associated with such exercises. Actual realizable value, if any, will depend on the future price of the Common Stock on the actual date of exercise, which may be earlier than the stated expiration date. The 5% and 10% assumed annualized rates of stock price appreciation over the exercise period of the options and warrants used in the table above are mandated by the rules of the Securities and Exchange Commission (the "Commission") and do not represent the Company's estimate or projection of the future price of the Common Stock on any date. There is no representation, either express or implied, that the stock price appreciation rates for the Common Stock assumed for purposes of this table will actually be achieved. 52 54 (3) Warrant vested immediately on date of grant. (4) Options vest 33% on October 1, 1998, 33% on October 1, 1999, and 34% on October 1, 2000. Option and Warrant Values. The following table sets forth information for the Chief Executive Officer with respect to the value of unexercised options and warrants outstanding as of December 31, 1997. The Chief Executive Officer did not exercise any options or warrants during 1997. 1997 OPTION AND WARRANT VALUES
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AND IN-THE-MONEY OPTIONS AND WARRANT AT WARRANT AT DECEMBER 31, 1997 DECEMBER 31, 1997 (1) ---------------------------- ---------------------------- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- ------------- ----------- ------------- Ronald J. Mittelstaedt............... 100,000 100,000 -- --
- --------------- (1) There was no public trading market for the Company's Common Stock at December 31, 1997. Accordingly, as permitted by the rules of the Commission, these values have been calculated based on the fair market value of the Company's Common Stock as of December 31, 1997, of $2.02 per share, as determined by the Board of Directors based on an independent valuation, less the aggregate exercise price. EMPLOYMENT AGREEMENTS The Company has entered into employment agreements with Steven F. Bouck, Eugene V. Dupreau, Charles B. Youngclaus, Darrell W. Chambliss, Michael R. Foos and Eric J. Moser. Each agreement has a three-year term. The Company entered into an employment agreement with Ronald J. Mittelstaedt, the President and the Chief Executive Officer, on October 1, 1997. The initial annual base salary is $170,000. If this offering is consummated by October 1, 1998, Mr. Mittelstaedt's base salary will be adjusted to at least $250,000. The agreement provides for a minimum bonus of $125,000 for the 15-month period ending December 31, 1998, if the Company achieves certain acquisition and financial targets. The agreement provides for an initial five-year term, at the end of which the agreement automatically renews for additional successive one-year terms unless terminated earlier upon written notice of either Mr. Mittelstaedt or the Company or extended further by the Board. The Company or Mr. Mittelstaedt may at any time terminate the agreement, with or without cause, provided that if the Company terminates the agreement without cause (as defined in the agreement) or if Mr. Mittelstaedt terminates the agreement for good reason (as defined in the agreement), the Company is required to make certain severance payments, and all of Mr. Mittelstaedt's unvested options, warrants and rights relating to capital stock of the Company will immediately vest. The agreement also provides that a change of control of the Company (as defined in the agreement) will be deemed a termination of Mr. Mittelstaedt without cause, unless Mr. Mittelstaedt waives that provision. Pursuant to the employment agreement, the Company sold Mr. Mittelstaedt 617,500 shares of the Company's Common Stock for $0.01 per share and 357,143 shares of the Company's Series A Preferred Stock for $1,000,000. Mr. Mittelstaedt may recommend nominees for election to the Company's Board of Directors. If the Board consists of five or fewer members, Mr. Mittelstaedt may recommend two nominees, and if it consists of more than five members, he may recommend three nominees. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The full Board of Directors served as the compensation committee of the Board during 1997. At the time the employment agreement with Mr. Mittelstaedt was approved by the Board of Directors, 53 55 Mr. Mittelstaedt was one of three members of the Board of Directors. No executive officer of the Company served as a director or member of the compensation committee of another entity, one of whose executive officers served as a director or member of the Compensation Committee of the Company. 1997 STOCK OPTION PLAN The 1997 Stock Option Plan (the "Stock Option Plan") was adopted by the Board of Directors effective as of October 1, 1997, and was approved by the stockholders on March 12, 1998. The Stock Option Plan is intended to provide employees, consultants and directors with additional incentives by increasing their proprietary interests in the Company. Under the Stock Option Plan, the Company may grant options with respect to a maximum of 1,200,000 shares of Common Stock. As of May 15, 1998, the Company had granted options to purchase 880,600 shares of Common Stock at a weighted average exercise price of $5.44 per share. The Stock Option Plan is currently administered by the Board of Directors. Upon consummation of the offering, the Compensation Committee will administer the Stock Option Plan. The administrator of the Stock Option Plan has the authority to determine the employees, consultants and directors to whom options are granted (the "Optionees"), the type, size and term of the options, the grant date, the expiration date, the vesting schedule and other terms and conditions of the options. The Stock Option Plan provides for the grant of incentive stock options ("ISOs") as defined in section 422 of the Internal Revenue Code, as amended, and nonqualified stock options. Only employees of the Company may receive ISOs. The aggregate fair market value, as of the grant date, of the Common Stock subject to ISOs that become exercisable by any employee during any calendar year may not exceed $100,000. Options generally become exercisable in installments pursuant to a vesting schedule set forth in the option agreement. No option shall be granted after September 30, 2007. No option will remain exercisable later than 10 years after the grant date (or five years in the case of ISOs granted to Optionees owning more than 10% of the total combined voting power of all classes of the Company's outstanding capital stock (a "Ten Percent Stockholder")). The exercise price of ISOs granted under the Stock Option Plan may be no less than the fair market value of a share of Common Stock on the grant date (or 110% of such fair market value, in the case of ISOs granted to Ten Percent Stockholders). If an Optionee with outstanding options retires or becomes disabled and does not die within the three months following retirement or disability, the Optionee may exercise his or her options, but only within the period ending, subject to the discretion of the administrator of the Stock Option Plan, on the earlier of: (i) six months after retirement or disability; or (ii) the expiration of the option set forth in the option agreement. If the Optionee does not exercise his or her options within that time period, the options will terminate, and the shares of Common Stock subject to the options will become available for issuance under the Stock Option Plan. If the Optionee ceases to be an employee, consultant or director of the Company other than because of retirement, death or disability, his or her options terminate on the date such relationship terminates, subject to the discretion of the administrator of the Stock Option Plan, and the shares of Common Stock subject to the options will become available for issuance under the Stock Option Plan. Each option agreement may include the right of the Company to repurchase any and all shares acquired by an Optionee under the Stock Option Plan upon termination of the Optionee, whether voluntary or involuntary or with or without cause. 54 56 CERTAIN TRANSACTIONS Initial Funding In September and October 1997, the Company sold an aggregate of 2,300,000 shares of Common Stock at a price of $0.01 per share and 2,499,998 shares of Series A Preferred Stock at a price of $2.80 per share to 19 accredited investors, including certain officers and directors of the Company, in a private placement. Such sales were made in accordance with Regulation D promulgated under the Securities Act of 1933, as amended (the "Securities Act"). The investors included the following officers and directors of the Company, their immediate family members, and entities controlled by them: Mittelstaedt Family Trust dated 6/18/97 (trustee is Ronald J. Mittelstaedt, President, Chief Executive Officer and Chairman): 357,143 shares of Series A Preferred for $1,000,000 and 617,500 shares of Common Stock for $6,175; J. Bradford Bishop (former director; resigned January 30, 1998): 678,750 shares of Common Stock for $6,787.50; James N. Cutler, Jr. (former director; resigned January 30, 1998): 678,750 shares of Common Stock for $6,787.50; Bishop-Cutler L.L.C. (controlled by former directors J. Bradford Bishop and James N. Cutler, Jr.): 339,285 shares of Series A Preferred Stock for $950,000; Frank W. Cutler (brother of former director James N. Cutler, Jr.): 142,857 shares of Series A Preferred Stock for $400,000 and 275,000 shares of Common Stock for $2,750; Darrell W. Chambliss (Vice President -- Operations): 20,000 shares of Common Stock for $200; Michael R. Foos (Vice President and Corporate Controller): 20,000 shares of Common Stock for $200; Eric J. Moser (Treasurer and Assistant Corporate Controller): 10,000 shares of Common Stock for $100. Options and Warrants to Management Group On October 1, 1997, Darrell W. Chambliss, Michael R. Foos and Eric J. Moser were granted options to purchase 150,000, 150,000 and 85,000 shares, respectively, of Common Stock, pursuant to their respective employment agreements with the Company. On December 15, 1997, each of then directors James N. Cutler and J. Bradford Bishop and Board consultant Frank W. Cutler was granted a warrant to purchase 247,000 shares of Common Stock at an exercise price of $2.80 per share. Messrs. Cutler and Bishop resigned as directors on January 30, 1998, and Frank W. Cutler's consulting relationship with the Board terminated on that date. On December 15, 1997, Ronald J. Mittelstaedt was granted a warrant to purchase 100,000 shares of Common Stock at an exercise price of $2.80 per share and an option to purchase 100,000 shares of Common Stock at an exercise price of $2.80 per share. All of the above warrants and options are currently exercisable, except for the option to purchase 100,000 shares granted to Mr. Mittelstaedt, one-third of which becomes exercisable on each of October 1, 1998, October 1, 1999, and October 1, 2000. On December 15, 1997, Michael W. Harlan was granted a warrant to purchase 5,000 shares of Common Stock at an exercise price of $2.80 per share, exercisable on October 1, 1998. On January 30, 1998, Mr. Harlan and William J. Razzouk were each granted an option to purchase 15,000 shares of Common Stock at an exercise price of $3.00 per share, exercisable on October 1, 1998. 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 the Company. These options include an option to purchase 100,000 shares at an exercise price of $2.80 per share, of which one-third is exercisable on each of October 1, 1998, October 1, 1999, and October 1, 2000. Of Mr. Bouck's remaining options, an option to purchase 50,000 shares has an exercise price of $9.50 per share, and an option to purchase 50,000 shares has an exercise price of $12.50 per share; one-third of each of these options vests on each of October 1, 1998, October 1, 1999, and October 1, 2000. On February 1, 1998, Mr. Bouck was granted an immediately exercisable warrant to purchase 50,000 shares of Common Stock at an exercise price of $2.80 per share, which was exercised in March 1998. On February 23, 1998, Eugene V. Dupreau and Charles B. Youngclaus were granted warrants in connection with the Company's acquisition of Madera. See "Purchase of Madera Disposal Systems, Inc." below. Purchase of Waste Connections of Idaho, Inc. On January 30, 1998, the Company purchased all of the outstanding stock of Waste Connections of Idaho, Inc. ("Waste Connections Idaho") from Ronald J. Mittelstaedt, J. Bradford Bishop and James N. Cutler, Jr., the sole shareholders of Waste Connections Idaho. The aggregate purchase price was $3,000, which was the aggregate price paid initially by Messrs. Mittelstaedt, Bishop and Cutler for such shares. Messrs. Mittelstaedt, Bishop and Cutler formed Waste Connections Idaho in September 1997 for the purpose of acquiring certain assets from Browning-Ferris Industries of Idaho, Inc. Purchase of Madera Disposal Systems, Inc. Eugene V. Dupreau was President and a 16.7% shareholder of Madera Disposal Systems, Inc. before it was acquired by the Company on February 23, 1998. Charles B. Youngclaus was Chief Operating Officer and a 16.7% shareholder of Madera before it was acquired by the Company. For their shares of Madera's common stock, each of Messrs. Dupreau and Youngclaus received $630,662 in cash, 333,333 shares of the Company's Common Stock and warrants to purchase 66,667 shares of the Company's Common Stock at an exercise price of $4.00 per share. Each of Messrs. Dupreau and Youngclaus has been engaged by the Company as Vice President -- Madera. Mr. Dupreau was appointed a director of the Company, effective February 23, 1998. In addition, the Company is required to pay contingent consideration to certain former Madera shareholders, subject to their involvement in the events that give rise to the consideration, if the Company enters into certain specified business transactions by February 3, 2001. These shareholders may include Messrs. Dupreau and Youngclaus. Other Transactions. The Company has entered into certain transactions with Continental Paper, LLC, an Oregon limited liability company doing business as Fibres International ("Fibres"). J. Bradford Bishop and James N. Cutler, Jr. own 60% of the membership interests in Fibres, were directors of the Company when some of these transactions occurred and may be deemed promoters of the Company. In markets where Fibres has processing facilities (which include three of the Company's four current markets), the Company delivers to Fibres' processing facilities all of the Company's collected recyclable materials for which Fibres pays the market rate (adjusted to reflect the Company's costs of transporting the materials to Fibres or another processor) otherwise obtainable by the Company for such materials. The gross revenues received by the Company from Fibres from the Company's inception through December 31, 1997, were approximately $222,701. The net amount retained by the Company, after deducting the fees the Company paid to Fibres for the right to collect the recyclables, was approximately $10,860 for such period. 56 58 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the beneficial ownership of the Common Stock of the Company as of May 15, 1998, and after the sale of the shares of Common Stock offered hereby and the automatic conversion to Common Stock of all outstanding shares of Series A Preferred Stock, by: (i) each person or entity known to the Company to beneficially own more than 5% of the Company's Common Stock; (ii) Mr. Mittelstaedt and each director of the Company; and (iii) all current directors and executive officers of the Company as a group.
TO BE OWNED AFTER OWNED AS OF MAY 15, 1998 THE OFFERING NAME OF ------------------------- ----------------------- BENEFICIAL OWNER(1) NUMBER PERCENTAGE NUMBER PERCENTAGE ------------------- ---------- ----------- --------- ---------- James N. Cutler, Jr.(2)(3)(4)............. 923,750 26.9% 977,322 12.3% J. Bradford Bishop(2)(3)(4)............... 905,750 26.4 923,607 11.6 Ronald J. Mittelstaedt(2)(4)(5)........... 667,900 19.5 1,025,043 12.9 Frank W. Cutler(2)(3)(4).................. 522,000 15.2 672,246 8.5 Eugene V. Dupreau(2)(6)................... 397,000 11.6 397,000 5.0 Charles B. Youngclaus(2)(6)............... 375,000 10.9 375,000 4.7 Melvin G. Dias(2)(7)...................... 400,000 11.7 400,000 5.0 Imperial Bank(2)(8)....................... 200,000 5.8 200,000 2.5 Kieckhefer Partnership 84-1(2)(4)......... -- -- 562,104 7.1 Michael W. Harlan(2)...................... -- -- -- -- William J. Razzouk(2)..................... -- -- -- -- Eugene P. Polk(2)(9)...................... -- -- 468,418 5.9 All executive officers and directors as a group (9 persons)(4)(5)................. 1,533,900 44.7% 1,926,758 24.3%
- --------------- (1) Beneficial ownership is determined in accordance with the rules of the Commission, and includes generally voting power and/or investment power with respect to securities. Shares of Common Stock subject to options and/or warrants currently exercisable or exercisable within 60 days of the date hereof are deemed outstanding for computing the percentage beneficially owned by the person holding such options but are not deemed outstanding for computing the percentage beneficially owned by any other person. Except as otherwise indicated by footnote, the Company believes that the persons named in this table, based on information provided by such persons, have sole voting and investment power with respect to the shares of Common Stock shown. (2) The address of Mr. Mittelstaedt is 2260 Douglas Boulevard, Suite 280, Roseville, California 95661. The address of J. Bradford Bishop and James N. Cutler, Jr. is 6950 S.W. Hampton Street, Suite 200, Portland, Oregon 97223. The address of Kieckhefer Partnership 84-1 and Eugene P. Polk is P.O. Box 1151, Prescott, Arizona 86302. The address of Frank W. Cutler is 711 North Bayfront, Newport Beach, California 92662. The address of Eugene V. Dupreau, Charles B. Youngclaus and Melvin G. Dias is Madera Disposal Systems, Inc., 21739 Road 19, Chowchilla, California 93610. The address of Michael W. Harlan is 2777 Allen Parkway, Suite 700, Houston, Texas 77019. The address of William J. Razzouk is 165 Madison Avenue, Suite 1300, Memphis, Tennessee 38103. The address of Imperial Bank is 777 108th Avenue NE, Suite 1670, Bellevue, Washington 98004. (3) Includes 247,000 shares purchasable under currently exercisable warrants. (4) As of May 15, 1998, the Mittelstaedt Family Trust, J. Bradford Bishop, James N. Cutler, Jr., Kieckhefer Partnership 84-1, Kieckhefer Trust Partnership 61-1 and Frank W. Cutler beneficially owned 357,143, 17,857, 53,572, 562,104, 281,052 and 150,246 shares, respectively, of Series A Preferred Stock. Those shares automatically convert to the same number of shares of Common Stock on the closing of the offering. 57 59 (5) Includes 100,000 shares purchasable under currently exercisable warrants. Also includes 567,900 shares held by the Mittelstaedt Family Trust dated 6/18/97, of which Mr. Mittelstaedt is the Trustee. (6) Includes 66,667 shares purchasable under immediately exercisable warrants. (7) Includes 66,666 shares purchasable under immediately exercisable warrants. (8) Shares purchasable under currently exercisable warrants. (9) As of May 15, 1998, Eugene Polk beneficially owned 468,418 shares of Series A Preferred Stock: 285,713 through three trusts for which he serves as a trustee (190,562 shares -- Eugene P. Polk and Barbara J. Polk Revocable Trust U/A 11/18/68; 53,571 shares -- Margaret T. Morris Trust U/A 5/1/67; and 53,571 shares -- Margaret T. Morris Trust U/A 4/19/69) and 170,714 shares through the Polk Investment Partnership 93-1, for which he serves as a Manager. Those shares automatically convert to the same number of shares of Common Stock on the closing of the offering. 58 60 DESCRIPTION OF CAPITAL STOCK GENERAL The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, par value $0.01 per share, and 10,000,000 shares of Preferred Stock, par value $0.01 per share (the "Preferred Stock"). As of the date of this Prospectus, there are 3,432,726 shares of Common Stock outstanding and 2,499,998 shares of Series A Preferred Stock outstanding. The Series A Preferred shares will automatically convert to 2,499,998 shares of Common Stock upon the consummation of this offering. After giving effect to this offering, there will be 7,932,724 shares of Common Stock outstanding (8,232,724 if the Underwriters' over-allotment option is exercised in full). The following description of the Company's capital stock is a summary of the material terms of such stock. The following does not purport to be complete and is subject in all respects to applicable Delaware law and to the provisions of the Company's Amended and Restated Certificate of Incorporation and Amended and Restated By-laws. COMMON STOCK The holders of shares of Common Stock are entitled to one vote per share held on all matters submitted to a vote at a meeting of stockholders. Cumulative voting for the election of directors is not permitted. Subject to such preferences to which holders of shares of Preferred Stock, if any, may be entitled, the holders of outstanding shares of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. In the event of a liquidation, dissolution or winding up of the Company, the holders of outstanding shares of Common Stock are entitled to share ratably in all assets of the Company which are legally available for distribution to stockholders, subject to the prior rights on liquidation of creditors and to preferences, if any, to which holders of shares of Preferred Stock, if any, may be entitled. In connection with the acquisition of Madera, the Company issued 1,000,000 shares of Common Stock, which was redeemable under certain circumstances. Upon the consummation of this offering, those shares will no longer be redeemable. The holders of outstanding shares of Common Stock do not have any preemptive, subscription, redemption, conversion or sinking fund rights. The outstanding shares of Common Stock are fully paid and nonassessable. PREFERRED STOCK The Company is authorized by its Amended and Restated Certificate of Incorporation to issue a maximum of 10,000,000 shares of Preferred Stock, in one or more series and containing such rights, privileges and limitations, including dividend rights, voting rights, conversion privileges, redemption rights, liquidation rights and/or sinking fund rights, as may from time to time be determined by the Board of Directors of the Company. The Company has issued 2,499,998 shares of Series A Preferred Stock, which on the closing of this offering will convert automatically to 2,499,998 shares of Common Stock. The Series A Preferred Stock provides for cumulative dividends, which if not paid in cash prior to the Preferred Stock's conversion into Common Stock are to be paid in additional shares of Common Stock. The Company intends to pay any such accumulated dividends in cash prior to conversion. Additional Preferred Stock may be issued in the future in connection with acquisitions, financings or such other matters as the Board of Directors deems to be appropriate. The effect of having such Preferred Stock authorized is that the Company's Board of Directors alone, within the bounds and subject to the federal securities laws and the Delaware General Corporation Law (the "Delaware Law"), may be able to authorize the issuance of Preferred Stock, which may adversely affect the voting and other rights of holders of Common Stock. The issuance of Preferred Stock may also have the effect of delaying, deferring or preventing a change in control of the Company. 59 61 CERTAIN STATUTORY, CHARTER AND BY-LAW PROVISIONS The following brief description of certain provisions of the Delaware Law and the Company's Amended and Restated Certificate of Incorporation (the "Restated Certificate") and Amended and Restated By-laws (the "Restated By-laws") does not purport to be complete and is subject in all respects to the provisions of the Delaware Law, the Restated Certificate and the Restated By-laws, copies of which have been filed as exhibits to the Registration Statement of which this Prospectus forms a part. Classified Board of Directors. The Restated Certificate provides that the Board shall be divided into three classes and that the number of directors in each class shall be as nearly equal as is possible based on the number of directors constituting the entire Board. The Restated Certificate effectively provides that the term of office of the first class will expire at the annual meeting of stockholders following December 31, 1998, the term of office of the second class will expire at the annual meeting of stockholders following December 31, 1999, and the term of office of the third class will expire at the annual meeting of stockholders following December 31, 2000. At each annual meeting of stockholders, successors to directors of the class whose term expires at such meeting will be elected to serve for three-year terms and until their successors are elected and qualified. The classification of directors has the effect of making it more difficult for stockholders to change the composition of the Board. At least two annual meetings of stockholders, instead of one, will generally be required to effect a change in a majority of the Board. Such a delay may help ensure that the Company's directors, if confronted by a third party attempting to force a proxy contest, a tender or exchange offer or other extraordinary corporate transaction, would have sufficient time to review the proposal as well as any available alternatives to the proposal and to act in what they believe to be the best interests of the stockholders. However, such classification provisions could also have the effect of discouraging a third party from initiating a proxy contest, making a tender offer or otherwise attempting to obtain control of the Company, even though such an attempt might be beneficial to the Company and its stockholders. The classification of the Board could thus increase the likelihood that incumbent directors will retain their positions. Number of Directors; Removal; Filling Vacancies. The Restated Certificate provides that, subject to any rights of holders of Preferred Stock to elect additional directors under specified circumstances, the number of directors comprising the entire Board will be fixed from time to time by action of not less than a majority of the directors then in office. In no event shall such number be less than three or more than nine, unless approved by action of not less than two-thirds of the directors then in office. In addition, the Restated Certificate provides that, subject to any rights of holders of Preferred Stock, newly created directorships resulting from an increase in the authorized number of directors, vacancies on the Board resulting from death, resignation, retirement, disqualification or removal of directors or any other cause may be filled only by the Board (and not by the stockholders unless there are no directors in office), provided that a quorum is then in office and present, or by a majority of the directors then in office, if less than a quorum is then in office, or by the sole remaining director. Accordingly, the Board could prevent any stockholder from enlarging the Board and filling the new directorships with such stockholder's own nominees. Under the Delaware Law, unless otherwise provided in the certificate of incorporation, directors serving on a classified board may only be removed by the stockholders for cause. The Restated Certificate provides that following the offering, directors may be removed only for cause and only on the affirmative vote of holders of at least 66 2/3% of the voting power of all the then outstanding shares of stock entitled to vote generally in the election of directors ("Voting Stock"), voting together as a single class. The provisions of the Restated Certificate governing the number of directors, their removal and the filling of vacancies may have the effect of discouraging a third party from initiating a proxy contest, making a tender offer or otherwise attempting to gain control of the Company, or of attempting to change the composition or policies of the Board, even though such attempts might be 60 62 beneficial to the Company or its stockholders. These provisions of the Restated Certificate could thus increase the likelihood that incumbent directors retain their positions. Limitation on Special Meetings; No Stockholder Action by Written Consent. The Restated Certificate and the Restated By-laws provide that (subject to the rights, if any, of holders of any class or series of Preferred Stock then outstanding): (i) only a majority of the Board of Directors or the President or Chairman of the Board will be able to call a special meeting of stockholders; (ii) the business permitted to be conducted at a special meeting of stockholders shall be limited to matters stated in the notice of meeting or properly brought before the meeting by or at the direction of the Board of Directors; and (iii) following the offering, stockholder action may be taken only at a duly called and convened annual or special meeting of stockholders and may not be taken by written consent. These provisions, taken together, prevent stockholders from forcing consideration by the stockholders of stockholder proposals over the opposition of the Board, except at an annual meeting. Advance Notice Provisions for Stockholder Nominations and Stockholder Proposals. The Restated By-laws establish an advance notice procedure for stockholders to make nominations of candidates for election as director, or to bring other business before an annual meeting of stockholders of the Company (the "Stockholder Notice Procedure"). The Stockholder Notice Procedure provides that, subject to the rights of any holders of Preferred Stock, only persons who are nominated by or at the direction of the Board, any committee appointed by the Board, or by a stockholder who has given timely written notice to the Secretary of the Company prior to the meeting at which directors are to be elected, will be eligible for election as directors of the Company. The Stockholder Notice Procedure provides that at an annual meeting, only such business may be conducted as has been brought before the meeting by, or at the direction of, the Board, any committee appointed by the Board, or by a stockholder who has given timely written notice to the Secretary of the Company of such stockholder's intention to bring such business before such meeting. Under the Stockholder Notice Procedure, to be timely, notice of stockholder nominations or proposals to be made at an annual or special meeting must be received by the Company not less than 60 days nor more than 90 days prior to the scheduled date of the meeting (or, if less than 70 days' notice or prior public disclosure of the date of the meeting is given, then the 15th day following the earlier of: (i) the day such notice was mailed; or (ii) the day such public disclosure was made). Under the Stockholder Notice Procedure, a stockholder's notice to the Company proposing to nominate a person for election as director must contain certain information about the nominating stockholder and the proposed nominee, and a stockholder's notice relating to the conduct of business other than the nomination of directors must contain certain information about such business and about the proposing stockholder. If the Chairman or other officer presiding at a meeting determines that a person was not nominated, or other business was not brought before the meeting, in accordance with the Stockholder Notice Procedure, such person will not be eligible for election as a director, or such business will not be conducted at such meeting, as the case may be. By requiring advance notice of nominations by stockholders, the Stockholder Notice Procedure affords the Board an opportunity to consider the qualifications of the proposed nominees and, to the extent deemed necessary or desirable by the Board, to inform stockholders about such qualifications. By requiring advance notice of other proposed business, the Stockholder Notice Procedure also provides a more orderly procedure for conducting annual meetings of stockholders and, to the extent deemed necessary or desirable by the Board, provides the Board with an opportunity to inform stockholders, prior to such meetings, of any business proposed to be conducted at such meetings, together with any recommendations as to the Board's position regarding action to be taken with respect to such business, so that stockholders can better decide whether to attend such a meeting or to grant a proxy regarding the disposition of any such business. 61 63 Although the Restated By-laws do not give the Board any power to approve or disapprove stockholder nominations for the election of directors or proposals for action, the forgoing provisions may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, if the proper advance notice procedures are not followed, without regard to whether consideration of such nominees or proposals might be harmful or beneficial to the Company and its stockholders. Certain Provisions Relating to Potential Change of Control. The Restated Certificate authorizes the Board and any committee of the Board to take such action as it may determine to be reasonably necessary or desirable to encourage any person or entity to enter into negotiations with the Board and management regarding any transaction which may result in a change of control of the Company, or to contest or oppose any such transaction which the Board determines to be unfair, abusive or otherwise undesirable to the Company, its business, assets, properties or stockholders. The Board or any such committee is specifically authorized to adopt plans or to issue securities of the Company including plans, rights, options, capital stock, notes, debentures or other debt securities, which securities may be exchangeable or convertible into cash or other securities on such terms and conditions as the Board or any such committee determines. In addition, the Board or such committee of the Board may provide that any holder or class of holders of such designated securities will be treated differently than, and unequally to, all other security holders in respect of the terms, conditions, provisions and rights of such securities. The existence of this authority or the actions which may be taken by the Board pursuant thereto are intended to give the Board flexibility in order to act in the best interests of stockholders in the event of a potential change of control transaction. Such provisions may, however, deter potential acquirors from proposing unsolicited transactions not approved by the Board and might enable the Board to hinder or frustrate such a transaction if proposed. Limitation of Liability of Directors. The Restated Certificate provides that a director will not be personally liable to the Company or its stockholders for monetary damages for any breach of fiduciary duty as a director, except for liability: (i) for any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Section 174 of the Delaware Law, which concerns unlawful payments of dividends, stock purchases or redemptions; or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware Law is subsequently amended to permit further limitation of the personal liability of directors, the liability of a director of the Company will be eliminated or limited to the fullest extent permitted by the Delaware Law as so amended. Amendment of the Certificate of Incorporation and By-laws. The Restated Certificate contains provisions requiring the affirmative vote of the holders of at least 66 2/3% of the voting power of the Voting Stock to amend certain provisions of the Restated Certificate (including the provisions discussed above relating to the size and classification of the Board, replacement and/or removal of Board members, action by written consent, special stockholder meetings, the authorization for the Board to take steps to encourage or oppose, as the case may be, transactions which may result in a change of control of the Company, and limitation of the liability of directors) or to amend any provision of the Restated By-laws by action of stockholders following the offering. These provisions make it more difficult for stockholders to make changes in the Restated Certificate and the Restated By-laws, including changes designed to facilitate the exercise of control over the Company. Business Combination Provisions of Delaware Law. The Company is a Delaware corporation and is subject to section 203 of the Delaware Law. In general, section 203 prevents a Delaware corporation from engaging in a "business combination" (as defined) with an "interested stockholder" (defined generally as a person owning 15% or more of a corporation's outstanding voting stock or affiliate or associate) for three years following the time such stockholder became an 62 64 interested stockholder, unless: (i) before such person became an interested stockholder, the board of directors of the corporation approved the business combination or the transaction in which the interested stockholder became an interested stockholder; (ii) upon consummation of the transaction that resulted in the interested stockholder's becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding stock held by directors who are also officers of the corporation and by employee stock plans that do not provide employees with the rights to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer); or (iii) at or subsequent to the time such person became an interested stockholder, the business combination was approved by the board of directors of the corporation and authorized at a meeting of stockholders by the affirmative vote of the holders of 66 2/3% of the outstanding voting stock of the corporation not owned by the interested stockholder. Under section 203, the restrictions described above also do not apply to certain business combinations proposed by an interested stockholder following the announcement or notification of one of certain extraordinary transactions involving the corporation and a person who had not been an interested stockholder during the previous three years or who became an interested stockholder with the approval of a majority of the corporation's directors, if such extraordinary transaction is approved or not opposed by a majority of the directors who were directors prior to any person becoming an interested stockholder during the previous three years or were recommended for election or elected to succeed such directors by a majority of such directors. TRANSFER AGENT AND REGISTRAR BankBoston, N.A., c/o Boston EquiServe, L.P., will serve as transfer agent and registrar for the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this offering, the Company will have 7,932,724 shares of Common Stock outstanding. All of the shares offered hereby will be freely saleable in the public market after completion of this offering, unless acquired by affiliates of the Company. All of the shares outstanding prior to completion of this offering are subject to contractual restrictions that prohibit the stockholder from selling or otherwise disposing of shares for a period of 180 days after the date of this Prospectus without the prior written consent of BT Alex. Brown Incorporated. After this 180-day period expires, 4,749,998 of the currently outstanding shares will be eligible for resale in the public market under Rule 144 promulgated under the Securities Act, an additional 1,000,000 of the currently outstanding shares will become eligible for resale in the public market in February 1999, an additional 132,726 of the currently outstanding shares will become eligible for resale in the public market later in 1999, and an additional 50,000 of the currently outstanding shares will become eligible for resale in the public market ratably over three years, in each case subject to the restrictions of Rule 144. Shares of Common Stock held by affiliates of the Company will be subject to certain volume and other limitations discussed below under Rule 144. The Company has agreed not to sell, contract to sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus, except as consideration for business acquisitions, upon exercise of currently outstanding stock options or warrants or upon the issuance of options to employees, consultants and directors under the Company's 1997 Stock Option Plan, and the exercise of such options, without the prior written consent of BT Alex. Brown Incorporated. In general, under Rule 144, a person (or persons whose shares are aggregated), including persons who may be deemed affiliates of the Company, who has beneficially owned his or her shares for at least one year is entitled to sell within any three-month period that number of shares which does not exceed the greater of 1% of the outstanding shares of the Common Stock (79,327 shares 63 65 after completion of this offering) or the average weekly trading volume during the four calendar weeks preceding each such sale. Sales under Rule 144 also are subject to certain manner of sale provisions, notice requirements and the availability of current public information about the Company. Under Rule 144(k), a person (or persons whose shares are aggregated) who is not or has not been deemed an "affiliate" of the Company for at least three months and who has beneficially owned his or her shares for at least two years would be entitled to sell such shares under Rule 144 without regard to the limitations discussed above. There has been no public market for the Common Stock prior to this offering and no assurance can be given that an active public market for the Common stock will develop or be sustained after completion of this offering. Sales of substantial amounts of the Common Stock, or the perception that such sales could occur, could adversely affect the prevailing market price of the Common Stock and could impair the Company's ability to raise capital or effect acquisitions through the issuance of Common Stock. After the completion of this offering, the Company intends to file a registration statement under the Securities Act to register all shares issuable on exercise of stock options or other awards granted or to be granted under its Stock Option Plan. After the filing of such registration statement and subject to certain restrictions under Rule 144, those shares will be freely saleable in the public market immediately following exercise of such options. The Company currently intends to file a shelf registration statement covering up to an additional 3,000,000 shares of Common Stock under the Securities Act, for its use in connection with acquisitions that may be made by the Company. Such shares, when issued, could be freely saleable in the public market 180 days after the date of this Prospectus, or earlier on prior approval of BT Alex. Brown Incorporated by persons not affiliated with the Company, unless the Company contractually restricts their resale. See "Underwriting." 64 66 UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below (the "Underwriters"), through their Representatives, BT Alex. Brown Incorporated and CIBC Oppenheimer Corp., have severally agreed to purchase from the Company the following respective number of shares of Common Stock at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus:
NUMBER OF UNDERWRITER SHARES ----------- --------------- BT Alex. Brown Incorporated................................. CIBC Oppenheimer Corp....................................... Total............................................. 2,000,000 ==========
The Underwriting Agreement provides that the obligations of the Underwriters are subject to certain conditions precedent and that the Underwriters will purchase all of the shares of Common Stock offered hereby if any of such shares are purchased. The Company has been advised by the Representatives of the Underwriters that the Underwriters propose to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per share to certain other dealers. After commencement of the initial public offering, the offering price and other selling terms may be changed by the Representatives of the Underwriters. The Company has granted the Underwriters an option, exercisable not later than 30 days after the date of this Prospectus, to purchase up to 300,000 additional shares of Common Stock at the initial public offering price less the underwriting discounts and commissions set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise such option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the above table bears to the total number of shares offered by the Company hereunder, and the Company will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the Common Stock offered hereby. If purchased, such additional shares will be offered by the Underwriters on the same terms as those on which the 2,000,000 shares are being offered. To facilitate the offering of the Common Stock, the Underwriters may engage in transactions that stabilize, maintain or otherwise affect the market price of the Common Stock. Specifically, the Underwriters may over-allot shares of the Common Stock in connection with the offering, thereby creating a short position in the Underwriters' syndicate account. Additionally, to cover such over- allotments or to stabilize the market price of the Common Stock, the Underwriters may bid for, and purchase, shares of the Common Stock in the open market. Any of these activities may maintain the market price of the Common Stock at a level above that which might otherwise prevail in the open market. The Underwriters are not required to engage in these activities, and, if commenced, any such activities may be discontinued at any time. The Representatives, on behalf of the syndicate of Underwriters, also may reclaim selling concessions allowed to an Underwriter or dealer, if the syndicate repurchases shares distributed by that Underwriter or dealer. 65 67 The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act. The Company has agreed not to sell, contract to sell or otherwise dispose of any shares of Common Stock for a period of 180 days after the date of this Prospectus, except as consideration for business acquisitions, upon exercise of currently outstanding stock options or warrants, or upon the issuance of options to employees, consultants and directors under the Company's 1997 Stock Option Plan, and the exercise of such options, without the prior written consent of BT Alex. Brown Incorporated. All stockholders, directors and officers of the Company have agreed not to sell, contract to sell or otherwise dispose of any shares of Common Stock for a period of 180 days without the prior written consent of BT Alex. Brown Incorporated. The Representatives of the Underwriters have advised the Company that they do not intend to confirm sales to any account over which they exercise discretionary authority. Prior to this offering, there has been no public market for the Common Stock of the Company. Consequently, the initial public offering price will be determined by negotiations between the Company and the Representatives of the Underwriters. Among the factors to be considered in such negotiations are prevailing market conditions, the results of operations of the Company in recent periods, the market capitalizations and stages of development of other companies that the Company and the Representatives believe to be comparable to the Company, estimates of the business potential of the Company, the present state of the Company's development and other factors deemed relevant. LEGAL MATTERS The validity of the issuance of the shares of Common Stock offered hereby will be passed upon for the Company by Shartsis, Friese & Ginsburg LLP, San Francisco, California. Certain legal matters related to this offering will be passed upon for the Underwriters by Piper & Marbury L.L.P., Baltimore, Maryland. The statements pertaining to the Company's G certificates awarded by the WUTC under "Risk Factors -- Highly Competitive Industry," "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General," "Business -- Industry Overview," and "Business -- G Certificates" will be passed upon for the Company by Williams, Kastner & Gibbs PLLC, Seattle, Washington. EXPERTS The financial statements of Waste Connections, Inc. and Predecessors as of December 31, 1996 and 1997, and for each of the three years in the period ended December 31, 1997, and the Financial Statements of Madera Disposal Systems, Inc. at December 31, 1996 and 1997, and for each of the three years in the period ended December 31, 1997, appearing in this Prospectus and Registration Statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere in this Prospectus and Registration Statement. Such financial statements have been included in this Prospectus in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company has filed with the Commission a Registration Statement (of which the Prospectus is a part) on Form S-1 (together with all amendments thereto, the "Registration Statement"), under the Securities Act with respect to the shares of Common Stock offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and the exhibits and schedules filed therewith, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. Statements contained in this Prospectus regarding the contents of 66 68 any contract or other document filed as an exhibit to the Registration Statement are not necessarily complete and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement, each such statement being deemed to be qualified in its entirety by such reference. For further information with respect to the Company and the Common Stock offered hereby, reference is hereby made to the Registration Statement and to the exhibits and schedules filed therewith. The Registration Statement, including all exhibits and schedules thereto, may be inspected without charge at the principal office of the Commission located at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material may be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Room 1204, Washington, D.C. 20549, at prescribed rates. The Commission maintains a World Wide Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the Commission's web-site is http:\\www.sec.gov. 67 69 INDEX TO FINANCIAL STATEMENTS
PAGE ---- WASTE CONNECTIONS, INC. UNAUDITED PRO FORMA FINANCIAL STATEMENTS Introduction to Unaudited Pro Forma Consolidated Financial Statements............................................. F-3 Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 1997................... F-4 Unaudited Pro Forma Consolidated Statement of Operations for the three months ended March 31, 1998.............. F-5 Notes to Unaudited Pro Forma Consolidated Statements of Operations............................................. F-6 Unaudited Pro Forma Consolidated Balance Sheet as of March 31, 1998............................................... F-9 Notes to Unaudited Pro Forma Consolidated Balance Sheet... F-10 WASTE CONNECTIONS, INC. AND PREDECESSORS Report of Ernst & Young LLP, Independent Auditors......... F-11 Combined Balance Sheet of Predecessors as of December 31, 1996................................................... F-12 Consolidated Balance Sheet of Waste Connections, Inc. as of December 31, 1997 (Audited) and March 31, 1998 (Unaudited)............................................ F-12 Combined Statement of Operations of Predecessors for the nine months ended September 30, 1997................... F-13 Consolidated Statement of Operations of Waste Connections, Inc. for the period from inception (September 9, 1997) through December 31, 1997 (Audited) and the three months ended March 31, 1997 and 1998 (Unaudited)....... F-13 Combined Statement of Operations of The Disposal Group for the period from January 1, 1996 through July 31, 1996................................................... F-14 Combined Statement of Operations of Predecessors for the period ended December 31, 1996......................... F-14 Combined Statement of Operations of The Disposal Group for the year ended December 31, 1995....................... F-15 Statement of Operations of Fibres International, Inc. for the period from January 1, 1995 through November 30, 1995................................................... F-15 Statement of Operations of Predecessors for the one month ended December 31, 1995................................ F-15 Consolidated Statement of Redeemable Stock and Stockholders' Equity (Deficit) of Waste Connections, Inc. for the period from inception (September 9, 1997) through December 31, 1997 (Audited) and the three months ended March 31, 1998 (Unaudited)................ F-16 Combined Statement of Cash Flows of Predecessors for the nine months ended September 30, 1997................... F-17 Consolidated Statement of Cash Flows of Waste Connections, Inc. for the period from inception (September 9, 1997) through December 31, 1997 (Audited) and the three months ended March 31, 1997 and 1998 (Unaudited)....... F-17 Combined Statement of Cash Flows of The Disposal Group for the period from January 1, 1996 through July 31, 1996................................................... F-18 Combined Statement of Cash Flows of Predecessors for the period ended December 31, 1996......................... F-18 Combined Statement of Cash Flows of The Disposal Group for the year ended December 31, 1995....................... F-19 Statement of Cash Flows of Fibres International, Inc. for the period from January 1, 1995 through November 30, 1995................................................... F-19 Statement of Cash Flows of Predecessors for the one month ended December 31, 1995................................ F-19 Notes to Financial Statements............................. F-20
F-1 70
PAGE ---- MADERA DISPOSAL SYSTEMS, INC. Report of Ernst & Young LLP, Independent Auditors......... F-41 Balance sheets as of December 31, 1996 and 1997........... F-42 Statements of income and retained earnings for the years ended December 31, 1995, 1996 and 1997................. F-43 Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997.................................... F-44 Notes to Financial Statements............................. F-45
F-2 71 WASTE CONNECTIONS, INC. INTRODUCTION TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The following Unaudited Pro Forma Consolidated Balance Sheet as of March 31, 1998 gives effect to this offering and the Unaudited Pro Forma Consolidated Statements of Operations for the year ended December 31, 1997 and the three months ended March 31, 1998, give effect to this offering and the business combinations involving Waste Connections, Inc., (the "Company"), its predecessors, Waste Connections of Idaho, Inc. ("WCII"), its predecessors and Madera Disposal Systems, Inc. ("Madera"). Such combinations were accounted for using the purchase method of accounting. The Unaudited Pro Forma Consolidated Balance Sheet is presented as if this offering had occurred on March 31, 1998, and the Pro Forma Consolidated Statements of Operations for the year ended December 31, 1997 and for the three months ended March 31, 1998 are presented as if this offering and the Company's acquisitions of its predecessors, WCII and its predecessors and Madera had occurred as of January 1, 1997. The Company has preliminarily analyzed the savings that it expects to be realized by consolidating certain operational and general and administrative functions. The Company has not and cannot quantify all of these savings due to the short period of time since the predecessor, Madera and WCII acquisitions occurred. It is anticipated that these savings will be partially offset by the costs of being a publicly held company and the incremental increase in costs related to the Company's corporate management. However, these costs, like the savings they offset, cannot be quantified accurately. Neither the anticipated savings nor the anticipated costs have been included in the Unaudited Pro Forma Consolidated Financial Statements. The Unaudited Pro Forma Consolidated Financial Statements include certain adjustments to the historical combined financial statements of the predecessors, including adjusting depreciation expense to reflect purchase price allocations, reducing interest expense to reflect retirement of the outstanding acquisition-related debt with the proceeds of this offering and the related income tax effects of these adjustments. The pro forma adjustments are based on preliminary estimates, available information and certain assumptions and may be revised as additional information becomes available. The Unaudited Pro Forma Consolidated Financial Statements do not purport to represent what the Company's financial position or results of operations would actually have been if such transactions in fact had occurred on those dates or to project the Company's financial position or results of operations for any future period. Because the Company, its predecessors, Madera, and WCII and its predecessors were not under common control or management for all periods, historical combined results may not be comparable to, or indicative of, future performance. The Unaudited Pro Forma Consolidated Financial Statements should be read in conjunction with the other financial statements and notes thereto included elsewhere in this Prospectus, as well as information included under the headings "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" included elsewhere herein. F-3 72 WASTE CONNECTIONS, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
PRO FORMA WASTE ADJUSTED WASTE CONNECTIONS, WASTE CONNECTIONS INC. CONNECTIONS, OF IDAHO, INC. PERIOD FROM PRO FORMA INC. AND MADERA PREDECESSORS INCEPTION PREDECESSORS ADJUSTMENTS PREDECESSORS DISPOSAL COMBINED (SEPTEMBER COMBINED NINE TO COMBINE WASTE COMBINED SYSTEMS, INC. NINE MONTHS 9, 1997) TO MONTHS ENDED CONNECTIONS, YEAR ENDED YEAR ENDED ENDED DECEMBER 31, SEPTEMBER 30, INC. AND DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1997 1997 PREDECESSORS 1997 1997 1997 ------------ ------------- ---------------- -------------- ------------- -------------- Revenues.................... $ 6,237 $18,114 $ -- $24,351 $7,845 $2,053 Operating expenses: Cost of operations......... 4,703 14,753 (146)(a) 19,015 5,289 1,377 (195)(b) (100)(c) Selling, general and administrative........... 619 3,009 (570)(d) 2,926 1,041 312 (132)(e) Depreciation and amortization............. 354 1,083 81(f) 1,416 627 307 (102)(g) Start-up and integration... 493 -- -- 493 -- -- Stock compensation......... 4,395 -- -- 4,395 -- -- --------- ------- ------ ------- ------ ------ Income (loss) from operations................. (4,327) (731) 1,164 (3,894) 888 57 Interest expense............ (1,035) (456) 456(h) (1,253) (280) -- (218)(h) Other income (expense), net........................ (36) 14 -- (22) 173 -- --------- ------- ------ ------- ------ ------ Income (loss) before (provision) benefit for income taxes............... (5,398) (1,173) 1,402 (5,169) 781 57 (Provision) benefit for income taxes............... 332 -- (561)(i) 240 -- -- 469(j) --------- ------- ------ ------- ------ ------ Net income (loss)........... $ (5,066) $(1,173) $1,310 $(4,929) $ 781 $ 57 ========= ======= ====== ======= ====== ====== Redeemable convertible preferred stock accretion.................. $ (531) --------- Net loss applicable to common stockholders........ $ (5,597) ========= Basic net loss per common share...................... $ (2.99) ========= Shares used in the per share calculation................ 1,872,567 ========= WASTE CONNECTIONS OF IDAHO, INC. PERIOD FROM INCEPTION (SEPTEMBER 25, 1997) TO PRO FORMA DECEMBER 31, PRO FORMA AS 1997 ADJUSTMENTS ADJUSTED -------------- ----------- --------- Revenues.................... $764 $ -- $ 35,013 Operating expenses: Cost of operations......... 433 -- 26,114 Selling, general and administrative........... 56 (83)(k) 4,252 Depreciation and amortization............. 94 (377)(l) 2,431 364(m) Start-up and integration... -- -- 493 Stock compensation......... -- -- 4,395 ---- -------- --------- Income (loss) from operations................. 181 96 (2,672) Interest expense............ (50) 280(n) -- (897)(o) 2,200(p) Other income (expense), net........................ -- -- 151 ---- -------- --------- Income (loss) before (provision) benefit for income taxes............... 131 1,679 (2,521) (Provision) benefit for income taxes............... (52) (297)(q) (781) (672)(i) ---- -------- --------- Net income (loss)........... $ 79 $ 710 $ (3,302) ==== ======== ========= Redeemable convertible preferred stock accretion.................. $ -- --------- Net loss applicable to common stockholders........ $ (3,302) ========= Basic net loss per common share...................... $ (0.45) ========= Shares used in the per share calculation................ 7,372,565 =========
See accompanying notes. F-4 73 WASTE CONNECTIONS, INC. UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
WASTE CONNECTIONS, INC. MADERA WASTE CONSOLIDATED DISPOSAL CONNECTIONS, THREE SYSTEMS, INC. OF IDAHO MONTHS INC. ONE ONE ENDED MONTH ENDED MONTH ENDED PRO FORMA MARCH 31, JANUARY 31, JANUARY 31, PRO FORMA COMBINED 1998 1998 1998 ADJUSTMENTS AS ADJUSTED ------------ ----------------- ------------- ----------- ----------- Revenues........................ $ 7,601 $ 611 $250 $ -- $ 8,462 Operating expenses: Cost of operations............ 5,397 412 208 -- 6,017 Selling, general and administrative............. 770 112 34 (19)(k) 897 Depreciation and amortization............... 541 69 32 (19)(l)(m) 623 Stock compensation............ 320 -- -- -- 320 --------- ----- ---- ----- --------- Income (loss) from operations... 573 18 (24) 38 605 Interest expense................ (301) (289) (7) 597(p) -- Other income (expense), net..... -- 16 -- -- 16 --------- ----- ---- ----- --------- Income (loss) before (provision) benefit for income taxes...... 272 (255) (31) 635 621 (Provision) benefit for income taxes......................... (237) -- 19 (159)(q)(i) (377) --------- ----- ---- ----- --------- Net income (loss)............... $ 35 $(255) $(12) $ 476 $ 244 ========= ===== ==== ===== ========= Redeemable convertible preferred stock accretion............... $ (572) $ -- --------- --------- Net income (loss) applicable to common stockholders........... $ (537) $ 244 ========= ========= Basic net income (loss) per common share.................. $ (0.23) $ 0.03 ========= ========= Diluted net income per share.... $ 0.03 ========= Shares used in the per share calculations: Basic......................... 2,311,111 7,811,109 ========= ========= Diluted....................... 8,835,415 =========
See accompanying notes. F-5 74 WASTE CONNECTIONS, INC. NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) ASSUMPTIONS. The unaudited pro forma consolidated statements of operations for the year ended December 31, 1997, and for the three months ended March 31, 1998 are presented as if the acquisitions of the Company's and WCII's predecessors, WCII and Madera had occurred on January 1, 1997. ACQUISITIONS. The acquisitions are being accounted for under the purchase method of accounting for business combinations. Certain items affecting the purchase prices and their allocations are preliminary. The preliminary purchase prices of WCII and Madera consist of the following:
WCII MADERA ------ -------- Cash paid to shareholders.............................. $ 3 $6,949 Common stock issued.................................... -- 7,500 Pay-off of long-term debt and capital lease obligations.......................................... -- 2,630 Liabilities assumed.................................... 1,943 1,626 Acquisition costs...................................... -- 180 Common stock warrants issued........................... -- 954 ------ -------- $1,946 $19,839 ====== ========
The Company has preliminary allocated the purchase prices as follows:
WCII MADERA ------ -------- Tangible assets purchased.............................. $1,946 $4,534 Goodwill............................................... -- 14,580 Long-term franchise agreements and contracts........... -- 725 ------ -------- $1,946 $19,839 ====== ========
PRO FORMA ADJUSTMENTS. The following adjustments have been made to the unaudited pro forma consolidated statements of operations: (a) To eliminate BFI corporate environmental expense allocation related to BFI landfill closure costs which do not exist for the Company. (b) To record amortization of the loss contract accrual that was recorded in connection with the acquisitions of the predecessor operations. The loss contract accrual is being amortized to operating expenses over the related terms of the loss contracts which range from 6 to 65 months. The loss contract accrual represents the estimated incremental losses to the Company related to certain unfavorable contracts the Company acquired in connection with the acquisition of the predecessor operations. (c) To reduce facilities lease expense to the amounts provided for in the sublease agreement entered into with BFI in connection with the acquisitions of the predecessor operations. The sublease agreement was directly attributable to, a required element of, and a condition to the closing of the acquisition. (d) To reduce BFI corporate overhead expense allocations to the amount of corporate overhead currently being incurred by the Company. (e) To eliminate consulting expenses incurred by BFI related to the acquisition of The Disposal Group which the Company did not assume in connection with the acquisitions of F-6 75 WASTE CONNECTIONS, INC. NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) the predecessors. The non-assumption of the consulting agreement was directly attributable to, a required element of, and a condition to the closing of the acquisition. (f) To increase depreciation for the increase in the property and equipment's carrying value to fair value. (g) To decrease goodwill amortization for the lower goodwill amount recorded by the Company in connection with its acquisition of the predecessor operations. (h) To eliminate the predecessor's interest expense and record interest expense on the debt obligations incurred by the Company in connection with the acquisitions of the predecessors. (i) To record the estimated tax provision associated with the pro forma adjustments using the Company's estimated effective tax rate of 40%. (j) To record an income tax benefit for the net operating loss incurred by the predecessors for the nine months ended September 30, 1997 using the Company's effective tax rate of 40%. (k) To adjust officers' salaries to levels provided for in the new employment agreements which were directly attributable to, required elements of, and a condition to the closing of the Madera acquisition. (l) To reduce depreciation for the reduction in the property and equipment's carrying value to fair value. (m) To increase goodwill amortization for the increase in goodwill resulting from the Madera acquisition. Goodwill is being amortized over a term of 40 years. (n) To eliminate interest expense associated with the outstanding debt obligations of Madera which were paid-off in connection with the acquisition. (o) To record interest expense on the additional long-term debt obligations incurred by the Company in connection with the Madera acquisition. (p) To eliminate all interest expense, as the offering proceeds will be used to pay off all outstanding debt obligations of the Company. (q) To record income taxes for Madera, which was a subchapter S corporation for income tax purposes for all periods prior to its acquisition by the Company. The effective income tax rate used was 38%. F-7 76 WASTE CONNECTIONS, INC. NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AMOUNTS) PRO FORMA PER SHARE DATA. The shares used in computing the unaudited pro forma net income (loss) per share for the year ended December 31, 1997, and the three months ended March 31, 1998 are based upon the pro forma number of common shares as summarized in the table below. See Note 1 of the Company's Notes to Financial Statements included elsewhere herein for information concerning the computation of basic and diluted net income (loss) per share.
THREE MONTHS YEAR ENDED ENDED DECEMBER 31, MARCH 31, 1997 1998 ------------ ------------ Company weighted average shares outstanding.... 1,872,567 2,311,111 Shares issued in connection with the acquisition of Madera........................ 1,000,000 1,000,000 Shares issuable upon conversion of redeemable Convertible Preferred Stock.................. 2,499,998 2,499,998 Shares issuable in connection with the offering..................................... 2,000,000 2,000,000 ---------- ----------- Shares used in calculating pro forma basic net income (loss) per share...................... 7,372,565 7,811,109 ========== Dilutive effect of employee stock options and stock purchase warrants...................... 1,024,306 ----------- Shares used in calculating pro forma diluted net income per share......................... 8,835,415 ===========
ACQUISITION COSTS. The Company incurred costs of $180 related to the Madera acquisition, which have been factored into the purchase price. Costs incurred by Madera were expensed as incurred. CONTINGENT PAYMENTS. In connection with the Madera acquisition the Company is required to pay contingent consideration to certain former Madera shareholders, subject to their involvement in specified events that give rise to the consideration. No amounts related to these contingent payments have been included in the pro forma financial statements as the events which would give rise to such payments have not yet occurred. OTHER. The Professional Cleaning business of Madera ceased operations in July 1997. This business had revenues of $193 and an operating loss of $215 during the year ended December 31, 1997. Shortly before the acquisition of the predecessor operations by the Company, BFI amended a franchise agreement with a municipality which provided for a reduction in the franchise fees. Had this amended franchise agreement been in effect as of January 1, 1997, pro forma cost of operations would have been approximately $135 lower during the year ended December 31, 1997. F-8 77 WASTE CONNECTIONS, INC. UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET MARCH 31, 1998 (IN THOUSANDS)
WASTE CONNECTIONS, INC. PRO FORMA PRO FORMA CONSOLIDATED ADJUSTMENTS AS ADJUSTED ------------------ ----------- ----------- ASSETS Current assets: Cash.......................................... $ 2,386 $ 19,260(1) $ 5,234 (123)(2) (16,289)(2) Accounts receivable, net...................... 4,198 -- 4,198 Prepaid expenses and other current assets..... 1,061 -- 1,061 ------- -------- ------- Total current assets.................. 7,645 2,848 10,493 Property and equipment, net..................... 7,316 -- 7,316 Goodwill, net................................... 24,935 -- 24,935 Other assets.................................... 1,137 -- 1,137 ------- -------- ------- $41,033 $ 2,848 $43,881 ======= ======== ======= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.............................. $ 3,661 $ -- $ 3,661 Deferred revenue.............................. 972 -- 972 Accrued liabilities........................... 1,701 -- 1,701 Current portion of accrued losses on acquired contracts.................................. 323 -- 323 ------- -------- ------- Total current liabilities............. 6,657 -- 6,657 Accrued losses on acquired contracts............ 1,149 -- 1,149 Long-term debt, net............................. 16,289 (16,289)(2) -- Deferred income taxes........................... 162 -- 162 Redeemable convertible preferred stock.......... 8,095 (123)(2) -- (7,972)(3) Redeemable common stock......................... 7,500 (7,500)(4) -- Stockholders' equity (deficit): Common stock.................................. 24 20(1) 79 25(3) 10(4) Additional paid-in capital.................... 8,114 19,240(1) 42,791 7,947(3) 7,490(4) Stockholder notes receivable.................. (82) -- (82) Deferred stock compensation................... (741) -- (741) Accumulated deficit........................... (6,134) -- (6,134) ------- -------- ------- Total stockholders' equity (deficit)........................... 1,181 34,732 35,913 ------- -------- ------- $41,033 $ 2,848 $43,881 ======= ======== =======
See accompanying notes. F-9 78 WASTE CONNECTIONS, INC. NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE AMOUNTS) ASSUMPTIONS. The unaudited pro forma consolidated balance sheet as of March 31, 1998 is presented as if the Company's initial public offering had occurred on March 31, 1998. PRO FORMA ADJUSTMENTS. The following adjustments have been made to the unaudited pro forma consolidated balance sheet to reflect the Company's initial public offering: (1) Issuance of 2,000,000 shares of Common Stock with estimated net proceeds of $19,260 (2) Pay-off of all outstanding debt obligations of the Company ($16,868) and accumulated preferred stock dividends ($123) (3) Conversion of 2,499,998 shares of redeemable Series A Preferred Stock into 2,499,998 shares of Common Stock which automatically converts upon the Company's initial public offering. (4) Reclassification of 1,000,000 shares of redeemable Common Stock to Common Stock since the Company's initial public offering will cause the redemption feature to be cancelled. F-10 79 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Stockholders Waste Connections, Inc. We have audited the accompanying financial statements of Waste Connections, Inc. and Predecessors as of December 31, 1996 and 1997, and for each of the three years in the period ended December 31, 1997 which appear on pages F-12 through F-19 herein as listed in the accompanying Index to Financial Statements. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Waste Connections, Inc. and Predecessors at December 31, 1996 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Sacramento, California March 6, 1998 F-11 80 WASTE CONNECTIONS, INC. AND PREDECESSORS BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
WASTE CONNECTIONS, INC. CONSOLIDATED ----------------------------------------------- PRO FORMA REDEEMABLE PREDECESSORS STOCK AND COMBINED STOCKHOLDERS' EQUITY DECEMBER 31, DECEMBER 31, MARCH 31, MARCH 31, 1996 (NOTE 1) 1997 1998 1998 (NOTE 14) ------------- ------------ --------- -------------------- (UNAUDITED) ASSETS Current assets: Cash.............................................. $ 102 $ 820 $ 2,386 Accounts receivable, less allowance for doubtful accounts of $56 at March 31, 1998 and $19 at December 31, 1997 ($81 in 1996)................. 2,650 3,940 4,198 Prepaid expenses and other current assets......... 339 358 1,061 ------- ------- -------- Total current assets........................ 3,091 5,118 7,645 Property and equipment, net......................... 5,069 4,185 7,316 Goodwill, net....................................... 6,762 9,408 24,935 Other assets........................................ 369 169 1,137 ------- ------- -------- $15,291 $18,880 $ 41,033 ======= ======= ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable.................................. $ 1,025 $ 2,609 $ 3,661 Deferred revenue.................................. 564 597 972 Accrued liabilities............................... 634 825 1,701 Current portion of accrued losses on acquired contracts....................................... 119 251 323 Current portion of long-term debt................. 54 -- -- ------- ------- -------- Total current liabilities................... 2,396 4,282 6,657 Accrued losses on acquired contracts................ -- 702 1,149 Long-term debt...................................... 89 6,762 16,289 Deferred income taxes............................... -- 162 162 Commitments and contingencies (Note 7) Redeemable convertible preferred stock: $.01 par value; 2,500,000 shares authorized; 2,499,998 shares issued and outstanding at December 31, 1997 and March 31, 1998; no shares issued and outstanding pro forma (aggregate liquidation preference of $10,500 at December 31, 1997 and March 31, 1998)................................... -- 7,523 8,095 $ -- ======= Redeemable common stock $.01 par value; no shares issued and outstanding at December 31, 1997; 1,000,000 shares issued and outstanding at March 31, 1998; and no shares issued and outstanding pro forma............................................. -- -- 7,500 $ -- ======= Net intercompany balance............................ 12,806 -- -- -- Stockholders' equity (deficit): Preferred stock: $.01 par value; 7,500,000 shares authorized; none issued and outstanding actual and pro forma................................... -- -- -- -- Common stock: $.01 par value; 50,000,000 shares authorized; 2,300,000 shares issued and outstanding at December 31, 1997; 2,350,000 shares issued and outstanding at March 31, 1998; 5,849,998 shares issued and outstanding pro forma........................................... -- 23 24 59 Additional paid-in capital........................ -- 5,105 8,114 23,674 Stockholder notes receivable...................... -- (82) (82) (82) Deferred stock compensation....................... -- -- (741) (741) Accumulated deficit............................... -- (5,597) (6,134) (6,134) ------- ------- -------- ------- Total stockholders' equity (deficit)........ -- (551) 1,181 $16,776 ------- ------- -------- ======= $15,291 $18,880 $ 41,033 ======= ======= ========
See accompanying notes. F-12 81 WASTE CONNECTIONS, INC. AND PREDECESSORS STATEMENTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 (AUDITED) AND THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
WASTE CONNECTIONS, INC. PREDECESSORS CONSOLIDATED WASTE COMBINED PERIOD FROM PREDECESSORS CONNECTIONS, INC. NINE MONTHS INCEPTION COMBINED CONSOLIDATED ENDED (SEPTEMBER 9, 1997) THREE MONTHS THREE MONTHS SEPTEMBER 30, THROUGH ENDED ENDED 1997 (NOTE 1) DECEMBER 31, 1997 MARCH 31, 1997 MARCH 31, 1998 ------------- ------------------- -------------- ----------------- (UNAUDITED) - ----------------------------------------- Revenues................................. $18,114 $ 6,237 $5,694 $ 7,601 Operating expenses: Cost of operations..................... 14,753 4,703 4,674 5,397 Selling, general and administrative.... 3,009 619 715 770 Depreciation and amortization.......... 1,083 354 378 541 Start-up and integration............... -- 493 -- -- Stock compensation..................... -- 4,395 -- 320 ------- ---------- ------ ----------------- Income (loss) from operations............ (731) (4,327) (73) 573 Interest expense......................... (456) (1,035) (152) (301) Other income (expense), net.............. 14 (36) -- -- ------- ---------- ------ ----------------- Income (loss) before income taxes........ (1,173) (5,398) (225) 272 Income tax (provision) benefit........... -- 332 -- (237) ------- ---------- ------ ----------------- Net income (loss)........................ $(1,173) (5,066) $ (225) 35 ======= ====== Redeemable convertible preferred stock accretion.............................. (531) (572) ---------- ----------------- Net loss applicable to common stockholders........................... $ (5,597) $ (537) ========== ================= Basic net loss per share................. $ (2.99) $ (0.23) ========== ================= Shares used in calculating basic net loss per share.............................. 1,872,567 2,311,111 Pro forma basic net income (loss) per share.................................. $ (1.16) $ 0.01 ========== ================= Shares used in calculating pro forma basic net loss per share............... 4,372,565 5,811,109 Pro forma diluted net income per share... $ 0.01 ================= Shares used in calculating pro forma diluted net income per share........... 6,835,415 - -----------------------------------------
See accompanying notes. F-13 82 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-14 83 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-15 84 WASTE CONNECTIONS, INC. AND PREDECESSORS CONSOLIDATED STATEMENT OF REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) PERIOD FROM INCEPTION (SEPTEMBER 9, 1997) THROUGH DECEMBER 31, 1997 (AUDITED) AND THREE MONTHS ENDED MARCH 31, 1998 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
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 1 139 -- Issuance of redeemable common stock (unaudited)............... -- -- 1,000,000 7,500 -- -- -- -- Issuance of common stock warrants (unaudited)..................... -- -- -- -- -- -- 2,049 -- Accretion of redeemable convertible preferred stock (unaudited)..................... -- 572 -- -- -- -- -- -- Deferred stock compensation associated with stock options (unaudited)..................... -- -- -- -- -- -- 821 -- Amortization of deferred stock compensation (unaudited)........ -- -- -- -- -- -- -- -- Net income (unaudited)........... -- -- -- -- -- -- -- -- --------- ------ --------- ------ --------- --- ------ ---- Balances at March 31, 1998 (unaudited)..................... 2,499,998 $8,095 1,000,000 $7,500 2,350,000 $24 $8,114 $(82) ========= ====== ========= ====== ========= === ====== ==== 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 Issuance of redeemable common stock (unaudited)............... -- -- -- Issuance of common stock warrants (unaudited)..................... -- -- 2,049 Accretion of redeemable convertible preferred stock (unaudited)..................... -- (572) (572) Deferred stock compensation associated with stock options (unaudited)..................... (821) -- -- Amortization of deferred stock compensation (unaudited)........ 80 -- 80 Net income (unaudited)........... -- 35 35 ----- ------- ------- Balances at March 31, 1998 (unaudited)..................... $(741) $(6,134) $ 1,181 ===== ======= =======
See accompanying notes. F-16 85 WASTE CONNECTIONS, INC. AND PREDECESSORS STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, 1997 (AUDITED) AND THREE MONTHS ENDED MARCH 31, 1997 AND 1998 (UNAUDITED) (IN THOUSANDS)
WASTE CONNECTIONS, INC. PREDECESSORS CONSOLIDATED COMBINED PERIOD FROM PREDECESSORS WASTE CONNECTIONS, INC. NINE MONTHS INCEPTION COMBINED CONSOLIDATED ENDED (SEPTEMBER 9, 1997) THREE THREE MONTHS SEPTEMBER 30, THROUGH MONTHS ENDED ENDED 1997 (NOTE 1) DECEMBER 31, 1997 MARCH 31, 1997 MARCH 31, 1998 ------------- ----------------------- -------------- ----------------------- (UNAUDITED) - --------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).......................... $(1,173) $ (5,066) $(225) $ 35 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Gain on sale of assets................... (4) -- -- -- Depreciation and amortization............ 1,083 354 378 541 Deferred income taxes.................... -- (369) -- -- Amortization of debt issuance costs, debt guarantee fees and accretion of discount on long-term debt............. -- 860 -- 47 Stock compensation....................... -- 4,395 -- 320 Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable, net............... (604) (1,021) (174) 1,432 Prepaid expenses and other current assets............................... (74) (51) 173 (641) Accounts payable....................... (221) 2,607 241 (1,167) Deferred revenue....................... (137) 169 (137) (110) Accrued liabilities.................... (450) 801 323 334 Accrued losses on acquired contracts... -- (65) (33) (78) ------- ---------- ----- ------- Net cash provided by (used in) operating activities............................... (1,580) 2,614 546 713 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment................................ 188 -- -- -- Payments for acquisitions, net of cash acquired................................. -- (11,493) -- (8,848) Prepaid acquisition costs.................. -- (20) -- -- Capital expenditures for property and equipment................................ (735) (264) (716) (343) Decrease (increase) in other assets........ 22 (19) (38) -- Issuance of stockholder notes receivable... -- (82) -- -- ------- ---------- ----- ------- Net cash used in investing activities........ (525) (11,878) (754) (9,191) CASH FLOWS FROM FINANCING ACTIVITIES: Net intercompany balance................... 2,142 -- 221 -- Proceeds from short-term borrowings........ -- 600 -- -- Proceeds from long-term debt............... -- 5,500 -- 17,109 Principal payments on notes payable........ (38) (2,724) -- (195) Principal payments on long-term debt....... -- (157) -- (6,762) Proceeds from sale of redeemable convertible preferred stock.............. -- 6,992 -- -- Proceeds from sale of common stock......... -- 23 -- 140 Debt issuance costs........................ -- (150) -- (248) ------- ---------- ----- ------- Net cash provided by financing activities.... 2,104 10,084 221 10,044 ------- ---------- ----- ------- Net increase (decrease) in cash.............. (1) 820 13 1,566 Cash at beginning of period.................. 102 -- 102 820 ------- ---------- ----- ------- Cash at end of period........................ $ 101 $ 820 $ 115 $ 2,386 ======= ========== ===== ======= SUPPLEMENTARY DISCLOSURES OF CASH FLOW INFORMATION AND NON-CASH TRANSACTIONS: Cash paid for income taxes................. $ -- $ -- $ 80 ======= ========== ======= Cash paid for interest..................... $ -- $ 183 $ 98 ======= ========== ======= Redeemable convertible preferred stock accretion................................ $ 531 $ 572 ========== ======= In connection with the BFI related acquisitions (Note 2), the Company assumed liabilities as follows: Fair value of assets acquired............ $ 17,040 $15,571 Cash paid for acquisitions (including acquisition costs)..................... (11,493) (8,848) ---------- ------- Liabilities assumed, stock and notes payable to seller...................... $ 5,547 $ 6,723 ========== =======
See accompanying notes. F-17 86 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-18 87 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-19 88 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Business Waste Connections, Inc. ("WCI" or "the Company") was incorporated in Delaware on September 9, 1997 and commenced its operations on October 1, 1997 through the purchase of certain solid waste operations in Washington, as more fully described below and in Note 2. The Company is a regional, integrated, non-hazardous solid waste services company that provides collection, transfer, disposal and recycling services to commercial, industrial and residential customers. Basis of Presentation The consolidated financial statements of the Company include the accounts of WCI and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. The entities the Company acquired in September 1997 from Browning-Ferris Industries, Inc. ("BFI") are collectively referred to herein as the Company's predecessors. BFI acquired the predecessor operations at various times during 1995 and 1996, and prior to being acquired by BFI, the predecessors operated as separate stand-alone businesses. During the periods in which the Company's predecessors operated as wholly owned subsidiaries of BFI, they maintained intercompany accounts with BFI for recording intercompany charges for costs and expenses, intercompany purchases of equipment and additions under capital leases and intercompany transfers of cash, among other transactions. It is not feasible to ascertain the amount of related interest expense that would have been recorded in the historical financial statements had the predecessors been operated as stand-alone entities. Charges for interest expense were allocated to the Company's predecessors by BFI as disclosed in the accompanying Statement of Operations. The interest expense allocations from BFI are based on formulas that do not necessarily correspond with the balances in the related intercompany accounts. Moreover, the financial position and results of operations of the predecessors during this period may not necessarily be indicative of the financial position or results of operations that would have been realized had the predecessors been operated as stand-alone entities. For the periods in which the predecessors operated as wholly owned subsidiaries of BFI, the statements of operations include amounts allocated by BFI to the predecessors for selling, general and administrative expenses based on certain allocation methodologies. During the periods prior to their acquisition by BFI, the Company's predecessors operated as separate stand-alone businesses. The acquisitions of the predecessors by BFI were accounted for using the purchase method of accounting, and the respective purchase prices were allocated to the fair values of the assets acquired and liabilities assumed. Similarly, the Company's acquisitions of the predecessors from BFI in September 1997 were accounted for using the purchase method of accounting, and the purchase price was allocated to the fair value of the assets acquired and liabilities assumed. Consequently, the amounts of depreciation and amortization included in the statements of operations for the periods presented reflect the changes in basis of the underlying assets that were made as a result of the changes in ownership that occurred during the periods presented. In addition, because the predecessor companies operated independently and were not F-20 89 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) under common control or management during these periods, and because different tax strategies may have influenced their results of operations, the data may not be comparable to or indicative of their operating results after their acquisition by BFI. Due to the manner in which BFI intercompany transactions were recorded as described above, it is not feasible to present a detailed analysis of transactions reflected in the net intercompany balance with BFI. The change in the predecessors' combined intercompany balance with BFI (net of income (loss) and initial investment in the acquired companies) was $642 and $2,142 during the period ended December 31, 1996 and the nine months ended September 30, 1997, respectively. The accompanying statements of operations and cash flows for the Company and its predecessors for the years ended December 31, 1995, 1996 and 1997 are comprised of the following entities for the periods indicated: 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-21 90 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) Interim Financial Information The unaudited interim consolidated financial statements as of March 31, 1998 and for the three months ended March 31, 1997 and 1998 have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. \ Common Stock Valuation In connection with the Company's organization and initial capitalization in September 1997, the Company sold 2.3 million shares of common stock for $.01 per share to certain directors, consultants, and management. As a result, the Company recorded a non-recurring, non-cash stock compensation charge of $4,395 in the accompanying consolidated statement of operations, representing the difference between the amount paid for the shares and the estimated fair value of the shares of $1.92 per share on the date of sale. The estimated fair value of the common shares was determined by the Company based on an independent valuation of the common stock. Concentrations of Credit Risk Financial instruments that potentially subject the Company to concentrations of credit risks consist primarily of accounts receivable. Credit risk on accounts receivable is minimized as a result of the large and diverse nature of the Company's customer base. The Company maintains an allowance for losses based on the expected collectibility of accounts receivable. Credit losses have been within management's expectations. Property and Equipment Property and equipment are stated at cost. Improvements or betterments which significantly extend the life of an asset are capitalized. Expenditures for maintenance and repair costs are charged to operations as incurred. The cost of assets retired or otherwise disposed of and the related accumulated depreciation are eliminated from the accounts in the year of disposal. Gains and losses resulting from property disposals are included in other income (expense). Depreciation is computed using the straight-line method over the estimated useful lives of the assets. F-22 91 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 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. Goodwill Goodwill represents the excess of the purchase price over the fair value of the net assets of the acquired entities (Note 2), and is amortized on a straight-line basis over the period of expected benefit of 40 years. Accumulated amortization amounted to $279 and $64 as of December 31, 1996 and 1997, respectively. The Company continually evaluates the value and future benefits of its intangibles. The Company assesses recoverability from future operations using income from operations of the related acquired business as a measure. Under this approach, the carrying value would be reduced if it becomes probable that the Company's best estimate for expected future cash flows of the related business would be less than the carrying amount of the intangible over the remaining amortization period. For the period ending December 31, 1997, there were no adjustments to the carrying amounts of intangibles resulting from these evaluations. Fair Value of Financial Instruments The carrying values of the line of credit (Note 5) and other long-term debt (Note 6) approximate their fair values as of December 31, 1997 and March 31, 1998, based on current incremental borrowing rates for similar types of borrowing arrangements. Income Taxes The Company, The Disposal Group, and Fibres International, Inc., use the liability method to account for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. During the periods in which the predecessors were owned by BFI, their operations were included in the consolidated income tax returns of BFI, and no allocations of income taxes were reflected in the historical statements of operations. For purposes of the combined predecessor financial statements, current and deferred income taxes have been provided on a separate income tax return basis. F-23 92 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) Revenue Recognition Revenues are recognized as services are provided. Certain customers are billed in advance and, accordingly, recognition of the related revenues is deferred until the services are provided. Start-Up and Integration Expenses During the period from inception (September 9, 1997) through December 31, 1997, the Company incurred certain start-up expenses relating to the formation of the Company, primarily for legal and other professional services, and the costs associated with recruiting the Company's initial management team. In addition, the Company incurred certain integration expenses relating to the Acquisitions (Note 2). These start-up and integration expenses have been charged to operations as incurred. As described in Note 9, the Company issued warrants during the period from inception (September 9, 1997) through December 31, 1997 to a bank in connection with a line of credit and term loan payable, and to certain directors and stockholders of the Company in connection with their guarantee of certain of the Company's debt obligations. The fair value of these warrants is being amortized into interest expense. During the period from inception (September 9, 1997) through December 31, 1997, $710 relating to these warrants is included in interest expense in the accompanying statement of operations of the Company. Stock-Based Compensation As permitted under the provisions of Financial Accounting Standards No. 123 "Accounting for Stock Based Compensation" ("SFAS 123"), the Company has elected to account for stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board's Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25"). Under the intrinsic value method, compensation cost is the excess, if any, of the quoted market price or fair value of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. None of the predecessor entities awarded stock-based compensation to employees. Consequently, the related disclosures in the accompanying financial statements and notes relate solely to the Company. Per Share Information In 1997, the Financial Accounting Standards Board ("FASB")issued Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts have been presented on the basis set forth in Statement 128 (Note 11). Earnings per share data have not been presented for the predecessor operations because such data is not meaningful. Pro-forma basic net income (loss) per share is computed by dividing the net income (loss) by the sum of the weighted average number of shares of common stock outstanding and common F-24 93 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) shares issuable upon the conversion of all outstanding shares of Redeemable Convertible Preferred Stock (Note 8) as though such conversion occurred at the beginning of the period. Pro-forma diluted net income per share is computed by dividing net income by the sum of the weighted average number of shares of common stock outstanding, common shares issuable upon conversion of all outstanding shares of Redeemable Convertible Preferred Stock (Note 8) as though such conversion occurred at the beginning of the period, and common shares issuable upon the exercise of outstanding common stock options and warrants (calculated using the treasury stock method.) Closure and Post-Closure Costs Because it does not currently own any landfills, the Company does not accrue for estimated landfill closure and post-closure maintenance costs. The Company may have material financial obligations relating to closure and post-closure costs of any disposal facilities it may own or operate in the future, and in such case the Company will provide accruals for future financial obligations relating to closure and post-closure costs of its landfills (generally for a term of 30 years after final closure of a landfill), based on engineering estimates of consumption of permitted landfill airspace over the useful life of any such landfill. New Accounting Pronouncements In February 1997, the FASB issued Statement No. 129, Disclosure of Information about Capital Structure, which is effective for financial statements for periods ending after December 15, 1997. This statement establishes standards for disclosing information about an entity's capital structure. Adoption of Statement 129 will have no impact on the Company's existing disclosures. In June 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income. Statement 130 establishes standards for reporting and disclosure of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. Statement 130, which is effective for fiscal years beginning after December 15, 1997, requires reclassification of financial statements for earlier periods to be provided for comparative purposes. The Company anticipates that implementing the provisions of Statement 130 will not have a significant impact on the Company's existing disclosures. In June 1997, the FASB issued Statement No. 131, Disclosure About Segments of an Enterprise and Related Information. Statement 131 establishes standards for the way that public business enterprises report information about operating segments. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Statement 131 is effective for fiscal years beginning after December 15, 1997. In the initial year of application, comparative information for earlier years must be restated. The Company anticipates that implementing the provisions of Statement 131 will not have a significant impact on the Company's existing disclosures. F-25 94 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 2. ACQUISITIONS Browning-Ferris Industries Related On September 29, 1997, the Company purchased all of the outstanding stock of Browning-Ferris Industries of Washington, Inc. and Fibres International, Inc. from BFI (collectively the "Acquisitions"). The total purchase price for the Acquisitions was approximately $15,036, comprised principally of $11,493 in cash and promissory notes payable to BFI totaling $3,543. Of the combined $15,036 purchase price, $9,578 was recorded as goodwill and $150 was assigned to a non-competition agreement. The Acquisitions were accounted for in accordance with the purchase method of accounting and, accordingly, the net assets acquired were included in the Company's consolidated balance sheet based upon their estimated fair values on the date of the Acquisitions. The Company's consolidated statement of operations includes the revenues and expenses of the acquired businesses after the effective date of the transaction. Certain items affecting the purchase price and the allocation are preliminary. A summary of the preliminary purchase price allocation as of December 31, 1997 for the Acquisitions is as follows: 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 three months ended March 31, 1998, the Company increased the accrual for losses on acquired contracts and goodwill by approximately $291 to reflect revised estimates of additional losses on the acquired contracts that are expected to be incurred. Waste Connections of Idaho, Inc. On January 30, 1998, the Company acquired all of the outstanding stock of Waste Connections of Idaho, Inc. ("WCII") for $3 and the assumption of liabilities in the amount of $1,943. WCII was owned by affiliates of the Company and commenced operations in September 1997 through the purchase of certain solid waste collection assets located in Eastern Idaho from Browning-Ferris of Idaho, Inc. The acquisition has been accounted for in accordance with the purchase method of accounting. F-26 95 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) Certain items affecting the purchase price and the allocation are preliminary. A summary of the preliminary purchase price allocation for the WCII acquisition is as follows: Acquired assets: Accounts receivable................................... $ 785 Prepaid expenses and other current assets............. 167 Property and equipment................................ 994 Assumed liabilities: Deferred revenue...................................... (237) Accounts payable and accrued liabilities.............. (256) Notes payable......................................... (1,450) ------- $ 3 =======
Madera Disposal Systems, Inc. On February 23, 1998, the Company purchased all of the outstanding stock of Madera Disposal Systems, Inc. ("Madera") effective February 1, 1998, pursuant to a Stock Purchase Agreement (the "Agreement"). The Agreement requires the Company to pay to the shareholders of Madera $9,579 in cash (a portion of which was used to repay Madera outstanding debt on the date of acquisition and which is subject to other adjustments as specified in the Agreement), 1,000,000 shares of the Company's common stock with a fair market value of $7,500 (the "Stock"), warrants to purchase 200,000 shares of the Company's common stock at $4.00 per share with a fair market value of $954 (the "Warrants") and other contingent consideration. The Agreement provides that in the event the Company does not complete an initial public offering ("IPO") of its stock by March 31, 1999, with aggregate gross proceeds of at least $5,000, the Company may be required to repurchase the Stock and the Warrants from the former shareholders of Madera for $2,800 in cash if certain other conditions are also met. The Madera acquisition has been accounted for in accordance with the purchase method of accounting. The total purchase price and the excess of the purchase price over the fair value of the net assets acquired in the Madera acquisition were approximately $18,213 and $14,580, respectively. Certain items affecting the purchase price and the allocation are preliminary. A summary of the preliminary purchase price allocation for the Madera acquisition is as follows: F-27 96 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 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 =======
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 ====== ======
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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 3. PROPERTY AND EQUIPMENT Property and equipment as of December 31, 1996 and 1997 and March 31, 1998 consists of the following:
PREDECESSORS COMPANY COMBINED -------------------------- DECEMBER 31, DECEMBER 31, MARCH 31, 1996 1997 1998 ------------ ------------ ----------- (UNAUDITED) Land and buildings............ $2,314 $ -- $1,000 Machinery and equipment....... 146 60 761 Rolling stock................. 2,068 2,353 3,612 Containers.................... 1,084 1,995 2,656 Furniture and fixtures........ 137 67 119 ------ ------ ------ 5,749 4,475 8,148 Less accumulated depreciation................ (680) (290) (832) ------ ------ ------ $5,069 $4,185 $7,316 ====== ====== ======
Combined depreciation expense for the predecessor operations was $1,304, $1,101, and $789 for the years ended December 31, 1995 and 1996, and the nine months ended September 30, 1997, respectively. The Company's depreciation expense for the period from inception (September 9, 1997) through December 31, 1997 was $290. 4. OTHER ASSETS Other assets as of December 31, 1996 and 1997 and March 31, 1998 consist of the following:
PREDECESSORS COMPANY COMBINED -------------------------- DECEMBER 31, DECEMBER 31, MARCH 31, 1996 1997 1998 ------------ ------------ ----------- (UNAUDITED) Long-term franchise agreements and contracts........................... $ -- $ -- $ 725 Non-competition agreement, net........ -- 142 150 Other................................. 369 27 262 ---- ---- ------ $369 $169 $1,137 ==== ==== ======
Related to certain of the Acquisitions (Note 2), the Company acquired certain long-term franchise agreements and contracts and entered into a non-competition agreement. The estimated fair value of the acquired long-term franchise agreements and contracts was determined by management based on the discounted net cash flows associated with the agreements and contracts. The amounts assigned to the franchise agreements and contracts is being amortized on a straight-line method over the remaining term of the related agreements (11 years). The estimated fair value of the non-competition agreement was determined by management based on the discounted adjusted operating income stream that would have otherwise been subject to competition. The amount assigned to the non-competition agreement is being amortized on a straight-line method F-29 98 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) over the term of the agreement (five years). Accumulated amortization amounted to $8 as of December 31, 1997. 5. LINE OF CREDIT On September 30, 1997, the Company obtained a revolving line of credit (the "Line") from a bank (the "Bank"). The maximum amount available under the terms of the Line was $2,000 and borrowings bore interest based on the prime rate plus 1.5% (aggregating 10.0% at December 31, 1997). Interest was payable monthly and the Line was to expire on September 29, 1998. Borrowings under the Line were secured by substantially all of the Company's assets and were subordinate to the notes payable to BFI (Note 6) with respect to certain specified assets. The Line was personally guaranteed by certain officers and stockholders of the Company (Note 9). As of December 31, 1997, $600 was outstanding under the Line. Management used borrowings from a new credit facility obtained in January 1998 (Note 12) to pay off amounts outstanding under the Line, and as such, these amounts have been included in long-term debt as of December 31, 1997. 6. OTHER LONG-TERM DEBT Other long-term debt consists of the following as of December 31, 1997: 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). 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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) As of December 31, 1997, aggregate contractual future principal payments by calendar year on long-term debt are due as follows: 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. 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 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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) could be precluded from entering into additional municipal solid waste collection contracts or obtaining or retaining landfill operating permits. CONTINGENCIES Environmental Risks The Company is subject to liability for any environmental damage that its solid waste facilities may cause to neighboring landowners or residents, particularly as a result of the contamination of soil, groundwater or surface water, and especially drinking water, including damage resulting from conditions existing prior to the acquisition of such facilities by the Company. The Company may also be subject to liability for any off-site environmental contamination caused by pollutants or hazardous substances whose transportation, treatment or disposal was arranged by the Company or its predecessors. Any substantial liability for environmental damage incurred by the Company could have a material adverse effect on the Company's financial condition, results of operations or cash flows. As of December 31, 1997 and March 31, 1998, the Company is not aware of any such environmental liabilities. Legal Proceedings In the normal course of its business and as a result of the extensive governmental regulation of the solid waste industry, the Company may periodically become subject to various judicial and administrative proceedings involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines on the Company or to revoke or deny renewal of an operating permit held by the Company. From time to time the Company may also be subject to actions brought by citizens' groups or adjacent landowners or residents in connection with the permitting and licensing of landfills and transfer stations, or alleging environmental damage or violations of the permits and licenses pursuant to which the Company operates. In addition, the Company may become party to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of the waste management business. However, as of December 31, 1997 and March 31, 1998 there is no current proceeding or litigation involving the Company that the Company believes will have a material adverse impact on the Company's business, financial condition, results of operations or cash flows. During the period from January 1, 1996 through July 31, 1996, The Disposal Group won a lawsuit against the city of Vancouver, Washington relating to the city's annexation of certain territories served by The Disposal Group. The Disposal Group received approximately $2.6 million from the lawsuit, which is included in other income in the accompanying statement of operations. Employees Approximately 55 drivers and mechanics at the Company's Vancouver, Washington operation are represented by the Teamsters Union, with which Browning-Ferris Industries of Washington, Inc., the Company's predecessor in Vancouver, entered a four-year collective bargaining agreement in January 1997. In addition, in July 1997, the employees at the Company's facility in Issaquah, Washington, adopted a measure to select a union to represent them in labor negotiations with F-32 101 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) management. The union and management are currently operating under a one-year negotiating agreement, and, if those negotiations are unsuccessful, the earlier date on which the union would be permitted to take additional action is July 27, 1998. Such additional action includes calling a strike or, if the Company agrees, continuing to negotiate or commencing arbitration of the outstanding issues. The Company is not aware of any other organizational efforts among its employees and believes that its relations with its employees are good. 8. REDEEMABLE CONVERTIBLE PREFERRED STOCK In September 1997, the Company received net proceeds of $6,992 from the sale of 2,499,998 shares of redeemable convertible preferred stock (the "Preferred Stock"). The Preferred Stock accrues cumulative dividends at the rate of $.098 per share annually. Accumulated and unpaid dividends on Preferred Stock amounted to $61 as of December 31, 1997. The Preferred Stock and any accumulated and unpaid dividends are convertible at the holder's option into shares of the Company's common stock at the calculated rate of $2.80 per share divided by the "Conversion Price" subject to certain anti-dilution adjustments. As of December 31, 1997 and March 31, 1998, the Conversion Price was $2.80 per share. Each share will automatically be converted into common stock immediately upon the closing of a registered public offering of the Company's common stock with proceeds to the Company of at least $5.00 per share and aggregate proceeds of at least $5,000. Each share of Preferred Stock is redeemable, at the holder's option, during the period from April 1, 1999 through October 1, 1999 for $4.20 per share plus any accumulated and unpaid dividends. The difference between the carrying value of the Preferred Stock and the redemption value (including accumulated dividends) is being accreted using the interest method through the earliest redemption date. The redemption of the Preferred Stock is not mandatory if it would cause the Company to incur additional indebtedness or if it is prohibited under any of the Company's then existing debt agreements. The preferred stockholders are entitled to one vote for each share of common stock into which such shares can be converted, and are also entitled to liquidation preferences equal to the greater of the initial purchase price per share ($2.80) plus any accumulated and unpaid dividends, plus the greater of $4.20 per share or an amount which equals an internal rate of return of 50% to the investor. After receiving such preference, the holders of the preferred stock share remaining proceeds with the common stockholders on an as converted basis. 9. STOCKHOLDERS' EQUITY Common Stock Of the 47,700,000 shares of common stock authorized but unissued as of December 31, 1997, the following shares were reserved for issuance: 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 =========
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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) Stockholder Notes Receivable In December 1997, the Company provided loans in the aggregate amount of $82 to certain employees, who are also common stockholders, for the purchase of shares of the Company's Preferred Stock. The notes bear interest at 8%, are due on January 1, 1999 and are secured by the Preferred Stock purchased and common stock owned by the employees. Stock Options In November 1997, the Company's Board of Directors adopted a stock option plan in which all officers, employees, directors and consultants may participate (the "Option Plan"). Options granted under the Option Plan may either be incentive stock options or nonqualified stock options (the "Options") and they will generally have a term of 10 years from the date of grant and will vest over periods determined at the date of grant. The exercise prices of the options are determined by the Company's Board of Directors and will be at least 100% or 110% of the fair market value of the Company's common stock on the date of grant as provided for in the Option Plan. In connection with the Option Plan, the Company's Board of Directors approved the reservation of 1,200,000 shares of common stock for issuance thereunder. As of December 31, 1997 and March 31, 1998, no options to purchase common stock were exercisable under the Option Plan. In addition, as of December 31, 1997 and March 31, 1998, options for 671,500 and 324,700 shares, respectively of common stock were available for future grants under the Option Plan. A summary of the Company's stock option activity and related information during the period from inception (September 9, 1997) through December 31, 1997 and the three months ended March 31, 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)............... 346,800 6.14 Forfeited (unaudited)............. -- -- Exercised (unaudited)............. -- -- ------- Outstanding as of March 31, 1998 (unaudited)..................... 875,300 5.40 =======
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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) The following table summarizes information about stock options outstanding as of December 31, 1997 and March 31, 1998:
DECEMBER 31, MARCH 31, EXERCISE PRICES 1997 1998 --------------- ------------ ----------- (UNAUDITED) $ 2.80......................... 376,000 496,000 $ 3.00......................... -- 70,000 $ 5.00......................... 9,500 13,800 $ 6.00......................... -- 19,500 $ 9.00......................... -- 3,000 $ 9.50......................... -- 50,000 $10.50......................... 143,000 168,000 $11.00......................... -- 5,000 $12.50......................... -- 50,000 ------- ------- 528,500 875,300 ======= =======
The weighted average remaining contractual life of stock options outstanding as of December 31, 1997, was 9.4 years. Pro Forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for the period from inception (September 9, 1997) through December 31, 1997: risk-free interest rate of 6%; dividend yield of zero; volatility factor of the expected market price of the Company's common stock of .40; and a weighted-average expected life of the option of 4 years. The Black-Scholes option valuation model was developed for us in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net loss and pro forma basic net loss per share for the period from inception (September 9, 1997) through December 31, 1997 were $(5,070) and $(2.99) per share, respectively. During the three months ended March 31, 1998, the Company recorded deferred stock compensation of $821 relating to stock options granted during the period with exercise prices less than the estimated fair value of the Company's common stock on the date of grant. The deferred stock compensation is being amortized into expense over the vesting periods of the stock options which generally range from 1 to 3 years. Compensation expense of $80 was recorded during the three months ended March 31, 1998 relating to these options, and the remaining $741 will be amortized into expense in future periods. 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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) Stock Purchase Warrants In September 1997, the Company issued a warrant to purchase 200,000 shares of the Company's common stock to the Bank that provided the Line and term loan payable (Notes 5 and 6). The exercise price of the warrant is $.01 per share. The warrant was valued at $382 on its date of issuance using the Black-Scholes pricing model with an assumed stock price volatility of .40, risk-free interest rate of 6.0%, estimated fair value of the common stock of $1.92 per share and an expected life of 7 years. The value assigned to the warrant was reflected as a discount on long-term debt. The discount was fully accreted to interest expense using the straight-line method over the expected term of the debt agreements (approximately three months). In connection with their guarantee of certain of the Company's debt obligations (Notes 5 and 6), the Company issued warrants to purchase 841,000 shares of the Company's common stock to certain directors and stockholders of the Company. The exercise price of the warrants is $2.80 per share. The warrants were valued at $328 on their date of issuance using the Black-Scholes pricing model with an assumed stock price volatility of .40, risk-free interest rate of 6.0%, estimated fair value of the common stock of $1.92 per share and expected lives of 3 years. The value assigned to these warrants was fully amortized to interest expense over the expected term of the debt agreements (approximately three months). In December 1997, the Company issued to consultants warrants to purchase 15,000 shares of the Company's common stock. Warrants to purchase 10,000 and 5,000 shares of common stock had exercise prices of $5.00 per share and $2.80 per share, respectively. 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 December 1997, the Company's board of directors authorized the filing of a registration statement with the Securities and Exchange Commission permitting the Company to sell up to an aggregate of 2,300,000 shares of common stock (including the underwriters' over-allotment option) to the public. Under the terms of the offering currently contemplated, the Preferred Stock will be converted into common stock, prior to or concurrently with the completion of the offering, and the redemption provisions of the common stock issued in connection with the Madera acquisition (Note 2) will expire. F-36 105 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 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) ===== ==== ==== =====
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) ====== ======
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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) The differences between the Company's provision (benefit) for income taxes as presented in the accompanying statements of operations and benefit for income taxes computed at the federal statutory rate is comprised of the items shown in the following table as a percentage of pre-tax income (loss):
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-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 MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) 11. NET LOSS PER SHARE INFORMATION The following table sets forth the computation of basic net loss per share and pro forma basic net loss per share for the period from inception (September 9, 1997) through December 31, 1997 and the three months ended March 31, 1998:
MARCH 31, 1998 DECEMBER 31, 1997 ------------------------------------ --------------------- (UNAUDITED) PRO FORMA PRO FORMA PRO FORMA BASIC BASIC BASIC BASIC DILUTED NET LOSS NET LOSS NET LOSS NET INCOME NET INCOME PER SHARE PER SHARE PER SHARE PER SHARE PER SHARE --------- --------- --------- ----------- ---------- Numerator: Net income (loss).................. $ (5,066) $ (5,066) $ 35 $ 35 $ 35 Redeemable convertible preferred -- stock accretion................. (531) -- (572) -- --------- --------- --------- --------- --------- $ (5,597) $ (5,066) $ (537) $ 35 $ 35 ========= ========= ========= ========= ========= Denominator: Weighted average common shares 3,311,111 outstanding..................... 1,872,567 1,872,567 2,311,111 3,311,111 Dilutive effect of stock options 1,024,306 and warrants outstanding........ -- -- -- -- Common shares issuable upon 2,499,998 conversion of preferred stock... -- 2,499,998 -- 2,499,998 --------- --------- --------- --------- --------- 1,872,567 4,372,565 2,311,111 5,811,109 6,835,415 ========= ========= ========= ========= ========= $ (2.99) $ (1.16) $ (0.23) $ 0.01 $ 0.01 ========= ========= ========= ========= =========
As of December 31, 1997, outstanding options to purchase 528,500 shares of common stock (with exercise prices ranging from $2.80 to $10.50), outstanding warrants to purchase 1,056,000 shares of common stock (with exercise prices from $0.01 to $5.00), and the outstanding Redeemable Convertible Preferred Stock could potentially dilute basic earnings per share in the future and have not been included in the computation of diluted net loss per share because to do so would have been antidilutive for the period presented. 12. NEW CREDIT FACILITY On January 30, 1998, the Company obtained a new revolving credit facility from BankBoston (the "Credit Facility"). The maximum amount available under the Credit Facility is $25,000 including stand-by letters-of-credit and the borrowings will bear interest at various fixed and/or variable rates at the Company's option. The Credit Facility allows for the Company to issue up to $5,000 in stand-by letters-of-credit. The Credit Facility requires quarterly payments of interest and it matures in January 2001. Borrowings under the Credit Facility are secured by all of the Company's assets. The borrowings are further secured by the shares of the Company's common and preferred stock owned by the Company's President and Chief Executive Officer. The Credit Facility requires the Company to pay an annual commitment fee equal to 0.5% of the unused portion of the Credit Facility. The Credit Facility places certain business, financial and operating restrictions on the F-39 108 WASTE CONNECTIONS, INC. AND PREDECESSORS NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (INFORMATION RELATING TO MARCH 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED) Company and it's subsidiaries including among other things, the incurrence of additional indebtedness, investments, acquisitions, asset sales, mergers, dividends, distributions and repurchases and redemptions of capital stock. The Credit Facility also requires that specified financial ratios and balances be maintained. In connection with the Credit Facility the Company granted to an affiliate of BankBoston a warrant to purchase 140,000 shares of the Company's common stock with an exercise price of $2.80 per share and an expiration date of January 29, 2008. 13. RELATED PARTY TRANSACTIONS The Company has entered into certain transactions with Continental Paper, LLC ("Continental"), in which the Company delivers to Continental all of the Company's collected recyclable materials in areas in which Continental has processing facilities and Continental pays the Company market rates for the recyclable materials. Certain of the Company's stockholders are the majority owners of Continental. During the period from inception (September 9, 1997) through December 31, 1997, the Company received approximately $223 from Continental in these transactions. 14. UNAUDITED PRO FORMA REDEEMABLE STOCK AND STOCKHOLDERS' EQUITY The Company's unaudited pro forma redeemable stock and stockholders' equity as of March 31, 1998, gives effect to the conversion of the Preferred Stock into 2,499,998 shares of common stock. The conversion of the Preferred Stock into common stock will occur prior to or concurrently with the completion of the Company's initial public offering (Note 9). In addition, the redemption provisions of the common stock issued in connection with the Madera acquisition (Note 2) will expire upon completion of the initial public offering. F-40 109 REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Shareholders Madera Disposal Systems, Inc. We have audited the accompanying balance sheets of Madera Disposal Systems, Inc. as of December 31, 1996 and 1997, and the related statements of income and retained earnings, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Madera Disposal Systems, Inc. at December 31, 1996 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ERNST & YOUNG LLP Sacramento, California February 20, 1998 F-41 110 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-42 111 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-43 112 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-44 113 MADERA DISPOSAL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997 (IN THOUSANDS) 1. ORGANIZATION, BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS Madera Disposal Systems, Inc. ("Madera") is a regional, integrated, non-hazardous solid waste services company that provides collection, transfer disposal and recycling services to residential, commercial and industrial customers. Madera Landfill is contracted by the County of Madera to operate the Fairmead, the North Fork Transfer Station and the materials recovery facility (aka, Mammoth Recycling Facility), all of which are located in the County of Madera, State of California. Madera also holds an exclusive contract with the County of Madera to collect solid waste within the unincorporated areas of the County of Madera. The contracts continue in force and effect until August 2004, and will automatically be extended for one five year period unless Madera is then in material breach or default of its obligations under the materials recovery facility contract. All contracts may be extended for additional periods and upon terms as the County of Madera and Madera may mutually agree upon. On November 9, 1993, Madera entered into an agreement with the County of Madera, whereby Madera was to design, permit, finance, construct, equip, staff, operate and maintain a materials recovery facility (the "Facility") at the County's Fairmead Landfill for the purpose of providing the County of Madera with a guaranteed reduction in the quantity of municipal solid waste requiring landfill disposal. The Facility was to be designed, constructed and operated to receive all municipal solid waste from the Cities of Madera and Chowchilla and the unincorporated areas of the County of Madera. It was also to meet the twenty-five percent (25%) waste reduction requirements of Assembly Bill 939 (Chapter 1095 of the Statutes of 1989) for the Cities of Madera and Chowchilla and the County of Madera by January 11, 1995, through the recycling of recovered material, and work toward the waste reduction requirements of fifty percent (50%) that each jurisdiction must achieve by January 1, 2000. The Facility became operational on August 15, 1994. The County of Madera will compensate Madera for its capital costs incurred in designing, permitting, financing, constructing and equipping the Facility. These costs were $1,661 and are included in property and equipment in the accompanying balance sheets. The County of Madera will reimburse Madera for the equipment and interest costs over a ten year operational period. The County of Madera will also reimburse Madera for its other operational costs incurred in connection with the staffing, maintaining and operating of the materials recovery facility. All of the aforementioned costs are reimbursed to Madera through receipt of a specified portion of waste disposal fees collected by Madera on behalf of the County of Madera for landfill operations. At the termination of the contracts described above, the improvements made by Madera become the sole and exclusive property of the County of Madera, subject only to the County of Madera's continuing obligation to pay or reimburse the Company for any remaining unamortized capital costs of the Facility. In 1995, Madera started a new line of business which provided clean-up and waste removal services to residential and commercial construction businesses. Due to continued losses, in July 1997 Madera ceased operations in this line of business. The estimated fair value of the remaining assets of the business is reflected in the accompanying balance sheets as assets held for sale at December 31, 1997. For the years ended December 31, 1995, 1996, and 1997, this business had revenues of $531, $785 and $193, respectively, and had operating losses of $290, $397, and $215, respectively. F-45 114 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-46 115 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 ====== ======
F-47 116 MADERA DISPOSAL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS) 3. LONG-TERM DEBT Long-term debt as of December 31, 1996 and 1997 consists of the following:
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 ==== ====
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 ====== ======
F-48 117 MADERA DISPOSAL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS) The future minimum lease payments under these capital leases along with the present value of the minimum lease payments as of December 31, 1997 are as follows:
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. PERFORMANCE BONDS AND LETTERS OF CREDIT Municipal solid waste collection contracts may require performance bonds to secure contractual performance. As of December 31, 1997, Madera had provided customers and various regulatory authorities with bonds of approximately $200 to secure its obligations. If Madera were unable to obtain surety bonds in sufficient amounts or at acceptable rates, it could be precluded from entering into additional municipal solid waste collection contracts or obtaining or retaining landfill operating permits. ENVIRONMENTAL RISKS Madera is subject to liability for any environmental damage that its solid waste facilities may cause to neighboring landowners, particularly as a result of the contamination of drinking water sources or soil, including damage resulting from conditions existing prior to the acquisition of such facilities by Madera. Madera may also be subject to liability for any off-site environmental contamination caused by pollutants or hazardous substances whose transportation, treatment or disposal was arranged by Madera or its predecessors. Any substantial liability for environmental damage incurred by Madera could have a material adverse effect on Madera's financial condition, results of operations or cash flows. LEGAL PROCEEDINGS In the normal course of its business and as a result of the extensive governmental regulation of the solid waste industry, Madera may periodically become subject to various judicial and administrative proceeding involving federal, state or local agencies. In these proceedings, an agency may seek to impose fines on Madera or to revoke or deny renewal of an operating permit held by Madera. From time to time Madera may also be subject to actions brought by citizens' groups or adjacent landowners in connection with the permitting and licensing of landfills and transfer F-49 118 MADERA DISPOSAL SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1997 (IN THOUSANDS) stations, or alleging environmental damage or violations of the permits and licenses pursuant to which Madera operates. In addition, Madera may become party to various claims and suits pending for alleged damages to persons and property, alleged violations of certain laws and alleged liabilities arising out of matters occurring during the normal operation of the waste management business. However, as of December 31, 1997, there is no current proceeding or litigation involving Madera that Madera believes will have a material adverse impact on Madera's business, financial condition, results of operations or cash flows. 5. RELATED PARTY TRANSACTIONS Madera performs repair services on equipment owned and operated by shareholders of Madera. Revenues relating to these activities were $41, $60 and $51 for the years ended December 31, 1995, 1996 and 1997, respectively. As of December 31, 1996 and 1997, Madera has receivables of $100 and $113, respectively, relating to these activities. 6. 401(K) PLAN Madera has a voluntary savings and investment plan (the "401(k) Plan"). The 401(k) Plan is available to all eligible employees of Madera. Under the 401(k) Plan Madera is required to match 100% of employees' contributions up to a maximum of 3% of the employees' wages. During the years ended December 31, 1995, 1996 and 1997, Madera's 401(k) Plan expenses were approximately $78, $107 and $108, respectively. 7. PRO FORMA INCOME TAX INFORMATION (UNAUDITED) The following unaudited pro forma information reflects income tax expense (benefit) as if Madera had been subject to federal and state income taxes:
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-50 119 ====================================================== NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ------------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary................... 3 Risk Factors......................... 8 Use of Proceeds...................... 17 Dividend Policy...................... 17 Capitalization....................... 18 Dilution............................. 19 Selected Historical and Pro Forma Financial and Operating Data....... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 23 Business............................. 33 Management........................... 49 Certain Transactions................. 55 Principal Stockholders............... 57 Description of Capital Stock......... 59 Shares Eligible for Future Sale...... 63 Underwriting......................... 65 Legal Matters........................ 66 Experts.............................. 66 Available Information................ 66 Index to Financial Statements........ F-1 - ------------------------------------------- UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. ===========================================
====================================================== 2,000,000 SHARES LOGO COMMON STOCK ------------------- PROSPECTUS ------------------- BT ALEX. BROWN CIBC OPPENHEIMER , 1998 ====================================================== 120 APPENDIX--DESCRIPTION OF GRAPHICAL MATERIALS INSIDE COVER UPPER LEFT PHOTO Caption above: "COLLECTION" - Picture of a rear end loader. UPPER RIGHT PHOTO Caption above: "TRANSFER" - Picture of a transfer station and transfer trailer. LOWER LEFT PHOTO Caption below: "DISPOSAL" - Picture of lined landfill. LOWER RIGHT PHOTO Caption below: "RECYCLING" - Picture of a recycling picking line. INSIDE GATE-FOLD OVERVIEW Map of western United States with areas of operations highlighted and notations of locations of the company's facilities and types of operations. Attached to various locations are photos depicting elements of each location. UPPER LEFT PHOTO Caption below: "ISSAQUAH & MALTBY, WASHINGTON - Waste Connections of Washington has two operations east of Seattle: one in Issaquah and one in Maltby. These two operations serve more than 20,000 customers in King and Snohomish Counties under one "G" Certificate and twelve municipal contracts. According to the Urban Growth Act of Washington, these Seattle suburbs are projected to have strong population growth and development over the next 5 years." Picture of a front end loader lifting a Company container. UPPER RIGHT PHOTO Caption below: "VANCOUVER, WASHINGTON - Waste Connections of Washington is the exclusive "G" certificate provider to more than 50,000 customers in Clark County, Washington, and also serves more than 25,000 customers in the city of Vancouver. Clark County has been the fastest growing county in the state of Washington over the past five years, and in 1997 was recognized as one of the ten fastest growing counties in the nation. Clark County and the city of Vancouver are located approximately eight miles north of Portland, Oregon and represent the southern boundary of the state of Washington, with the Columbia River actually separating the two states." Picture of the Columbia River LOWER LEFT PHOTO Caption below: "MADERA COUNTY, CALIFORNIA - Madera County is the third fastest growing county in the state of California. Madera Disposal Systems serves more than 10,000 residential, commercial and industrial customers in Madera County and the city of Chowchilla. Madera Disposal Systems is the exclusive waste services and recycling provider within the unincorporated areas of Madera County, with a franchise for collection, two transfer stations, a MRF, and a landfill operating contract." 121 Picture of vineyard in central California. LOWER RIGHT PHOTO Caption below: "IDAHO FALLS & POCATELLO, IDAHO - Waste Connections of Idaho is the largest waste services provider in Eastern Idaho, serving approximately 65% of the market. In 1997, Idaho Falls had a population growth of more than 12%. Eastern Idaho is served by more than 15 municipally owned landfills. In March of 1998, Waste Connections of Idaho completed the acquisition of Hunter Enterprises as a tuck-in to its existing operation." Picture of roll off truck in front of residential construction site. 122 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. SEC Registration Fee........................................ $ 8,142 NASD Filing Fee............................................. 3,260 Nasdaq Listing Fee.......................................... 37,000 Accounting Fees and Expenses*............................... 600,000 Printing and Engraving Expenses*............................ 200,000 Legal Fees and Expenses*.................................... 300,000 Transfer Agent and Registrar Fees*.......................... 2,500 Director and Officer Insurance Premiums..................... 18,900 Miscellaneous Expenses*..................................... 30,198 ---------- Total*...................................................... $1,200,000 ==========
- --------------- * Estimated. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. The Amended and Restated Certificate of Incorporation (the "Restated Certificate") of the Company provides that a director will not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law (the "Delaware Law"), which concerns unlawful payments of dividends, stock purchases or redemptions, or (iv) for any transaction from which the director derived an improper personal benefit. If the Delaware Law is subsequently amended to permit further limitation of the personal liability of directors, the liability of a director of the Company will be eliminated or limited to the fullest extent permitted by the Delaware Law as amended. Section 145(a) of the Delaware Law provides that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of non contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interest of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Section 145(b) of the Delaware Law states that a corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the II-1 123 request or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit is brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 145(c) of the Delaware Law provides that to the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of section 145, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 145(d) of the Delaware Law states that any indemnification under subsections (a) and (b) of section 145 (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in subsections (a) and (b). Such determination shall be made (i) by the board of directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. Section 145(e) of the Delaware Law provides that expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in section 145. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. Section 145(f) of the Delaware Law states that the indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of section 145 shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Section 145(g) of the Delaware Law provides that a corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of section 145. Section 145(j) of the Delaware Law states that the indemnification and advancement of expenses provided by, or granted pursuant to, section 145 shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent, and shall inure to the benefit of the heirs, executors and administrators of such a person. II-2 124 Pursuant to Section 145 of the Delaware Law, the Registrant has purchased insurance on behalf of its present and former directors and officers against any liability asserted against or incurred by them in such capacity or arising out of their status as such. The Company has entered into indemnification agreements with each of its directors and officers providing for mandatory indemnification and advancement of expenses to the maximum extent permitted by the Delaware Law. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. Set forth below is a listing of all sales by the Company of unregistered securities since the Company was incorporated on September 9, 1997. All such sales were exempt from registration under the Securities Act, pursuant to Section 4(2) of the Securities Act (and, as noted below, Regulation D or Rule 701 thereunder), as they were transactions not involving a public offering. The Company believes that each of the issuances made pursuant to Section 4(2) was made to a sophisticated investor, who had the financial resources to bear the risk of the investment and who had the means and opportunity to obtain information concerning the Company. The consideration paid to the Company in respect of each issuance was cash, unless otherwise indicated. All sales described below were made by the Company without the assistance of any underwriters. 1. In September and October 1997, the Company in a private placement sold an aggregate of 2,300,000 shares of Common Stock at a price of $0.01 per share and 2,499,998 shares of Series A Preferred Stock at a price of $2.80 per share to 19 accredited investors, including certain officers and directors of the Company. Such sales were made in accordance with Regulation D promulgated under the Securities Act. 2. In September 1997, the Company issued warrants to purchase 200,000 shares of Common Stock, with an exercise price of $0.01 per share, to Imperial Bank in connection with the credit facility with Imperial Bank entered into by the Company. Such warrants were issued pursuant to Regulation D under the Securities Act. 3. In October and November 1997, the Company issued options to purchase 428,500 shares of Common Stock to employees of the Company. Such options have exercise prices ranging from $2.80 per share to $10.50 per share and a weighted average exercise price of $5.42 per share. Some of such options were issued pursuant to Regulation D under the Securities Act and others were issued pursuant to Rule 701 under the Securities Act. 4. In December 1997, the Company issued warrants to purchase an aggregate of 841,000 shares of Common Stock to the Company's directors and options to purchase 100,000 shares of Common Stock to Ronald J. Mittelstaedt. Such warrants and options have an exercise price of $2.80 per share and were issued pursuant to Regulation D under the Securities Act. 5. In December 1997 and January 1998, the Company issued warrants to purchase an aggregate of 15,000 shares of Common Stock to three consultants, with an exercise price of $5.00 per share, and warrants to purchase 5,000 shares of Common Stock to a fourth consultant, with an exercise price of $2.80 per share. Such warrants were issued pursuant to Rule 701 under the Securities Act. 6. In January 1998, the Company issued warrants to purchase 140,000 shares of Common Stock to BankBoston, N.A., at an exercise price of $2.80 per share, in connection with the Company's credit facility with BankBoston, N.A. Such warrants were issued pursuant to Regulation D under the Securities Act. 7. In January and February 1998, the Company issued options to purchase 104,300 shares of Common Stock to various employees of the Company, at exercise prices ranging from $2.80 to $10.50 per share, and a weighted average exercise price of $5.27 per share. Such options were issued pursuant to Rule 701 and Regulation D under the Securities Act. II-3 125 8. In January 1998, the Company issued options to purchase an aggregate of 30,000 shares of Common Stock to Michael W. Harlan and William J. Razzouk, at an exercise price of $3.00 per share. Such options were issued pursuant to Regulation D under the Securities Act. 9. In February 1998, the Company issued to the shareholders of Madera an aggregate of 1,000,000 shares of Common Stock and warrants to purchase 200,000 shares of Common Stock at an exercise price of $4.00 per share, all as part of the consideration for the acquisition by the Company of Madera. Such shares and warrants were issued pursuant to Regulation D under the Securities Act. 10. In February 1998, the Company issued options to purchase 200,000 shares of Common Stock to Steven Bouck, of which 100,000 are exercisable at $2.80 per share, 50,000 are exercisable at $9.50 per share, and 50,000 are exercisable at $12.50 per share. On the same date, the Company issued to Mr. Bouck warrants to purchase 50,000 shares of Common Stock, at an exercise price of $2.80 per share, which were exercised in March 1998. Such options and warrants were issued pursuant to Regulation D under the Securities Act. 11. In March 1998, the Company issued options to purchase 5,000 shares of Common Stock to David Goldsmith, a consultant to the Company, at an exercise price equal to the price to the public of the shares included in this registration statement. Such options were issued pursuant to Rule 701 and Regulation D under the Securities Act. 12. In February, March, April and May 1998, the Company issued options to purchase 47,800 shares of Common Stock to various employees at exercise prices of $3.00 to $11.00 per share. Such options were issued pursuant to Rule 701 and Regulation D under the Securities Act. 13. In April 1998, the Company issued 23,636 shares of Common Stock to A-1 Disposal, Inc. in connection with the acquisition of the solid waste collection assets of that company. Such shares were issued pursuant to Regulation D under the Securities Act. 14. In April 1998, the Company issued 18,182 shares of Common Stock to Gwendolyn Sullivan in connection with the acquisition of certain solid waste collection assets owned by her. Such shares were issued pursuant to Regulation D under the Securities Act. 15. In May 1998, the Company issued 27,272 shares of Common Stock to James C. Sowers and Mildred A. Sowers in connection with the acquisition of Sowers' Sanitation, Inc. Such shares were issued pursuant to Regulation D under the Securities Act. 16. In May 1998, the Company issued 13,636 shares of Common Stock to Timothy Thomas in connection with the acquisition of T&T Disposal, Inc. Such shares were issued pursuant to Regulation D under the Securities Act. ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE A. EXHIBITS. The following exhibits are filed herewith and made a part hereof:
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 1.1 Form of Underwriting Agreement among the Registrant and the Representatives 3.1** Amended and Restated Certificate of Incorporation of the Company, in effect as of the date hereof 3.2** Amended and Restated By-laws of the Company, in effect as of the date hereof 4.1** Form of Common Stock Certificate 5.1 Opinion of Shartsis, Friese & Ginsburg LLP
II-4 126
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 10.1+** Revolving Credit Agreement, dated as of January 30, 1998, between the Company and various banks represented by BankBoston, N.A 10.2** 1997 Stock Option Plan 10.3** Form of Option Agreement(1) 10.4** Form of Warrant Agreement(2) 10.5** Warrant Agreement and related Anti-Dilution Agreement issued to Imperial Bank 10.6** Warrant Agreement and related Anti-Dilution Agreement issued to BankBoston, N.A 10.7** Form of Stock Purchase Agreement dated as of September 30, 1997(3) 10.8** Form of Second Amended and Restated Investors' Rights Agreement dated as of September 30, 1997(3) 10.9** Form of Stockholders' Agreement dated as of September 30, 1997(3) 10.10** Employment Agreement among the Company, J. Bradford Bishop, Frank W. Cutler, James N. Cutler, Jr. and Ronald J. Mittelstaedt, dated as of October 1, 1997 10.11** First Amended Employment Agreement between the Company and Darrell Chambliss, dated as of October 1, 1997 10.12** First Amended Employment Agreement between the Company and Michael Foos, dated as of October 1, 1997 10.13** First Amended Employment Agreement between the Company and Eric Moser, dated as of October 1, 1997 10.14** Employment Agreement between the Company and Steven Bouck, dated as of February 1, 1998 10.15** Employment Agreement between the Company and Eugene V. Dupreau, dated as of February 23, 1998 10.16** Employment Agreement between the Company and Charles B. Youngclaus, dated as of February 23, 1998 10.17+** Purchase and Sale Agreement, dated as of September 29, 1997, between Browning-Ferris Industries, Inc., Browning-Ferris, Inc. and Browning-Ferris Industries of Idaho, Inc., as Sellers, and the Company, Waste Connections of Idaho, Inc. and Continental Paper Recycling, L.L.C. as Buyers 10.18** Stock Purchase Agreement, dated as of January 26, 1998, among the Company, Waste Connections of Idaho, Inc. and the shareholders of Waste Connections of Idaho, Inc. 10.19+** Stock Purchase Agreement, dated as of February 4, 1998, among the Company and the shareholders of Madera Disposal Company, Inc. 10.20+** Asset Purchase Agreement, dated as of March 1, 1998, among the Company, Waste Connections of Idaho, Inc., Hunter Enterprises, Inc. and the shareholder of Hunter Enterprises, Inc. 10.21** Form of Indemnification Agreement entered into by the Company and each of its directors and officers 10.22** Asset Purchase Agreement, dated as of April 8, 1998, between Waste Connections, Inc., Waste Connections of Wyoming, Inc., A-1 Disposal, Inc., David Jones and Thomas Fries 10.23** Asset Purchase Agreement, dated as of April 8, 1998, between Waste Connections, Inc., Waste Connections of Wyoming, Inc. and Gwendolyn L. Sullivan 10.24 Stock Purchase Agreement, dated as of May 8, 1998, by and among the Company, Sunshine Sanitation, Incorporated, Robert E. Ewing and Sherry D. Ewing
II-5 127
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 10.25 Stock Purchase Agreement, dated as of May 8, 1998, by and among the Company, Sowers' Sanitation, Inc., James C. Sowers and Mildred A. Sowers 10.26 Stock Purchase Agreement, dated as of May 11, 1998, by and among the Company, T&T Disposal, Inc. and Timothy Thomas 21.1** Subsidiaries of the Registrant 23.1 Consent of Shartsis, Friese & Ginsburg LLP (included in opinion filed as Exhibit 5.1) 23.2 Consent of Ernst & Young LLP, Independent Auditors 23.3 Consent of Williams, Kastner & Gibbs PLLC 24.1** Power of Attorney (included in Part II of the Registration Statement under the caption "Signatures") 27.1** Financial Data Schedule
- --------------- ** Previously filed. + Filed without exhibits and schedules (to be provided supplementally on request of the Commission). (1) Pursuant to the 1997 Stock Option Plan, the Company issued options in this form to the following officers of the Company (or in certain cases to an entity controlled by such individual) for the number of shares of Common Stock indicated: Darrell W. Chambliss (150,000); Michael R. Foos (150,000); Ronald J. Mittelstaedt (100,000); Eric J. Moser (85,000); Steven F. Bouck (200,000); Eugene V. Dupreau (10,000) and Charles B. Youngclaus (10,000). The Company also issued options in this form to the following directors of the Company: Michael W. Harlan (15,000); and William J. Razzouk (15,000). (2) The Company issued warrants in this form to the following directors of the Company (or in certain cases to an entity controlled by such individual) for the number of shares of Common Stock indicated: James N. Cutler, Jr. (247,000); J. Bradford Bishop (247,000); Ronald J. Mittelstaedt (100,000). The Company also issued warrants in this form as follows: warrants to purchase 247,000 shares of Common Stock to Board consultant Frank W. Cutler; warrants to purchase an aggregate of 200,000 shares of Common Stock to the shareholders of Madera in connection with the Company's acquisition of Madera; warrants to purchase 20,000 shares of Common Stock to four consultants to the Company; and warrants to purchase 50,000 shares of Common Stock to Steven Bouck. (3) Each purchaser of shares in the Company's September 1997 private placement of 2,300,000 shares of Common Stock and 2,499,998 shares of Series A Preferred Stock entered into a Stock Purchase Agreement, Investors' Rights Agreement and Stockholders' Agreement in these forms with respect to the shares purchased. Subsequent holders of the Company's Common Stock have also become parties to the Investors' Rights and Stockholders' Agreements. B. FINANCIAL STATEMENT SCHEDULE. The following financial statement schedule is filed herewith and made a part hereof: Schedule II -- Valuation and Qualifying Accounts II-6 128 ITEM 17. UNDERTAKINGS. The undersigned Registrant hereby undertakes to provide to the Underwriters, at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-7 129 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 3 to registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Roseville, State of California, on May 18, 1998. WASTE CONNECTIONS, INC. By: /s/ RONALD J. MITTELSTAEDT ------------------------------------ Ronald J. Mittelstaedt President, Chief Executive Officer and Chairman Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 3 to Registration Statement has been signed by the following persons in the capacities indicated on May 18, 1998.
SIGNATURE TITLE DATE --------- ----- ---- /s/ RONALD J. MITTELSTAEDT President, Chief Executive Officer May 18, 1998 - ----------------------------------------------------- and Chairman Ronald J. Mittelstaedt /s/ EUGENE V. DUPREAU* Director and Vice President -- May 18, 1998 - ----------------------------------------------------- Madera Eugene V. Dupreau /s/ MICHAEL W. HARLAN* Director May 18, 1998 - ----------------------------------------------------- Michael W. Harlan /s/ WILLIAM J. RAZZOUK* Director May 18, 1998 - ----------------------------------------------------- William J. Razzouk /s/ STEVEN F. BOUCK* Executive Vice President and Chief May 18, 1998 - ----------------------------------------------------- Financial Officer Steven F. Bouck /s/ MICHAEL R. FOOS* Vice President and Corporate May 18, 1998 - ----------------------------------------------------- Controller Michael R. Foos * /s/ RONALD J. MITTELSTAEDT May 18, 1998 - ----------------------------------------------------- Attorney-in-Fact
II-8 130 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
131 EXHIBIT INDEX
EXHIBIT PAGE NUMBER DESCRIPTION NUMBER -------- ----------- ------ 1.1 Form of Underwriting Agreement among the Registrant and the Underwriters 3.1** Amended and Restated Certificate of Incorporation of the Company, in effect as of the date hereof 3.2** Amended and Restated By-laws of the Company, in effect as of the date hereof 4.1** Form of Common Stock Certificate 5.1 Opinion of Shartsis, Friese & Ginsburg LLP 10.1+** Revolving Credit Agreement, dated as of January 30, 1998, between the Company and various banks represented by BankBoston, N.A 10.2** 1997 Stock Option Plan 10.3** Form of Option Agreement(1) 10.4** Form of Warrant Agreement(2) 10.5** Warrant Agreement and related Anti-Dilution Agreement issued to Imperial Bank 10.6** Warrant Agreement and related Anti-Dilution Agreement issued to BankBoston, N.A 10.7** Form of Stock Purchase Agreement dated as of September 30, 1997(3) 10.8** Form of Investors' Rights Agreement dated as of September 30, 1997(3) 10.9** Form of Stockholders' Agreement dated as of September 30, 1997(3) 10.10** Employment Agreement among the Company, J. Bradford Bishop, Frank W. Cutler, James N. Cutler, Jr. and Ronald J. Mittelstaedt, dated as of October 1, 1997 10.11** First Amended Employment Agreement between the Company and Darrell Chambliss, dated as of October 1, 1997 10.12** First Amended Employment Agreement between the Company and Michael Foos, dated as of October 1, 1997 10.13** First Amended Employment Agreement between the Company and Eric Moser, dated as of October 1, 1997 10.14** Employment Agreement between the Company and Steven Bouck, dated as of February 1, 1998 10.15** Employment Agreement between the Company and Eugene V. Dupreau, dated as of February 23, 1998 10.16** Employment Agreement between the Company and Charles B. Youngclaus, dated as of February 23, 1998 10.17+** Purchase and Sale Agreement, dated as of September 29, 1997, between Browning-Ferris Industries, Inc., Browning-Ferris, Inc. and Browning-Ferris Industries of Idaho, Inc., as Sellers, and the Company, Waste Connections of Idaho, Inc. and Continental Paper Recycling, L.L.C. as Buyers 10.18** Stock Purchase Agreement, dated as of January 26, 1998, among the Company, Waste Connections of Idaho, Inc. and the shareholders of Waste Connections of Idaho, Inc. 10.19+** Stock Purchase Agreement, dated as of February 4, 1998, among the Company and the shareholders of Madera Disposal Company, Inc. 10.20+** Asset Purchase Agreement, dated as of March 1, 1998, among the Company, Waste Connections of Idaho, Inc., Hunter Enterprises, Inc. and the shareholder of Hunter Enterprises, Inc.
132
EXHIBIT PAGE NUMBER DESCRIPTION NUMBER -------- ----------- ------ 10.21** Form of Indemnification Agreement entered into by the Company and each of its directors and officers 10.22** Asset Purchase Agreement, dated as of April 8, 1998, between Waste Connections, Inc., Waste Connections of Wyoming, Inc., A-1 Disposal, Inc., David Jones and Thomas Fries 10.23** Asset Purchase Agreement, dated as of April 8, 1998, between Waste Connections, Inc., Waste Connections of Wyoming, Inc. and Gwendolyn L. Sullivan 10.24 Stock Purchase Agreement, dated as of May 8, 1998, by and among the Company, Sunshine Sanitation, Incorporated, Robert E. Ewing and Sherry D. Ewing 10.25 Stock Purchase Agreement, dated as of May 8, 1998, by and among the Company, Sowers' Sanitation, Inc., James C. Sowers and Mildred A. Sowers 10.26 Stock Purchase Agreement, dated as of May 11, 1998, by and among the Company, T&T Disposal, Inc. and Timothy Thomas 21.1** Subsidiaries of the Registrant 23.1 Consent of Shartsis, Friese & Ginsburg LLP (included in opinion filed as Exhibit 5.1) 23.2 Consent of Ernst & Young LLP, Independent Auditors 23.3 Consent of Williams, Kastner & Gibbs PLLC 24.1** Power of Attorney (included in Part II of the Registration Statement under the caption "Signatures") 27.1** Financial Data Schedule
- --------------- ** Previously filed. + Filed without exhibits and schedules (to be provided supplementally on request of the Commission). (1) Pursuant to the 1997 Stock Option Plan, the Company issued options in this form to the following officers of the Company (or in certain cases to an entity controlled by such individual) for the number of shares of Common Stock indicated: Darrell W. Chambliss (150,000); Michael R. Foos (150,000); Ronald J. Mittelstaedt (100,000); Eric J. Moser (85,000); Steven F. Bouck (230,000); Eugene V. Dupreau (10,000) and Charles B. Youngclaus (10,000). The Company also issued options in this form to the following directors of the Company: Michael W. Harlan (15,000); and William J. Razzouk (15,000). (2) The Company issued warrants in this form to the following directors of the Company (or in certain cases to an entity controlled by such individual) for the number of shares of Common Stock indicated: James N. Cutler, Jr. (247,000); J. Bradford Bishop (247,000); Ronald J. Mittelstaedt (100,000). The Company also issued warrants in this form as follows: warrants to purchase 247,000 shares of Common Stock to Board consultant Frank W. Cutler; warrants to purchase an aggregate of 200,000 shares of Common Stock to the shareholders of Madera in connection with the Company's acquisition of Madera; warrants to purchase 20,000 shares of Common Stock to four consultants to the Company; and warrants to purchase 50,000 shares of Common Stock to Steven Bouck. (3) Each purchaser of shares in the Company's September 1997 private placement of 2,300,000 shares of Common Stock and 2,499,998 shares of Series A Preferred Stock entered into a Stock Purchase Agreement, Investors' Rights Agreement and Stockholders' Agreement in these forms with respect to the shares purchased. Subsequent holders of the Company's Common Stock have also become parties to the Investors' Rights and Stockholders' Agreements. EX-1.1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 2,000,000 Shares WASTE CONNECTIONS, INC. Common Stock ($.01 Par Value) UNDERWRITING AGREEMENT May ____, 1998 BT Alex. Brown Incorporated CIBC Oppenheimer Corp. 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 2,000,000 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 also proposes to sell at the Underwriters' option an aggregate of up to 300,000 additional shares of the Company's Common Stock (the "Option Shares") as set forth below. As the Representatives, you have advised the Company (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 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 -1- 2 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. The Company represents and warrants to each of the Underwriters as follows: (a) A registration statement on Form S-1 (File No. 333-48029) 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 the 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." (b) 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 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 -2- 3 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, in the case of the Subsidiaries, liens in favor of BankBoston N.A., as agent, to secure the obligations of the company and the Subsidiaries pursuant to the Revolving Credit Agreement filed as Exhibit 10.1 to the Registration Statement; 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. (c) The outstanding shares of Common Stock of the Company 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. (d) 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. (e) 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 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. (f) The consolidated financial statements of the Company and the Subsidiaries, together with related notes and schedules as set forth in the Registration Statement, present fairly the -3- 4 financial position and the results of operations and cash flows of the Company and the consolidated Subsidiaries, 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. (g) Ernst & Young, 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. (h) 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. (i) 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. (j) 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. -4- 5 (k) 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. (l) 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 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. (m) 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 -5- 6 Commission or the National Association of Securities Dealers, Inc. (the "NASD") has been obtained or made and is in full force and effect. (n) 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. (o) 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. (p) 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. (q) 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. (r) 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. (s) 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 -6- 7 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. (t) 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. 2. PURCHASE, SALE AND DELIVERY OF THE FIRM 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) 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 of certificates therefor 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.) The certificates for the Firm Shares will be delivered in such denominations and in such registrations as the Representatives request in writing not later than the second full business day prior to the Closing Date, and will be made available for inspection by the Representatives at least one business day prior to the Closing Date. (c) In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants 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 Company 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. 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 -7- 8 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 2,000,000, 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 Company. 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. 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 initial 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. The Company covenants and agrees with the several Underwriters that: (a) 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. -8- 9 (b) 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 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. (c) 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. (d) 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. (e) 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 -9- 10 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. (f) 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. (g) 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. (h) No offering, sale, short sale 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 180 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 exercise or issuance of options issued to employees, consultants and directors under the Company's 1997 Stock Option Plan to purchase up to 1,200,000 shares of the Company's Common Stock or with the prior written consent of BT Alex. Brown Incorporated. (i) The Company will use its best efforts to have the Shares approved for quotation on The Nasdaq National Market. (j) The Company has caused each officer, director and shareholder 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 shall agree not to offer, sell, sell short 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 180 days after the date of this Agreement, directly or indirectly, except with the prior written consent of BT Alex. Brown Incorporated ("Lockup Agreements"). -10- 11 (k) The Company shall apply the net proceeds of its sale of the Shares as set forth in the Prospectus and shall file such reports with the Commission with respect to the sale of the Shares and the application of the proceeds therefrom as may be required in accordance with Rule 463 under the Act. (l) 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. (m) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar for the Common Stock. (n) 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. 5. COSTS AND EXPENSES. The Company will pay all costs, expenses and fees incident to the performance of the obligations of the Company 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; the cost of printing and delivering to, or as requested by, the Underwriters copies of the Registration Statement, Preliminary Prospectuses, 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. The Company shall not, however, be required to pay for any of the Underwriter's 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 Company 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 Company shall reimburse the several Underwriters for 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 Company 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 -11- 12 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 contained herein, and to the performance by the Company of its 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, 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. (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, the outstanding shares of capital stock of each of the Subsidiaries is owned free and clear of all liens, encumbrances and equities and claims, except, in the case of the Subsidiaries, liens in favor of BankBoston N.A., as agent, to secure the obligations of the Company and the subsidiaries pursuant to the Revolving Credit Agreement filed as Exhibit 10.1 to the Registration Statement, 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. -12- 13 (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 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 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 -13- 14 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. (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. 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 -14- 15 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, 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 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 -- Results of Operations -- General," "Business -- Industry Overview," and " -- G Certificates" 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 -15- 16 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 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 Ernst & Young 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 -16- 17 hereof are true and correct as of the Closing Date or the Option Closing Date, as the case may be; (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 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(j) 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 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 and the Underwriters shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). -17- 18 7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY. The obligations of the Company 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; 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) 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 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 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 the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the -18- 19 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 or controlling person in connection with investigating or defending any such loss, claim, damage, liability, 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. (c) 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) or (b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) 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) or (b). 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, 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) and by the Company in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without -19- 20 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. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) 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 on the one hand and the 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 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 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 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 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 and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 8(d) 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(d). 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(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party -20- 21 in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (d), (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 and (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. The Underwriters' obligations in this Section 8(d) to contribute are several in proportion to their respective underwriting obligations and not joint. (e) 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 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 or it as an additional defendant in any such proceeding in which such other contributing party is a party. (f) 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 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, 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), 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 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 -21- 22 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 shares 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 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 or of the Company 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 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. 11. TERMINATION. This Agreement may be terminated by you by notice to the Company 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 first business day following 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 -22- 23 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 NASD; (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 organization" (as defined for purposes of Rule 436(g) under the Exchange Act); or (vii) 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 and the Company 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 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 information set forth in the last paragraph on the front cover page (insofar as such information relates to the Underwriters), 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 -23- 24 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. -24- 25 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 agreement among the Company and the several Underwriters in accordance with its terms. Very truly yours, WASTE CONNECTIONS, INC. By:____________________________________ Ronald J. Mittelstaedt, President and Chief Executive Officer The foregoing Underwriting Agreement is hereby confirmed and accepted as of the date first above written. BT ALEX. BROWN INCORPORATED CIBC OPPENHEIMER CORP. As Representatives of the several Underwriters listed on Schedule I By: BT Alex. Brown Incorporated By:____________________________________ Authorized Officer -25- 26 SCHEDULE I SCHEDULE OF UNDERWRITERS
Number of Firm Shares Underwriter to be Purchased - ----------- --------------------- BT Alex. Brown Incorporated CIBC Oppenheimer Corp. --------------------- Total 2,000,000 =====================
-26- EX-5.1 3 OPINION OF SHARTSIS, FRIESE & GINSBURG LLP 1 EXHIBIT 5.1 May 19, 1998 Waste Connections, Inc. 2260 Douglas Blvd., Suite 280 Roseville, California 95661 Ladies and Gentlemen: We have acted as counsel for Waste Connections, Inc. (the "Company") in connection with its Registration Statement on Form S-1 (File No. 333-48029) filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, relating to up to 2,300,000 shares of the Company's Common Stock, $0.01 par value, to be sold by the Company. We are of the opinion that the shares being so registered for sale have been duly authorized and, when sold and delivered as contemplated in such Registration Statement, will be validly issued, fully paid and nonassessable. We hereby consent to the filing of this opinion with the Securities and Exchange Commission as an exhibit to such Registration Statement. Very truly yours, SHARTSIS, FRIESE & GINSBURG LLP By /s/ Robert D. Evans Robert D. Evans EX-10.24 4 STOCK PURCHASE AGREEMENT-- SUNSHINE SANITATION 1 EXHIBIT 10.24 STOCK PURCHASE AGREEMENT Dated as of May 8, 1998, by and among Waste Connections, Inc. Sunshine Sanitation, Incorporated Robert E. Ewing Sherry D. Ewing 2 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT, dated as of May 8, 1998, is entered into by and among Waste Connections, Inc., a Delaware corporation ("WCI"), Sunshine Sanitation, Incorporated, a South Dakota corporation (the "CORPORATION"), and Robert E. Ewing and Sherry D. Ewing (collectively, the "SHAREHOLDER"). WHEREAS, the Corporation is engaged in the collection and transport of solid waste and recyclables in the Cities of Spearfish, Lead, Belle Fourche, Deadwood, Newell and Whitewood, South Dakota, and the unincorporated areas of Meade County, Lawrence County and Butte County, South Dakota, and Crook County, Wyoming and other related activities; WHEREAS, the Shareholder owns all of the issued and outstanding capital stock of the Corporation (the "CORPORATION'S STOCK"); WHEREAS, WCI wishes to acquire from the Shareholder all of the Corporation's Stock; NOW, THEREFORE, in consideration of the premises and of the mutual agreements, representations, warranties, provisions and covenants herein contained, the parties hereto, each intending to be bound hereby, agree as follows: 1. PURCHASE OF CORPORATION'S STOCK 1.1 SHARES TO BE PURCHASED. At the Closing (as defined in Section 2), the Shareholder shall sell and deliver to WCI all of the issued and outstanding shares of the Corporation's Stock, being the number of shares of the Corporation set forth on Schedule 3.2 opposite the Shareholder's name. At the Closing, WCI shall purchase the Corporation's Stock and in exchange therefor shall deliver to the Shareholder at the Closing or thereafter as provided by this Agreement the purchase price described in Section 1.2 (the "PURCHASE PRICE"). 1.2 PURCHASE PRICE. The Purchase Price is composed of the following: (a) One million twenty-nine thousand dollars ($1,029,000) (i) minus the Closing Date Debt (as defined in Section 3.22(a)), and (ii) plus or minus, as the case may be, the amount by which the Closing Date Current Assets (as defined in Section 3.22(b)) are greater or less than the Closing Date Current Liabilities (as defined in Section 3.22(b)). The $1,029,000 minus the Closing Date Debt shall be payable to the Shareholder at Closing in cash by wire transfer or check payable in clearinghouse funds. Within 120 days after the Closing Date, WCI shall perform all necessary calculations, adjustments and other acts necessary to convert the Corporation from a cash to accrual basis of financial reporting, and then, based on such accrual method, WCI shall determine the actual Closing Date Debt. If the difference between the actual amount and the 1 3 estimated amount provided at the Closing Date of Closing Date Debt results in an increase in the amount that should have been paid at the Closing over the amount that was so paid, WCI shall promptly pay such amount to the Shareholder; if the result is a decrease in the amount that should have been paid at the Closing from the amount that was so paid, the Shareholder shall promptly pay such amount to WCI. In addition, within 120 days after the Closing Date, WCI shall determine the actual Closing Date Current Assets and Closing Date Current Liabilities. If the Closing Date Current Assets are greater than the Closing Date Current Liabilities, WCI shall promptly pay the difference between the two amounts to the Shareholder; if the Closing Date Current Liabilities are greater than the Closing Date Current Assets, the Shareholder shall promptly the difference between the two amounts to WCI; (b) At the Closing, WCI shall deliver to the Shareholder a Promissory Note (the "NOTE") in the aggregate principal amount of two hundred thousand dollars ($200,000), which Note shall be payable in five equal annual installments of forty thousand dollars ($40,000) each. These annual installments shall be paid on the first, second, third, fourth and fifth anniversaries of the Closing Date. The Note shall be non-interest bearing and shall be secured by a lien on all of the assets of the Corporation; and (c) If the Shareholder owes the Corporation money ("SHAREHOLDER DEBT") and the Corporation owes the Shareholder money ("CORPORATION DEBT"), the amount by which the Shareholder Debt exceeds the Corporation Debt will be deducted from the Purchase Price payable to that Shareholder or the amount by which the Corporation Debt exceeds the Shareholder Debt will be added to the Purchase Price payable to that Shareholder and the remaining Corporation's Debt and Shareholder Debt shall be cancelled. 1.3 ALLOCATION OF THE PURCHASE PRICE. Ten thousand dollars ($10,000) of the Purchase Price shall be allocated to the covenant not to compete as described in Section 8.1(a) hereof, and the balance of the Purchase Price shall be allocated to the Corporation's Stock. 1.4 EXCLUDED ASSETS. The Assets of the Corporation listed on Schedule 1.4 (the "EXCLUDED ASSETS") shall be distributed to the Shareholder prior to the Closing, and WCI shall acquire no interest in or claim to any of the Excluded Assets. 2. CLOSING TIME AND PLACE Subject to the terms and conditions of this Agreement, the closing of the transactions contemplated herein (the "CLOSING") shall take place concurrent with the execution of this Agreement or on such date as WCI and the Shareholder's Representative shall agree (the "CLOSING DATE"). The Closing shall take place at the Law Offices of Shartsis, Friese & Ginsburg LLP, One Maritime Plaza, Suite 1800, San Francisco, California 94111, or through an exchange of consideration and signed documents using overnight courier service. At the Closing, WCI, the Corporation and the Shareholder shall deliver to each other the documents, instruments and 2 4 other items described in Section 5 of this Agreement. 3. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION AND THE SHAREHOLDER The Corporation and the Shareholder, jointly and severally, (i) represent and warrant that each of the following representations and warranties is true as of the Closing Date, and (ii) agree that such representations and warranties shall survive the Closing. 3.1 ORGANIZATION, STANDING AND QUALIFICATION. The Corporation is duly organized, validly existing and in good standing under the laws of the State of South Dakota. The Corporation has full corporate power and authority to own and lease its properties and to carry on its business as now conducted. The Corporation is registered as a foreign corporation in the State of Wyoming. Registration in any other jurisdiction is either immaterial or not required. 3.2 CAPITALIZATION. Schedule 3.2 sets forth, as of the Closing Date, the authorized and outstanding capital of the Corporation, the names, address and social security numbers of the record and beneficial owner thereof, the number of shares so owned and wire transfer instructions for the Shareholder relating to the bank account to which the Purchase Price should be sent. On the Closing Date, all of the issued and outstanding shares of the capital stock of the Corporation are owned of record and beneficially by the Shareholder, as set forth in Schedule 3.2, and are free and clear of all liens, security interests, encumbrances and claims of every kind except as set forth in Schedule 3.2. Each share of the capital stock of the Corporation is duly and validly authorized and issued, fully paid and nonassessable, and was not issued in violation of any preemptive rights of any past or present shareholder of the Corporation. No option, warrant, call, conversion right or commitment of any kind (including any of the foregoing created in connection with any indebtedness of the Corporation) exists which obligates the Corporation to issue any of its authorized but unissued capital stock or other equity interest or which obligates the Shareholder to transfer the Corporation's Stock to any person. 3.3 ALL STOCK BEING ACQUIRED. The Corporation's Stock being acquired by WCI hereunder constitutes all of the outstanding capital stock of the Corporation. 3.4 AUTHORITY FOR AGREEMENT. The Corporation and the Shareholder have full right, power and authority to enter into this Agreement and to perform its or his obligations hereunder. The execution and delivery of this Agreement by the Corporation and the consummation of the transactions contemplated hereby by the Corporation have been duly authorized by its Board of Directors. This Agreement has been duly and validly executed and delivered by the Corporation and the Shareholder and, subject to the due authorization, execution and delivery by WCI, constitutes the legal, valid and binding obligation of the Corporation and the Shareholder enforceable against each of them in accordance with its terms. 3.5 NO BREACH OR DEFAULT. Except as disclosed on Schedule 3.5, the execution and delivery by the Corporation and the Shareholder of this Agreement, and the consummation by the 3 5 Shareholder of the transactions contemplated hereby, will not: (a) result in the breach of any of the terms or conditions of, or constitute a default under, or allow for the acceleration or termination of, or in any manner release any party from any obligation under, any mortgage, lease, note, bond, indenture, or material contract, agreement, license or other instrument or obligation of any kind or nature to which the Corporation or the Shareholder is a party, or by which the Corporation or the Shareholder, or any of its or his assets, is or may be bound or affected; or (b) violate any law or any order, writ, injunction or decree of any court, administrative agency or governmental authority, or require the approval, consent or permission of any governmental or regulatory authority; or (c) violate the Articles of Incorporation or Bylaws of the Corporation. 3.6 SUBSIDIARIES. Schedule 3.6 lists as of the Closing Date any and all subsidiaries of the Corporation and any securities of any other corporation or any securities or other interest in any other business entity owned by the Corporation or any of its subsidiaries. 3.7 FINANCIAL STATEMENTS. The Corporation has delivered to WCI, as Schedule 3.7, copies of financial statements ("FINANCIAL STATEMENTS") for its three most recent fiscal years, compiled by Dean Heintz, C.P.A. and unaudited interim financial statements for the Corporation for the period ended April 30, 1998 (the "BALANCE SHEET DATE"). The Financial Statements are true and correct and fairly present (i) the financial position of the Corporation as of the respective dates of the balance sheets included in said statements, and (ii) the results of operations for the respective periods indicated. The Financial Statements have been prepared consistently with prior periods. Except to the extent reflected or reserved against in the Corporation's balance sheet as of the Balance Sheet Date, or as disclosed on Schedule 3.7 or Schedule 3.8, the Corporation had as of the Balance Sheet Date, and has as of the Closing Date, no liabilities of any nature, whether accrued, absolute, contingent or otherwise, including, without limitation, tax liabilities due or to become due. 3.8 LIABILITIES. Parts I, II, III and IV of Schedule 3.8, are accurate lists and descriptions of all liabilities of the Corporation required to be described below in the format set forth below. (a) Part I of Schedule 3.8 lists, as of the Closing Date, other than with respect to trade payables and as of the end of the month prior to the Closing Date with respect to trade payables, all indebtedness for money borrowed and all other fixed and uncontested liabilities of any kind, character and description (excluding all real and personal property leasehold interests included in Part IV of Schedule 3.8), whether reflected or not reflected on the Financial Statements and whether accrued or absolute, and states as to each such liability the amount of such liability and to whom payable. From the date as of which information is provided with 4 6 respect to trade payables, trade payables have been incurred only in the ordinary course of business consistent with comparable prior periods. (b) Part II of Schedule 3.8 lists, as of the Closing Date, all claims, suits and proceedings which are pending against the Corporation, all contingent liabilities, and, to the knowledge of the Corporation and the Shareholder, all contingent liabilities and all claims, suits and proceedings threatened or anticipated against the Corporation. Part II of Schedule 3.8 includes a summary description of each such liability, including, without limitation, (A) the name of each court, agency, bureau, board or body before which any such claim, suit or proceeding is pending, (B) the date such claim, suit or proceeding was instituted, (C) the parties to such claim, suit or proceeding, (D) a brief description of the factual basis alleged to underlie such claim, suit or proceeding, including the date or dates of all material occurrences, and (E) the amount claimed and other relief sought, together with copies of all material documents, reports and other records relating thereto to the extent that they are in the Corporation's or the Shareholder's possession or control. (c) Part III of Schedule 3.8 list, as of the Closing Date and to the extent not otherwise included in Part I of Schedule 3.8, all liens, claims and encumbrances secured by or otherwise affecting any asset of the Corporation (including any Corporate Property, as hereafter defined), including a description of the nature of such lien, claim or encumbrance, the amount secured if it secures a liability, the nature of the obligation secured, and the party holding such lien, claim or encumbrance. (d) Part IV of Schedule 3.8 lists, as of the Closing Date and to the extent not otherwise included in Part I or Part III of Schedule 3.8, all real and personal property leasehold interests to which the Corporation is a party as lessor or lessee or, to the knowledge of the Corporation or the Shareholder, affecting or relating to any Corporate Property, and includes a description of the nature and principal terms of such leasehold interest, including, without limitation, the identity of the other party thereto, the term of such leasehold interest (including renewal options), the base rent and any additional rent owing thereunder (including any adjustments thereto), security deposits, rights of first offer or first refusal, purchase options, and restrictions on transfer. Except as described on the applicable part of Schedule 3.8, neither the Corporation nor the Shareholder has made any payment or committed to make any payment since the Balance Sheet Date on or with respect to any of the liabilities or obligations listed on Schedule 3.8 except, in the case of liabilities and obligations listed on Parts I, III and IV of Schedule 3.8, periodic payments required to be made under the terms of the agreements or instruments governing such obligations or liabilities or made in the ordinary course of business. Between the Balance Sheet Date and the Closing Date, trade payables have been incurred only in the ordinary course of business consistent with comparable prior periods. 3.9 CONDUCT OF BUSINESS. Except as set forth on Schedule 3.21, since the Balance Sheet Date: 5 7 (a) The business of the Corporation has been conducted only in the ordinary course; and (b) There has been no change in the condition (financial or otherwise) of the assets, liabilities or operations of the Corporation other than changes in the ordinary course of business, none of which either singly or in the aggregate has been materially adverse. 3.10 PERMITS AND LICENSES. (a) Schedule 3.10(a) is a full and complete list, and includes copies, of all material permits, licenses, franchises, and service agreements pursuant to which the Corporation is authorized to collect and haul industrial, commercial and residential solid waste (the "COLLECTION FRANCHISES"), and of all other material permits, licenses, titles (including motor vehicle titles and current registrations), fuel permits, zoning and land use approvals and authorizations, including, without limitation, any conditional or special use approvals or zoning variances, occupancy permits, and any other similar documents constituting a material authorization or entitlement or otherwise material to the operation of the business of the Corporation (collectively the "GOVERNMENTAL PERMITS") owned by, issued to, held by or otherwise benefitting the Corporation or the Shareholder as of the Closing Date. The status of the Governmental Permits related to the disposal areas owned or used by the Corporation, including, without limitation, any conditions thereto and, if applicable, the expiration dates thereof, are also described in Schedule 3.10(a). Schedule 3.10(a) also sets forth the name of any governmental agency or other third party from whom the Shareholder, the Corporation or WCI must obtain consent (the "REQUIRED GOVERNMENTAL CONSENTS") in order to effect a direct or indirect transfer of the Collection Franchises or other Governmental Permits required as a result of the consummation of the transactions contemplated by this Agreement. All such consents have been obtained. Except as set forth on Schedule 3.10(a), all of the Collection Franchises and other Governmental Permits enumerated and listed on Schedule 3.10(a) are adequate for the operation of the business of the Corporation and of each Corporate Property as presently operated and are valid and in full force and effect. All of said Collection Franchises and other Governmental Permits and agreements have been duly obtained and are in full force and effect, and there are no proceedings pending or, to the actual knowledge of the Corporation or the Shareholder, threatened which may result in the revocation, cancellation, suspension or adverse modification of any of the same. Neither the Corporation nor the Shareholder has any actual knowledge of any reason why all such Governmental Permits and agreements will not remain in effect after consummation of the transactions contemplated hereby. (b) Schedule 3.10(b) includes: (i) all records, notifications, reports, permit and license applications, engineering and geologic studies, and environmental impact reports, tests or assessments (collectively, "RECORDS, NOTIFICATIONS AND REPORTS") that (A) are material to the operation of the business of the Corporation, or (B) relate to the discharge or release of materials into the environment and/or the handling or transportation of waste materials or 6 8 hazardous or toxic substances or otherwise relate to the protection of the public health or the environment, or (C) were filed with or submitted to appropriate governmental agencies during the past 24 months by the Corporation or the Shareholder or their agents with respect to the business of the Corporation, and (ii) all material notifications from such governmental agencies to the Corporation, the Shareholder or their agents in response to or relating to any of such Records, Notifications and Reports. (c) Schedule 3.10(c) lists, as of the Closing Date, each facility owned, leased, operated or otherwise used by the Corporation, the ownership, lease, operation or use of which is being transferred to, assumed by or otherwise acquired directly or indirectly by WCI pursuant to this Agreement or the Real Estate Agreement (each, a "FACILITY" and collectively, the "FACILITIES"). Except as otherwise disclosed on Schedule 3.10(c): (i) Each Facility is fully licensed, permitted and authorized to carry on its current business under all applicable federal, state and local statutes, orders, approvals, zoning or land use requirements, rules and regulations, and no Facility or the current use thereof constitutes a non-conforming use or is otherwise subject to any restrictions regarding the operation, renovation or reconstruction thereof. (ii) All activities and operations at each Facility are being and have been conducted in compliance in all material respects with the requirements, criteria, standards and conditions set forth in all applicable federal, state and local statutes, orders, approvals, permits, zoning or land use requirements and restrictions, variances, licenses, rules and regulations. (iii) Each Facility is located on real property owned or leased by the Corporation (each a "FACILITY PROPERTY") and each Facility Property owned by the Corporation is legally described on the preliminary title reports, surveys or site plans attached to Schedule 3.10(c) (the "FACILITY SURVEYS/SITE PLANS"), which accurately depict the respective Facility Property. (iv) There are no circumstances, conditions or reasons which are likely to be the basis for revocation or suspension of any Facility's site assessments, permits, licenses, consents, authorizations, zoning or land use permits, variances or approvals relating to any Facility owned by the Corporation or owned by the Shareholder or an Affiliate (as hereinafter defined) of the Shareholder and leased to the Corporation, and to the knowledge of the Corporation and the Shareholder there are no circumstances, conditions or reasons which are likely to be the basis for revocation or suspension of any site assessment, permits, licenses, consents, authorizations, zoning or land use permits, variances or approvals relating to any Facility. 3.11 CERTAIN RECEIVABLES. Schedule 3.11 is an accurate list as of the Closing Date of the accounts and notes receivable of the Corporation from and advances to employees, former employees, officers, directors, the Shareholder and Affiliates of the foregoing which have not 7 9 been repaid. For purposes of this Agreement, the term "AFFILIATE" means, with respect to any person, any person that directly or indirectly through one or more intermediaries controls or has an ownership interest in, or is controlled or owned in whole or in part by, or is under common control or ownership in whole or in part with such person, and in the case of the Corporation includes directors and officers, in the case of individuals includes the individual's spouse, father, mother, grandfather, grandmother, brothers, sisters, children and grandchildren and in the case of a trust includes the grantors, trustees and beneficiaries of the trust. 3.12 FIXED ASSETS AND REAL PROPERTY. (a) Schedule 3.12(a) lists, as of the Closing Date, substantially all the fixed assets (other than real estate) of the Corporation, including, without limitation, identification of each vehicle by description and serial number, identification of machinery, equipment and general descriptions of parts, supplies and inventory. Except as described on Schedule 3.12(a), all of the Corporation's containers, vehicles, machinery and equipment necessary for the operation of its business are in operable condition, and all of the motor vehicles and other rolling stock of the Corporation are in material compliance with all applicable laws, rules and regulations. All such containers, vehicles, machinery and equipment are substantially free of known defects that would cause them to fail, except as noted on Schedule 3.12(a). All leases of fixed assets are in full force and effect and binding upon the parties thereto; neither the Corporation nor, to the knowledge of the Corporation or the Shareholder, any other party to such leases is in breach of any of the material provisions thereof. (b) Each parcel of real property leased, owned or being purchased by the Corporation as of the Closing Date (the "CORPORATE PROPERTY"), including the street address and, in the case of Corporate Property owned or being purchased, the legal description thereof, is listed on Schedule 3.12(b) - Part I, and attached to said Schedule 3.12(b) - Part I are copies of all leases, deeds, outstanding mortgages, other encumbrances and any existing title insurance policies or lawyer's title opinions relating to each Corporate Property, as well as a current commitment for title insurance issued by a title insurance company satisfactory to WCI with respect to each Corporate Property owned or being purchased by the Corporation, together with copies of all of the title exceptions referred to in each such commitment. All leases listed on Schedule 3.12(b) - Part I are in full force and effect and binding on the parties thereto; neither the Corporation nor, to the knowledge of the Corporation and the Shareholder, any other party to any such lease is in breach of any of the material provisions thereof; the landlord's interest in any such lease has not been assigned to any third party nor has any such interest been mortgaged, pledged or hypothecated; and the Corporation has not assigned any such lease or sublet all or any part of the Corporate Property which is the subject of any such lease. Except as described on Schedule 3.12(b) - Part II, to the actual knowledge of the Corporation and the Shareholder, there are no material physical or mechanical defects in any Facility located on any Corporate Property and each such Facility is in good condition and repair. (c) The Corporation has good, valid and marketable title to all properties and assets, real, personal, and mixed, tangible and intangible, actually used or necessary for the 8 10 conduct of its business, free of any encumbrance or charge of any kind except: (i) liens for current taxes not yet due; (ii) minor imperfections of title and encumbrances, if any, that are not substantial in amount, do not materially reduce the value or impair the use of the property subject thereto, do not materially impair the value of the Corporation, and have arisen only in the ordinary course of business and consistent with past practice; and (iii) the liens identified on Part III of Schedule 3.8 (collectively, the "PERMITTED LIENS"). Except as described on Schedule 3.12(b) - Part I, there are no leases, occupancy agreements, options, rights of first refusal or any other agreements or arrangements, either oral or written, that create or confer in any person or entity the right to acquire, occupy or possess, now or in the future, any Facility, any Corporate Property, or any portion thereof, or create in or confer on any person or entity any right, title or interest therein or in any portion thereof. 3.13 ACQUISITION/DISPOSAL OF ASSETS. Except as indicated on Schedule 3.13, since the Balance Sheet Date, the Corporation has not acquired or sold or otherwise disposed of any properties or assets which, singly or in the aggregate, have a value in excess of $10,000, or which are material to the operation of the Corporation's business as presently conducted, without the prior written consent of WCI. 3.14 CONTRACTS AND AGREEMENTS; ADVERSE RESTRICTIONS. (a) Schedule 3.14(a) lists, as of the Closing Date, and includes copies of, all material contracts and agreements (other than leases and documents included with Schedule 3.12(b)) to which the Corporation is a party or by which it or any of its property is bound (including, but not limited to, joint venture or partnership agreements, contracts with any labor organizations, promissory notes, loan agreements, bonds, mortgages, deeds of trust, liens, pledges, conditional sales contracts or other security agreements). Except as disclosed on Schedule 3.14(a), all such contracts and agreements included in Schedule 3.14(a) are in full force and effect and binding upon the parties thereto. Except as described or cross referenced on Schedule 3.14(a), neither the Corporation nor, to the Corporation's or the Shareholder's knowledge, any other parties to such contracts and agreements is in breach thereof, and none of the parties has threatened to breach any of the material provisions thereof or notified the Corporation or the Shareholder of a default thereunder, or exercised any options thereunder. (b) Except as set forth on Schedule 3.14(b), there is no outstanding judgment, order, writ, injunction or decree against the Corporation, the result of which could materially adversely affect the Corporation or its business or any of the Corporate Properties, nor has the Corporation been notified that any such judgment, order, writ, injunction or decree has been requested. 3.15 INSURANCE. Schedule 3.15 is a complete list and includes copies, as of the Closing Date, of all insurance policies in effect on the Closing Date or, with respect to "occurrence" policies that were in effect, carried by the Corporation in respect of the Corporate Properties or any other property used by the Corporation specifying, for each policy, the name of the insurer, the type of risks insured, the deductible and limits of coverage, and the annual premium therefor. 9 11 The Corporation currently carries insurance in the type and amount ordinarily carried by owners or corporations in similar circumstances, in respect to the Corporation' properties, assets and business. During the last five years, there has been no lapse in any material insurance coverage of the Corporation. For each insurer providing coverage for any of the contingent or other liabilities listed on Schedule 3.8, except to the extent otherwise set forth in Part II of Schedule 3.8, each such insurer, if required, has been properly and timely notified of such liability, no reservation of rights letters have been received by the Corporation and the insurer has assumed defense of each suit or legal proceeding. All such proceedings are fully covered by insurance, subject to normal deductibles. 3.16 PERSONNEL. Schedule 3.16 is a complete list, as of the Closing Date, of all officers, directors and employees (by type or classification) of the Corporation and their respective rates of compensation, including (i) the portions thereof attributable to bonuses, (ii) any other salary, bonus, stock option, equity participation, or other compensation arrangement made with or promised to any of them, and (iii) copies of all employment agreements with non-union officers, directors and employees. Schedule 3.16 also lists the driver's license number for each driver of the Corporation's motor vehicles. 3.17 BENEFIT PLANS AND UNION CONTRACTS. (a) Schedule 3.17(a) is a complete list as of the Closing Date, and includes complete copies (or, in the case of oral arrangements, descriptions), of all employee benefit plans and agreements (written or oral) currently maintained or contributed to by the Corporation, including employment agreements and any other agreements containing "golden parachute" provisions, retirement plans, welfare benefit plans and deferred compensation agreements, together with copies of such plans, agreements and any trusts related thereto, and classifications of employees covered thereby as of the Closing Date. Except for the employee benefit plans described on Schedule 3.17(a), the Corporation has no other pension, retirement, welfare, profit sharing, deferred compensation, stock option, employee stock purchase or other employee benefit plans or arrangements with any party. Except as disclosed on Schedule 3.17(a), all employee benefit plans listed on Schedule 3.17(a) are fully funded and in substantial compliance with all applicable federal, state and local statutes, ordinances and regulations. All such plans that are intended to qualify under Section 401(a) of the Internal Revenue Code have been determined by the Internal Revenue Service to be so qualified, and copies of such determination letters are included as part of Schedule 3.17(a). Except as disclosed on Schedule 3.17(a), all reports and other documents required to be filed with any governmental agency or distributed to plan participants or beneficiaries (including, but not limited to, actuarial reports, audits or tax returns) have been timely filed or distributed, and copies thereof are included as part of Schedule 3.17(a). All employee benefit plans listed on such Schedule have been operated in accordance with the terms and provisions of the plan documents and all related documents and policies. The Corporation has not incurred any liability for excise tax or penalty due to the Internal Revenue Service or U.S. Department of Labor nor any liability to the Pension Benefit Guaranty Corporation for any employee benefit plan, nor has the Corporation, nor party-in-interest or disqualified person, engaged in any transaction or other activity which would give rise to such 10 12 liability. The Corporation has not participated in or made contributions to any "multi-employer plan" as defined in the Employee Retirement Income Security Act of 1974 ("ERISA"), nor would the Corporation or any affiliate be subject to any withdrawal liability with respect to such a plan if any such employer withdrew from such a plan immediately prior to the Closing Date. No employee pension benefit plan is under funded on a termination basis as of the date of this Agreement. (b) Schedule 3.17(b) is a complete list, as of the Closing Date, and includes complete copies of all union contracts and agreements between the Corporation and any collective bargaining group. The Corporation is in compliance in all material respects with all applicable federal and state laws respecting employment and employment practices, terms and conditions of employment, wages and hours, and nondiscrimination in employment, and is not engaged in any unfair labor practice. There is no charge pending or, to the Corporation's or the Shareholder's knowledge, threatened, against the Corporation before any court or agency and alleging unlawful discrimination in employment practices and there is no charge of or proceeding with regard to any unfair labor practice against it pending before the National Labor Relations Board. There is no labor strike, dispute, slow down or stoppage as of the Closing Date, existing or threatened against the Corporation; no union organizational activity exists respecting employees of the Corporation not currently subject to a collective bargaining agreement; the union contracts or other agreements delivered as part of Schedule 3.17(b) constitute all agreements with the unions or other collective bargaining groups, and there are no other arrangements or established practices relating to the employees covered by any collective bargaining agreement; and Schedule 3.17(b) contains as of the date it is delivered a list of all arbitration or grievance proceedings that have occurred since the Balance Sheet Date. No one has petitioned within the last five years, and no one is now petitioning, for union representation of any employees of the Corporation. The Corporation has not experienced any labor strike, slow-down, work stoppage, labor difficulty or other job action during the last five years. (c) No payment made to any employee, officer, director or independent contractor of the Corporation (the "RECIPIENT") pursuant to any employment contract, severance agreement or other arrangement (the "Golden Parachute Payment") will be nondeductible by the Corporation because of the application of Sections 280G and 4999 of the Code to the Golden Parachute Payment, nor will the Corporation be required to compensate any Recipient because of the imposition of an excise tax (including any interest or penalties related thereto) on the Recipient by reason of Sections 280G and 4999 of the Code. 3.18 TAXES. (a) The Corporation has timely filed all requisite federal, state, local and other tax and information returns due for all fiscal periods ended on or before the Closing Date. All such returns are accurate and complete. Except as set forth on Schedule 3.18, there are no open years (other than those within the statute of limitations), examinations in progress, extensions of any statute of limitations or claims against the Corporation relating to federal, state, local or other taxes (including penalties and interest) for any period or periods prior to and including the 11 13 Closing Date and no notice of any claim for taxes has been received. Copies of (i) any tax examinations, (ii) extensions of statutory limitations and (iii) the federal income, and state franchise, income and sales tax returns of the Corporation for its last three fiscal years are attached as part of Schedule 3.18. Copies of all other federal, state, local and other tax and information returns for all prior years of the Corporation's existence have been made available to WCI and are among the records of the Corporation which will accrue to WCI at the Closing. The Corporation has not been contacted by any federal, state or local taxing authority regarding a prospective examination. (b) Except as set forth on Schedule 3.18 (which schedule also includes the amount due with respect to the Corporation) the Corporation has duly paid all taxes and other related charges required to be paid prior to the Closing Date. (c) The Corporation has withheld all required amounts from its employees for all pay periods in full and complete compliance with the withholding provisions of applicable federal, state and local laws. All required federal, state and local and other returns with respect to income tax withholding, social security, and unemployment taxes have been duly filed by the Corporation for all periods for which returns are due, and the amounts shown on all such returns to be due and payable have been paid in full. 3.19 COPIES COMPLETE; REQUIRED CONSENTS. Except as disclosed on Schedule 3.19, the certified copies of the Articles of Incorporation and Bylaws of the Corporation, both as amended to the Closing Date, and the copies of all leases, instruments, agreements, licenses, permits, certificates or other documents that have been delivered to WCI in connection with the transactions contemplated hereby are complete and accurate as of the Closing Date and are true and correct copies of the originals thereof. Except as specifically disclosed on Schedule 3.19, the rights and benefits of the Corporation will not be adversely affected by the transactions contemplated hereby, and the execution of this Agreement and the performance of the obligations hereunder will not violate or result in a breach or constitute a default under any of the terms or provisions thereof. None of such leases, instruments, agreements, licenses, permits, site assessments, certificates or other documents requires notice to, or consent or approval of, any governmental agency or other third party to any of the transactions contemplated hereby, except the Required Governmental Consents, such consents and approvals as are listed on Schedule 3.19; all of which will have been given or obtained prior to the Closing. 3.20 CUSTOMERS, BILLINGS, CURRENT RECEIPTS AND RECEIVABLES. Schedule 3.20 is a current, accurate and complete list of, and includes: (a) the customers the Corporation serves on an ongoing basis, including name, location and current billing rate, as of the Closing Date; (b) an accurate and complete aging of all accounts and notes receivable from customers as of the last day of the month preceding the month in which such Schedule is delivered, showing amounts due in 30-day aging categories; and 12 14 (c) the average monthly revenues of the Corporation derived from billings to its customers for each of the twelve months preceding the Closing Date. Except as set forth on Schedule 3.20, the Corporation and the Shareholder have no knowledge of any reason why the Corporation's average monthly revenues derived from billings to its customers after the Closing Date should not continue at approximately the same rate as before the Closing Date. 3.21 NO CHANGE WITH RESPECT TO THE CORPORATION. Except as set forth on Schedule 3.21, since the Balance Sheet Date, the business of the corporation has been conducted only in the ordinary course and there has been no change in the condition (financial or otherwise) of the assets, liabilities or operations of the Corporation other than changes in the ordinary course of business, none of which either singly or in the aggregate has been materially adverse. Specifically, and without limiting the generality of the foregoing, except as set forth on Schedule 3.21, with respect to the Corporation, since the Balance Sheet Date, there has not been: (a) any material change in its financial condition, assets, liabilities (contingent or otherwise), income, operations or business which would have a material adverse effect on the financial condition, assets, liabilities (contingent or otherwise), income, operations or business of the Corporation, taken as a whole; (b) any material damage, destruction or loss (whether or not covered by insurance) adversely affecting any material portion of its properties or business; (c) any change in or agreement to change (i) its shareholders, (ii) ownership of its authorized capital or outstanding securities, or (iii) its securities; (d) any declaration or payment of, or any agreement to declare or pay, any dividend or distribution in respect of its capital stock or any direct or indirect redemption, purchase or other acquisition of any of its capital stock; (e) any material increase or bonus or promised increase or bonus in the compensation payable or to become payable by it, in excess of usual and customary practices, to any of its directors, officers, employees or agents, or any accrual or arrangement for or payment of any bonus or other special compensation to any employee or any severance or termination pay paid to any of its present or former officers or other key employees; (f) any labor dispute or any other event or condition of any character with respect to the Corporation's employees, materially adversely affecting its business or future prospects; (g) any sale or transfer, or any agreement to sell or transfer, any of its material assets, property or rights to any other person, including, without limitation, the Shareholder and his Affiliates, other than in the ordinary course of business; 13 15 (h) any cancellation, or agreement to cancel, any material indebtedness or other material obligation owing to it, including, without limitation, any indebtedness or obligation of the Shareholder or any of his Affiliates; (i) any plan, agreement or arrangement granting any preferential rights to purchase or acquire any interest in any of its assets, property or rights or requiring consent of any party to the transfer and assignment of any such assets, property or rights; (j) any purchase or acquisition of, or any agreement, plan or arrangement to purchase or acquire, any of its property, rights or assets outside the ordinary course of its business; (k) any waiver of any of its material rights or claims; (l) any new or any amendment or termination of any existing material contract, agreement, license, permit or other right to which it is a party; (m) any other material transaction outside the ordinary course of its business. 3.22 CLOSING DATE DEBT; CLOSING DATE CURRENT ASSETS AND CLOSING DATE CURRENT LIABILITIES. (a) Schedule 3.22(a) is an estimate based on the Corporation's balance sheet for the period ending on the Balance Sheet Date of (i) the amount of the aggregate debt (excluding trade payables) of the Corporation outstanding on the Closing Date required to be repaid by WCI at or immediately after the Closing Date and all prepayment penalties incurred or to be incurred by WCI or the Corporation in connection with the repayment of any such debt, (ii) the amount of the aggregate debt (excluding trade payables) of the Corporation outstanding on the Closing Date which will remain outstanding obligations of the Corporation after the Closing Date, and all prepayment penalties applicable to such debt if repaid prior to maturity, including in each case all interest accrued through and including the Closing Date, (iii) the aggregate amount of the present value, discounted at the lease rate factor, if known, inherent in the lease or, if the lease rate factor is not known, at the rate charged to the Corporation by a third party lender in connection with its most recent borrowing to finance equipment, of all lease obligations of the Corporation that are not capitalized lease obligations and (iv) the aggregate amount of the present value of all capitalized lease obligations (determined in accordance with generally accepted accounting principles) of the Corporation (the "CLOSING DATE DEBT"). Schedule 3.22(a) includes wire transfer instructions for creditors whose Closing Date Debt WCI has designated for payment, and attached to Schedule 3.22(a) are pay-off letters or instructions from such creditors in the form provided by WCI's bank. (b) Schedule 3.22(b) is an estimate based on the Corporation's balance sheet for the period ending on the Closing Date of the amount of the aggregate current liabilities 14 16 (including any reserve for unpaid taxes and excluding the current portion of long-term debt to the extent such current portion is included in Closing Date Debt) and trade payables of the Corporation (including billed trade payables and trade payables incurred but not yet billed) as of the Closing Date (the "CLOSING DATE CURRENT LIABILITIES") and the amount of the aggregate cash and other current assets of the Corporation as of the Closing Date, including prepaid expenses the benefit of which survives the Closing Date and the billed and unbilled accounts receivable of the Corporation earned prior to the Closing Date, and collectible on or after the Closing Date (the "CLOSING DATE CURRENT ASSETS"). The Corporation and the Shareholder expressly acknowledge that in arriving at the Closing Date Current Assets, accounts receivable owed to the Corporation that are outstanding sixty (60) days or less prior to the Closing Date are valued at one hundred percent (100%) of their amount, accounts receivable outstanding sixty-one (61) to ninety (90) days prior to the Closing Date are valued at forty percent (40%) of their amount, and that any amounts outstanding more than ninety (90) days prior to the Closing Date are valued at zero. 3.23 BANK ACCOUNTS. (a) Schedule 3.23(a) is a complete and accurate list, as of the Closing Date, of: (i) the name of each bank in which the Corporation has accounts or safe deposit boxes; (ii) the name(s) in which the accounts or boxes are held; (iii) the type of account; and (iv) the name of each person authorized to draw thereon or have access thereto. (b) Schedule 3.23(b) is a complete and accurate list, as of the Closing Date, of: (i) each credit card or other charge account issued to the Corporation; and (ii) the name of each person to whom such credit cards or other charge accounts have been issued. 3.24 COMPLIANCE WITH LAWS. Except as disclosed on Schedule 3.24, the Corporation, has complied with, and the Corporation is presently in compliance with, federal, state and local laws, ordinances, codes, rules, regulations, Governmental Permits, orders, judgments, awards, decrees, consent judgments, consent orders and requirements applicable to it (collectively "LAWS"), including, but not limited to, the Americans with Disabilities Act, the Federal Occupational Safety and Health Act, and Laws relating to the public health, safety or protection 15 17 of the environment (collectively, "ENVIRONMENTAL LAWS"). Except as disclosed on Schedule 3.24, there has been no assertion by any party that the Corporation is in violation of any Laws. Specifically and without limiting the generality of the foregoing, except as disclosed on Schedule 3.24: (a) Except as permitted under applicable laws and regulations, including, without limitation, the federal Resource Conservation Recovery Act, 42 USC Section 6901 et seq. ("RCRA"), the Corporation has not accepted, processed, handled, transferred, generated, treated, stored or disposed of any Hazardous Material (as defined in Section 3.24(e) below) nor has it accepted, processed, handled, transferred, generated, treated, stored or disposed of asbestos, medical waste, radioactive waste or municipal waste, except in compliance with Environmental Laws. (b) During the Corporation's ownership or leasing of the Corporate Property owned or leased by it and, to the knowledge of the Corporation and the Shareholder, prior to the Corporation's ownership or leasing of such Corporate Property, no Hazardous Material, other than that allowed under Environmental Laws, including, without limitation, RCRA, has been disposed of, or otherwise released on any Corporate Property. (c) During the Corporation's ownership or leasing of the Corporate Property owned or leased by it and, to the knowledge of the Corporation and the Shareholder, prior to the Corporation's ownership or leasing of such Corporate Property, no Corporate Property has ever been subject to or received any notice of any private, administrative or judicial action, or notice of any intended private, administrative or judicial action relating to the presence or alleged presence of Hazardous Material in, under, upon or emanating from any Corporate Property or any real property now or previously owned or leased by the Corporation. There are no pending and, to the Corporation's and Shareholder's knowledge, no threatened actions or proceedings from any governmental agency or any other entity involving remediation of any condition of the Corporate Property, including, without limitation, petroleum contamination, pursuant to Environmental Laws. (d) Except as allowed under Environmental Laws, the Corporation has not knowingly sent, transported or arranged for the transportation or disposal of any Hazardous Material, to any site, location or facility. (e) As used in this Agreement, "HAZARDOUS MATERIAL" means the substances (i) defined as "HAZARDOUS WASTE" in 40 CFR 261, and substances defined in any comparable South Dakota statute or regulation; (ii) any substance the presence of which requires remediation pursuant to any Environmental Laws; and (iii) any substance disposed of in a manner not in compliance with Environmental Laws. 3.25 POWERS OF ATTORNEY. The Corporation has not granted any power of attorney (except routine powers of attorney relating to representation before governmental agencies) or 16 18 entered into any agency or similar agreement whereby a third party may bind or commit the Corporation in any manner. 3.26 UNDERGROUND STORAGE TANKS. Except as set forth on Schedule 3.26, no underground storage tanks containing petroleum products or wastes or other hazardous substances regulated by 40 CFR 280 or Environmental Laws are currently or have been located on any Corporate Property. Except as set forth on Schedule 3.26, the Corporation has never owned or leased any real property not included in the Corporate Property having any underground storage tanks containing petroleum products or wastes or other hazardous substances regulated by 40 CFR 280. As to each such underground storage tank ("UST") identified on Schedule 3.26, the Corporation has provided to WCI, on Schedule 3.26: (a) the location of the UST, information and material, including any available drawings and photographs, showing the location, and whether the Corporation currently owns or leases the property on which the UST is located (and if the Corporation does not currently own or lease such property, the dates on which it did and the current owner or lessee of such property); (b) the date of installation and specific use or uses of the UST; (c) copies of tank and piping tightness tests and cathodic protection tests and similar studies or reports for each UST; (d) a copy of each notice to or from a governmental body or agency relating to the UST; (e) other material records with regard to the UST, including, without limitation, repair records, financial assurance compliance records and records of ownership; and (f) to the extent not otherwise set forth pursuant to the above, a summary description of instances, past or present, in which, to the Corporation's, or the Shareholder's knowledge, the UST failed to meet applicable standards and regulations for tightness or otherwise and the extent of such failure, and any other operational or environmental problems with regard to the UST, including, without limitation, spills, including spills in connection with delivery of materials to the UST, releases from the UST and soil contamination. Except to the extent set forth on Schedule 3.26, the Corporation has complied with Environmental Laws regarding the installation, use, testing, monitoring, operation and closure of each UST described on Schedule 3.26. 3.27 PATENTS, TRADEMARKS, TRADE NAMES, ETC. Schedule 3.27 lists all patents, tradenames, fictitious business names, trademarks, service marks, and copyrights owned by the 17 19 Corporation or which it is licensed to use (other than licenses to use software for personal computer operating systems that were provided when the computer was purchased and licenses to use software for personal computers that are granted to retail purchasers of such software). No patents, trade secrets, know-how, intellectual property, trademarks, trade names, assumed names, copyrights, or designations used by the Corporation in its business infringe on any patents, trademarks, or copyrights, or any other rights of any person. Neither the Corporation nor the Shareholder knows or has any reason to believe that there are any claims of third parties to the use of any such names or any similar name, or knows of or has any reason to believe that there exists any basis for any such claim or claims. WCI gives its consent to the Shareholder to form a corporation by the name of Sunshine, Inc. 3.28 ASSETS, ETC., NECESSARY TO BUSINESS. The Corporation owns or leases all properties and assets, real, personal, and mixed, tangible and intangible, and, except as disclosed on Schedules 3.5, 3.10(a), 3.10(c), 3.14(a) and 3.19, is a party to all Collection Franchises and Governmental Permits and other agreements necessary to permit it to carry on its business as presently conducted. All of said Collection Franchises and Governmental Permits and agreements have been duly obtained and, except as disclosed on Schedules 3.5, 3.8-Part II, 3.10(a), 3.10(c) 3.14(a) and 3.19, are in full force and effect and there are no proceedings pending or threatened which may result in the revocation, cancellation, suspension or adverse modification of any of the same. Neither the Corporation nor the Shareholder has any knowledge of any reason why all such Collection Franchises and Governmental Permits and agreements will not remain in effect after consummation of the transactions contemplated hereby. 3.29 CONDEMNATION. No Corporate Property owned or leased by the Corporation is the subject of, or would be affected by, any pending condemnation or eminent domain proceedings, and, to the knowledge of the Corporation and the Shareholder, no such proceedings are threatened. 3.30 SUPPLIERS AND CUSTOMERS. The relations between the Corporation and its customers are good. Neither the Corporation nor the Shareholder has knowledge of any fact (other than general economic and industry conditions) which indicates that any of the suppliers supplying products, components, materials or providing use of, or access to, landfills or disposal sites to the Corporation intends to cease providing such items to the Corporation, nor does the Corporation or the Shareholder have knowledge of any fact (other than general economic and industry conditions) which indicates that any of the customers of the Corporation intends to terminate, limit or reduce its business relations with the Corporation. 3.31 ABSENCE OF CERTAIN BUSINESS PRACTICES. Neither the Corporation nor the Shareholder has directly or indirectly within the past five years given or agreed to give any gift or similar benefit to any customer, supplier, governmental employee or other person who is or may be in a position to help or hinder the business of the Corporation in connection with any actual or proposed transaction which (a) might subject the Corporation to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (b) if not given in the past, might have had an adverse effect on the financial condition, business or results of operations of the 18 20 Corporation, or (c) if not continued in the future, might adversely affect the financial condition, business or operations of the Corporation or which might subject the Corporation to suit or penalty in any private or governmental litigation or proceeding. 3.32 RELATED PARTY TRANSACTIONS. Neither the Shareholder nor any of his Affiliates has entered into any transaction with or is a party to any agreement, lease or other instrument, or as of the date of this Agreement is indebted to or is owed money by, the Corporation not disclosed on the Financial Statements delivered to WCI prior to the date of this Agreement. Except as disclosed in the Financial Statements, neither the Shareholder or his Affiliates owns any direct or indirect interest of any kind in, or controls or is a director, officer, employee, shareholder or partner of, or consultant or lender to or borrower from or has the right to participate in the profits of, any Person which is a competitor, supplier, customer, landlord, tenant, creditor or debtor of the Corporation. 3.33 DISCLOSURE SCHEDULES. Any matter disclosed on any Schedule to this Agreement shall be deemed to have been disclosed on every other Schedule that refers to such Schedule by cross reference so long as the nature of the matter disclosed is obvious from a fair reading of the Schedule on which the matter is disclosed. 3.34 NO MISLEADING STATEMENTS. The representations and warranties of the Corporation and the Shareholder contained in this Agreement, the Exhibits and Schedules hereto and all other documents and information furnished to WCI and its representatives pursuant hereto are complete and accurate in all material respects and do not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements made and to be made not misleading. 3.35 ACCURATE AND COMPLETE RECORDS. The corporate minute books, stock ledgers, books, ledgers, financial records and other records of the Corporation: (a) have been made available to WCI and its agents at the Corporation's offices or at the offices of WCI's attorneys or the Corporation's attorneys; (b) have been, in all material respects, maintained in accordance with all applicable laws, rules and regulations; and (c) are accurate and complete, reflect all material corporate transactions required to be authorized by the Boards of Directors and/or shareholders of the Corporation and do not contain or reflect any material discrepancies. 3.36 KNOWLEDGE. Wherever reference is made in this Agreement to the "KNOWLEDGE" of the Shareholder, such term means the actual knowledge of the Shareholder or any knowledge which should have been obtained by the Shareholder upon reasonable inquiry by a reasonable business person. Wherever reference is made in this Agreement to the "knowledge" of the Corporation, such term means the actual knowledge of any management employee, officer or 19 21 director of the Corporation or any knowledge which should have been obtained by any such person upon reasonable inquiry by a reasonable business person. 3.37 BROKERS; FINDERS. No person has acted directly or indirectly as a broker, finder or financial advisor for the Corporation or the Shareholder in connection with the transactions contemplated by this Agreement and no person is entitled to any broker's, finder's, financial advisory or similar fee or payment in respect thereof based in any way on any agreement, arrangement or understanding made by or on behalf of the Corporation or the Shareholder. 3.38 S CORPORATION. The Corporation has elected to be taxed as an S Corporation under the Internal Revenue Code of 1986, as amended, for all the years listed on Schedule 3.39. 4. REPRESENTATIONS AND WARRANTIES OF WCI WCI represents and warrants to the Shareholder that each of the following representations and warranties is true as of the date of this Agreement and will be true as of the Closing Date, and agrees that such representations and warranties shall survive the Closing: 4.1 EXISTENCE AND GOOD STANDING. WCI is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. WCI has full corporate power and authority to own and lease its properties and to carry on its business as now conducted. WCI is not required to be qualified or licensed to conduct business as a foreign corporation in any jurisdiction where the failure to be so qualified would have a material adverse effect on its financial condition. 4.2 NO CONTRACTUAL RESTRICTIONS. No provisions exist in any article, document or instrument to which WCI is a party or by which it is bound which would be violated by consummation of the transactions contemplated by this Agreement. 4.3 AUTHORIZATION OF AGREEMENT. This Agreement has been duly authorized, executed and delivered by WCI and, subject to the due authorization, execution and delivery by the Corporation and the Shareholder, constitutes a legal, valid and binding obligation of WCI. WCI has full corporate power, legal right and corporate authority to enter into and perform its obligations under this Agreement and to carry on its business as presently conducted. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and the fulfillment of and compliance with the terms and conditions hereof do not and will not, after the giving of notice, or the lapse of time or otherwise: (a) violate any provisions of any judicial or administrative order, award, judgment or decree applicable to WCI; (b) conflict with any of the provisions of the Amended and Restated Certificate of Incorporation or Amended and Restated Bylaws of WCI; or (c) conflict with, result in a breach of or constitute a default under any material agreement or instrument to which WCI is a party or by which it is bound. 4.4 NO MISLEADING STATEMENTS. The representations and warranties of WCI contained in this Agreement, the Exhibits and Schedules hereto and all other documents and 20 22 information furnished to the Shareholder pursuant hereto are materially complete and accurate, and do not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements made and to be made not misleading as of the Closing Date. 4.5 BROKERS; FINDERS. No person has acted directly or indirectly as a broker, finder or financial advisor for WCI in connection with the transactions contemplated by this Agreement and no person is entitled to any broker's, finder's, financial advisory or similar fee or payment in respect thereof based in any way on any agreement, arrangement or understanding made by or on behalf of WCI. 4.6 DISCLOSURE SCHEDULES. Any matter disclosed by WCI on any Schedule to this Agreement shall be deemed to have been disclosed on every other Schedule that refers to such Schedule by cross reference so long as the nature disclosed is obvious from a fair reading of the Schedule on which the matter is disclosed. 5. CLOSING DELIVERIES At the Closing, the respective parties shall make the deliveries indicated: 5.1 WCI DELIVERIES. (a) WCI shall deliver the cash portion of the Purchase Price required to be delivered on the Closing Date pursuant to Section 1.2(a). (b) WCI shall execute and deliver a Consulting Agreement with Robert E. Ewing substantially in the form of the draft included in Exhibit 5.1(d). 5.2 SHAREHOLDER DELIVERIES. (a) The Shareholder shall deliver to WCI the certificates representing the outstanding Corporation's Stock free and clear of all liens, security interests, claims and encumbrances, accompanied by a stock power duly executed in blank. (b) The Shareholder shall deliver to WCI an opinion of counsel for the Shareholder, dated as of the Closing Date, in substantially the form attached hereto as Exhibit 5.2(c). (c) The Shareholder shall deliver evidence reasonably satisfactory to WCI that all required third-party consents to the transactions contemplated hereby, including without limitation all Required Governmental Consents and all required consents of the landlords under all real estate leases to which the Corporation is a party, were obtained and the Shareholder shall deliver an estoppel certificate from the landlords under all real estate leases to which the Corporation is a party confirming the terms thereof and the rental amount owing thereunder, certifying that such lease is in full force and effect, that the Corporation is not in default under 21 23 any of the terms or conditions thereof, that there have been no amendments or modifications to any such lease (or specifying the same), and otherwise containing such statements and certifications as the Corporation may require. (d) The Corporation shall deliver to WCI evidence satisfactory to WCI showing that all written employment contracts and all oral employment contracts other than those that are terminable "at will" without payment of severance (other than normal severance benefits approved by WCI) or other benefits with non-union employees of the Corporation (including, without limitation, stock options or other rights to obtain equity in the Corporation) have been terminated, effective on or before the Closing Date. (e) The Shareholder shall execute and deliver the Consulting Agreement in the form of Exhibit 5.1(d). (f) The Shareholder shall cause each officer and director of the Corporation to deliver to WCI a resignation as an officer and/or director of the Corporation together with a general release releasing the Corporation from all obligations under any indemnification agreements, the charter documents of the Corporation, or otherwise, arising out of or relating to this Agreement or the consummation of the transactions contemplated thereby, other than obligations arising after the Closing Date under this Agreement, except to the extent there exists insurance coverage. 6. ADDITIONAL COVENANTS OF WCI, THE CORPORATION AND THE SHAREHOLDER 6.1 RELEASE OF GUARANTIES. WCI shall use reasonable efforts to obtain the termination and release promptly after the Closing Date of the personal guaranties of the Shareholder listed on Schedule 6.1 (including application and notice to the Secretary of State of South Dakota for change of registered agent and address), all of which relate to indebtedness of the Corporation included in the Financial Statements as of the Balance Sheet Date or WCI shall indemnify the Shareholder and hold him harmless from and against all losses, expenses or claims by third parties to enforce or collect indebtedness owed by the Corporation as of the Closing Date which is personally guaranteed by the Shareholder pursuant to such guaranties. The Shareholder may notify the obligees under such guaranties that he has terminated his obligations under such guaranties. The Shareholder shall cooperate with WCI in obtaining such releases. 6.2 RELEASE OF SECURITY INTERESTS. On or after the Closing Date, the Shareholder and his respective Affiliates shall cause those security interests in the assets of the Corporation that have been created in favor of financial institutions or other lenders to secure indebtedness (other than indebtedness of the Corporation) of the Shareholder or his respective Affiliates to be released in a manner reasonably satisfactory to WCI, and shall cause all guaranties by the Corporation relating to the indebtedness of the Shareholder to be released to the reasonable satisfaction of WCI. 22 24 6.3 CONFIDENTIALITY. Neither the Corporation nor the Shareholder shall disclose or make any public announcements of the transactions contemplated by this Agreement without the prior written consent of WCI, unless required to make such disclosure or announcement by law, in which event the party making the disclosure or announcement shall notify WCI at least 24 hours before such disclosure or announcement is expected to be made. WCI shall not disclose or make any public announcement of the transactions contemplated by this Agreement without the prior written consent of the Shareholder, unless in connection with the initial public offering of WCI's Common Stock or otherwise required to make such disclosure or announcement by law, in which event WCI shall notify the Shareholder at least 24 hours before such disclosure or announcement is expected to be made. 6.4 BROKERS AND FINDERS FEES. Each party shall pay and be responsible for any broker's, finder's or financial advisory fee incurred by such party in connection with the transactions contemplated by this Agreement. 6.5 TAXES. WCI shall reasonably cooperate, at the expense of the Shareholder, with the Shareholder with respect to any matters involving the Shareholder arising out of the Shareholder's ownership of the Corporation prior to the Closing, including matters relating to tax returns and any tax audits, appeals, claims or litigation with respect to such tax returns or the preparation of such tax returns. In connection therewith, WCI shall safely store, protect and make available to the Shareholder such files, documents, books and records of the Corporation for inspection and copying as may be reasonably requested by the Shareholder and shall cooperate with the Shareholder with respect to retaining information and documents which relate to such matters. 6.6 SHORT YEAR TAX RETURNS. After the Closing Date, the Shareholder shall prepare at his sole cost and expense, all short year federal, state, county, local and foreign tax returns required by law for the period beginning with the first day of the Corporation's fiscal year in which the Closing occurs and ending with the Closing Date. Each such return shall be prepared in a financially responsible and conservative manner and shall be delivered to WCI together with all necessary supporting schedules within 120 days following the Closing Date for its approval (but such approval shall not relieve the Shareholder of his responsibility for the taxes assessed under these returns). The Shareholder shall be responsible for the payment of all taxes shown to be due or that may come to be due on such returns or otherwise relating to the period prior to the Closing Date in excess of the amount of any reserve for taxes included in Effective Date Current Liabilities. The Shareholder shall also be responsible for all taxes arising from the conversion of the Corporation from a cash to accrual basis of reporting whether or not due on such returns or on the first return filed by the Corporation for the period commencing after the Closing Date. At the time of the delivery of the returns, shall contemporaneously deliver to WCI checks payable to the respective taxing authorities in amounts equal to the amount due. WCI shall sign tax returns and cause such returns to be timely filed with the appropriate authorities. The Shareholder shall be entitled to receive all refunds shown on said returns and any such refunds received by the Corporation or WCI shall be remitted to the Shareholder. 23 25 6.7 CERTAIN TAX MATTERS. The Shareholders acknowledge that WCI may make an election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended. The Shareholders agree that WCI, in its discretion, may make such election; provided, however, that such election shall be made no later than the due date for such election. If such election is made by WCI: (a) WCI shall be authorized to complete Form 8023-A; (b) The Shareholders shall sign such completed Form 8023-A at the Closing; and (c) WCI and the Shareholders shall agree upon the allocation of the Purchase Price among the assets (including intangible assets) of the Corporation. (d) If WCI does make its election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended, WCI shall reimburse the Shareholders and the Corporation for any additional taxes, penalties, interest and costs of preparation of amended income tax returns incurred due to such election resulting from the recapture of depreciation previously taken on various assets of the Corporation at ordinary income instead of capital gain rates. Such reimbursement shall be in a sum computed by a simultaneous equation computing the additional tax owed by stockholders, as well as the tax on the payment of that sum. 6.8 RESERVED. 6.9 TITLE INSURANCE. The Shareholder shall arrange for an irrevocable commitment from a title insurance company reasonably acceptable to WCI to issue, within three business days after the Closing Date, a CLTA Owner's Policy of title insurance for the Corporate Property, in an amount as shall be reasonably agreed upon by the Shareholder and WCI, insuring fee simple title to the Corporate Property in the Corporation, subject only to current real property taxes and assessments, standard printed conditions and exceptions, and such title exceptions as shall have been accepted in writing by WCI, and containing such endorsements as WCI may reasonably require. The cost of such title insurance shall be paid one-half by the Shareholder and one-half by WCI. 6.10 GENERAL RELEASE BY SHAREHOLDER. The Shareholder hereby fully releases and discharges the Corporation and its directors, officers, agents and employees from all rights, claims and actions, known or unknown, of any kind whatsoever, which the Shareholder now has or may hereafter have against the Corporation and its directors, officers, agents and employees, arising out of or relating to events arising prior to or on the Closing Date, except (a) as may be described in written contracts disclosed in Schedule 6.10 and expressly described and specifically excepted from this release in Schedule 6.10, (b) compensation as an employee of the Corporation for current periods expressly described and excepted from such release on schedule 6.10, and (c) for the obligations of the Corporation arising after the Closing Date under this Agreement. 24 26 Specifically, but not by way of limitation, the Shareholder waives any right of indemnification, contribution or other recourse against the Corporation which he now has or may hereafter have against the Corporation with respect to representations, warranties or covenants made in this Agreement by the Corporation. The Shareholder hereby waives and relinquishes all rights and benefits afforded by South Dakota Codified Laws ("SDCL") 20-7- 11, which states as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS TO WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." The Shareholder understands and acknowledges the significance and consequence of this waiver of SDCL 20-7-11 and nevertheless elects to, and does, release those claims described in this Section 6.10, known or unknown, that he may have now or in the future arising out of or relating to any event arising on or prior to the date of this Agreement, except to the extent there exists insurance coverage. 7. INDEMNIFICATION 7.1 INDEMNITY BY THE SHAREHOLDER. The Shareholder, subject to the limitations set forth in Section 7.2, covenants and agrees that he and she will indemnify and hold harmless WCI, the Corporation and their respective directors, officers and agents and their respective successors and assigns (collectively the "WCI INDEMNITEES"), from and after the date of this Agreement, against any and all losses, damages, assessments, fines, penalties, adjustments, liabilities, claims, deficiencies, costs, expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation), expenditures, including, without limitation, any "Environmental Site Losses" (as such term is hereinafter defined) identified by a WCI Indemnitee in a Claims Notice (as defined in Section 7.4(a)), or asserted by a WCI Indemnitee in litigation commenced against the Shareholder provided that in either case any such Claims Notice shall be given or the litigation commenced prior to the expiration of the applicable statute of limitations (irrespective of the date of discovery), with respect to each of the following contingencies (all, the "7.1 INDEMNITY EVENTS"): (a) Any misrepresentation, breach of warranty, or nonfulfillment of any agreement or covenant on the part of the Shareholder or the Corporation pursuant to the terms of this Agreement or any misrepresentation in or omission from any Exhibit, Schedule, list, certificate, or other instrument furnished or to be furnished to WCI pursuant to the terms of this Agreement, regardless of whether, in the case of a breach of a representation or a warranty, WCI relied on the truth of such representation or warranty or had any knowledge of any breach thereof. (b) The design, development, construction or operation of any Facility or any 25 27 other "Environmental Site" as hereinafter defined, or the installation or operation of a UST during any period on or prior to the Closing Date, in excess of the amount of liability with respect thereto, if any, set forth on Part II of Schedule 3.8. As used in this Agreement, "ENVIRONMENTAL SITE" shall mean any Facility, any UST and any other waste storage, processing, treatment or disposal facility, and any other business site or any other real property owned, leased, controlled or operated by the Corporation or by any predecessor thereof on or prior to the Closing Date. As used in this Agreement, "ENVIRONMENTAL SITE LOSSES" shall mean any and all losses, damages (including exemplary damages and penalties), liabilities, claims, deficiencies, costs, expenses, and expenditures (including, without limitation, expenses in connection with site evaluations, risk assessments and feasibility studies) arising out of or required by an interim or final judicial or administrative decree, judgment, injunction, mandate, interim or final permit condition or restriction, cease and desist order, abatement order, compliance order, consent order, clean-up order, exhumation order, reclamation order or any other remedial action that is required to be undertaken under federal, state or local law in respect of operating activities on or affecting any Facility, any UST or any other Environmental Site, including, but not limited to (x) any actual or alleged violation of any law or regulation respecting the protection of the environment, including, but not limited to, RCRA and CERCLA or any other law or regulation respecting the protection of the air, water and land and (y) any remedies or violations, whether by a private or public action, alleged or sought to be assessed as a consequence, directly or indirectly, of any "Release" (as defined below) of pollutants (including odors) or Hazardous Substances from any Facility, any UST or any other Environmental Site resulting from activities thereat, whether such Release is into the air, water (including groundwater) or land and whether such Release arose before, during or after the Closing Date. The term "RELEASE" as used herein means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the ambient environment. Notwithstanding anything in this paragraph to the contrary, it is specifically understood and agreed that a Release composed solely of Hazardous Substances contained in household waste lawfully disposed of in a landfill during the time the Corporation owned and/or operated such landfill does not constitute an Environmental Site Loss. (c) All matters on Schedule 3.8 - Part II. (d) All actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incident to any of the foregoing. 26 28 7.2 LIMITATIONS ON SHAREHOLDER'S INDEMNITIES. (a) Subject to the provisions of 7.2(b) hereof, the obligations of the Shareholder to indemnify the WCI Indemnitees as provided in Section 7.1 shall be equal to the amount by which the cumulative amount of all such liabilities, claims, damages deficiencies, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses, expenditures and Environmental Site Losses with respect to any or all 7.1 Indemnity Events exceed $50,000 (the "GENERAL DEDUCTIBLE AMOUNT"); provided, that the amount of any obligation of indemnity arising pursuant to Section 7.1(a) with respect to any representation, warranty or covenant contained in Sections 3.1 through 3.5, 3.12(c), 3.18, 3.22 and 6.6 hereof and pursuant to Section 7.1(c) shall not be subject to the General Deductible Amount. (b) The maximum amount which WCI can recover as a result of one or more 7.1 Indemnity Events shall not exceed: (i) seventy-five percent (75%) of the Purchase Price (as adjusted pursuant to Section 1.2(a) hereof) if the 7.1 Indemnity Event occurs during the time period from the Closing Date to, and including, the first anniversary of the Closing Date; (ii) sixty-five percent (65%) of the Purchase Price (as adjusted pursuant to Section 1.2(a) hereof) if the 7.1 Indemnity Event occurs during the time period from the first anniversary of the Closing Date to, and including, the second anniversary of the Closing Date; and (iii) sixty percent (60%) of the Purchase Price (as adjusted pursuant to Section 1.2(a) hereof) if the Indemnity Event occurs during the time period from the second anniversary of the Closing Date to the third anniversary of the Closing Date. (c) WCI shall use reasonable efforts to pursue any insurance coverage it may have with respect to any matter resulting in a 7.1 Indemnity Event and shall apply any insurance recoveries it receives in connection with any 7.1 Indemnity Event towards its recovery from the Shareholder for such 7.1 Indemnity Event. Nothing herein shall require WCI from pursuing any such insurance coverage prior to pursuing any claim against the Shareholder. 7.3 INDEMNITY BY WCI. WCI, subject to the limitations set forth in Section 7.4, covenants and agrees that it will indemnify and hold harmless the Shareholder and their respective successors and assigns (collectively the "SHAREHOLDER INDEMNITEES"), from and after the date of this Agreement, against any and all losses, damages, assessments, fines, penalties, adjustments, liabilities, claims, deficiencies, costs, expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation), expenditures, including, without limitation, any Environmental Site Losses identified by a Shareholder Indemnitee in a Claims Notice, or asserted by a Shareholder Indemnitee in litigation commenced against WCI provided that in either case any such Claims Notice shall be given or the litigation commenced 27 29 prior to the expiration of the applicable statute of limitations (irrespective of the date of discovery), with respect to each of the following contingencies (all, the "7.3 INDEMNITY EVENTS"): (a) Any misrepresentation, breach of warranty, or nonfulfillment of any agreement or covenant on the part of WCI pursuant to the terms of this Agreement or any misrepresentation in or omission from any Exhibit, Schedule, list, certificate, or other instrument furnished or to be furnished to the Shareholder pursuant to the terms of this Agreement, regardless of whether, in the case of a breach of a representation or a warranty, the Shareholder relied on the truth of such representation or warranty or had any knowledge of any breach thereof. (b) The design, development, construction or operation of any Facility or any other Environmental Site, or the installation or operation of a UST during any period after the Closing Date, in excess of the amount of liability with respect thereto, if any, set forth on Part II of Schedule 3.8; provided, however, that WCI shall have no obligation to indemnify any Shareholder Indemnitee under this section 7.3 if a 7.3 Indemnity Event is caused in whole or in part by a 7.1 Indemnity Event. (c) All actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incident to any of the foregoing. 7.4 LIMITATIONS ON WCI'S INDEMNITIES. (a) Subject to the provisions of 7.4(b) hereof, the obligations of WCI to indemnify the Shareholder Indemnitees as provided in Section 7.3 shall be equal to the amount by which the cumulative amount of all such liabilities, claims, damages deficiencies, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses, expenditures and Environmental Site Losses with respect to any or all 7.1 Indemnity Events exceed the General Deductible Amount. (b) The maximum amount which the Shareholder can recover as a result of one or more 7.3 Indemnity Events shall not exceed: (i) eighty percent (80%) of the Purchase Price (as adjusted pursuant to Section 1.2(a) hereof) if the 7.3 Indemnity Event occurs during the time period from the Closing Date to, and including, the first anniversary of the Closing Date; (ii) seventy percent (70%) of the Purchase Price (as adjusted pursuant to Section 1.2(a) hereof) if the 7.3 Indemnity Event occurs during the time period from the first anniversary of the Closing Date to, and including, the second anniversary of the Closing Date; and 28 30 (iii) sixty-five percent (65%) of the Purchase Price (as adjusted pursuant to Section 1.2(a) hereof) if the Indemnity Event occurs during the time period from the second anniversary of the Closing Date to the third anniversary of the Closing Date. 7.5 NOTICE OF INDEMNITY CLAIM. (a) In the event that any claim ("CLAIM") is hereafter asserted against or arises with respect to any WCI or Shareholder Indemnitee (as applicable, an "Indemnitee") as to which such Indemnitee may be entitled to indemnification hereunder, the Indemnitee shall notify the Shareholder (as applicable collectively, the "INDEMNIFYING PARTY") in writing thereof (the "CLAIMS NOTICE") within 20 days after (i) receipt of written notice of commencement of any third party litigation against such Indemnitee, (ii) receipt by such Indemnitee of written notice of any third party claim pursuant to an invoice, notice of claim or assessment, against such Indemnitee, or (iii) such Indemnitee becomes aware of the existence of any other event in respect of which indemnification may be sought from the Indemnifying Party (including, without limitation, any inaccuracy of any representation or warranty or breach of any covenant). The Claims Notice shall describe the Claim and the specific facts and circumstances in reasonable detail, and shall indicate the amount, if known, or an estimate, if possible, of the losses that have been or may be incurred or suffered by the Indemnitee. (b) The Indemnifying Party may elect to defend any Claim for money damages where the cumulative total of all Claims (including such Claims) do not exceed the limit set forth in Section 7.2 at the time the Claim is made, by the Indemnifying Party's own counsel; provided, however, the Indemnifying Party may assume and undertake the defense of such a third party Claim only upon written agreement by the Indemnifying Party that the Indemnifying Party is obligated to fully indemnify the Indemnitee with respect to such action. The Indemnitee may participate, at the Indemnitee's own expense, in the defense of any Claim assumed by the Indemnifying Party. Without the written approval of the Indemnitee, which approval shall not be unreasonably withheld, the Indemnifying Party shall not agree to any compromise of a Claim defended by the Indemnifying Party. (c) If, within thirty (30) days of the Indemnifying Party's receipt of a Claims Notice, the Indemnifying Party shall not have provided the written agreement required by Section 7.3(b) and elected to defend the Claim, the Indemnitee shall have the right to assume control of the defense and/or compromise of such Claim, and the costs and expenses of such defense, including reasonable attorneys' fees, shall be added to the Claim. The Indemnifying Party shall promptly, and in any event within thirty (30) days after demand therefor, reimburse the Indemnitee for the costs of defending the Claim, including attorneys' fees and expenses. (d) The party assuming the defense of any Claim shall keep the other party reasonably informed at all times of the progress and development of its or his defense of and compromise efforts with respect to such Claim and shall furnish the other party with copies of all relevant pleadings, correspondence and other papers. In addition, the parties to this Agreement 29 31 shall cooperate with each other and make available to each other and their representatives all available relevant records or other materials required by them for their use in defending, compromising or contesting any Claim. The failure to timely deliver a Claims Notice or otherwise notify the Indemnifying Party of the commencement of such actions in accordance with this Section 7.3 shall not relieve the Indemnifying Party from the obligation to indemnify hereunder but only to the extent that the Indemnifying Party establishes by competent evidence that it has been prejudiced thereby. (e) In the event both the Indemnitee and the Indemnifying Party are named as defendants in an action or proceeding initiated by a third party, they shall both be represented by the same counsel (on whom they shall agree), unless such counsel the Indemnitee, or the Indemnifying Party shall determine that such counsel has a conflict of interest in representing both the Indemnitee and the Indemnifying Party in the same action or proceeding and the Indemnitee and the Indemnifying Party do not waive such conflict to the satisfaction of such counsel. 7.6 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The representations and warranties of the parties contained in this Agreement and in any certificate, Exhibit or Schedule delivered pursuant hereto, or in any other writing delivered pursuant to the provisions of this Agreement (the "REPRESENTATIONS AND WARRANTIES") and the liability of the party making such Representations and Warranties for breaches thereof shall survive the consummation of the transactions contemplated hereby. The parties hereto in executing and delivering and in carrying out the provisions of this Agreement are relying solely on the representations, warranties, Schedules, Exhibits, agreements and covenants contained in this Agreement, or in any writing or document delivered pursuant to the provisions of this Agreement, and not upon any representation, warranty, agreement, promise or information, written or oral, made by any persons other than as specifically set forth herein or therein, including WCI's reliance on its knowledge of events pursuant to its due diligence review of the Corporation. 7.7 NO EXHAUSTION OF REMEDIES OR SUBROGATION; RIGHT OF SET OFF. The Shareholder waives any right to require any WCI Indemnitee to (i) proceed against the Corporation; (ii) proceed against any other person; or (iii) pursue any other remedy whatsoever in the power of any WCI Indemnitee. WCI may, but shall not be obligated to, set off against any and all payments due the Shareholder any amount to which any WCI Indemnitee is entitled to be indemnified hereunder with respect to any 7.1 Indemnity Event. Such right of set off shall be separate and apart from any and all other rights and remedies that the Indemnities may have against Shareholder or his successors. 8. OTHER POST-CLOSING COVENANTS OF THE SHAREHOLDER AND WCI 8.1 RESTRICTIVE COVENANTS. As to the Corporation, the Shareholder and his Affiliates acknowledge that (i) WCI, as the purchaser of the Corporation's Stock, is and will be engaged in the same business as the Corporation (the "BUSINESS"); (ii) the Shareholder and his Affiliates are intimately familiar with the Business; (iii) the Business is currently conducted in the States of 30 32 South Dakota, Wyoming and Montana and WCI intends to continue the Business in South Dakota and Washington and intends, by acquisition or otherwise, to expand the Business into other geographic areas of South Dakota, Wyoming and Montana where it is not presently conducted; (iv) the Shareholder and his Affiliates have had access to trade secrets of, and confidential information concerning, the Business; (v) the agreements and covenants contained in this Section 8.1 are essential to protect the Business and the goodwill being acquired; and (vi) the Shareholder and his Affiliates have the means to support themselves and their dependents other than by engaging in a business substantially similar to the Business and the provisions of this Section 8 will not impair such ability. The Shareholder covenants and agrees as set forth in (a), (b) and (c) below with respect to the Corporation: (a) NON-COMPETE. For a period commencing on the Closing Date and terminating five years thereafter (the "RESTRICTED PERIOD"), neither the Shareholder nor any of his Affiliates shall, anywhere in the Cities of Spearfish, Lead, Belle Fourche, Deadwood, Newell and Whitewood, South Dakota; the Counties of Lawrence, Perkins, Meade, Butte, Harding, Pennington and Custer, South Dakota, the Counties of Campbell, Crook and Westin, Wyoming, or Carter County, Montana, where WCI or one of its subsidiaries owns or operates a business similar to the Business (the "RESTRICTED COUNTIES"), directly or indirectly, acting individually or as the owner, shareholder, partner, or employee of any entity, (i) engage in the operation of a solid waste collection, transporting, disposal and/or composting business, transfer facility, recycling facility, materials recovery facility or solid waste landfill; (ii) enter the employ of, or render any personal services to or for the benefit of, or assist in or facilitate the solicitation of customers for, or receive remuneration in the form of salary, commissions or otherwise from, any business engaged in such activities; (iii) as owner or lessor of real estate or personal property, rent to lease any facility, equipment or other assets to any business engaged in the same business as the Corporation; or (iv) receive or purchase a financial interest in, make a loan to, or make a gift in support of, any such business in any capacity, including, without limitation, as a sole proprietor, partner, shareholder, officer, director, principal, agent, trustee or lender; provided, however, that the Shareholder may (x) retain all salvage rights currently possessed by the Corporation in connection with the operation of any rubble site; and (y) own, directly or indirectly, solely as an investment, securities of any business traded on any national securities exchange or NASDAQ, provided none of the Shareholder is a controlling person of, or a member of a group which controls, such business and further provided that the Shareholder does not, in the aggregate, directly or indirectly, own 2% or more of any class of securities of such business. (b) CONFIDENTIAL INFORMATION. During the Restricted Period and thereafter, the Shareholder and his Affiliates shall keep secret and retain in strictest confidence, and shall not use for the benefit of themselves or others, all data and information relating to the Business ("CONFIDENTIAL INFORMATION"), including without limitation, know-how, trade secrets, customer lists, supplier lists, details of contracts, pricing policies, operational methods, marketing plans or strategies, bidding information, practices, 31 33 policies or procedures, product development techniques or plans, and technical processes; provided, however, that the term "Confidential Information" shall not include information that (i) is or becomes generally available to the public other than as a result of disclosure by the Shareholder or (ii) is general knowledge in the solid waste handling and landfill business and not specifically related to the Business. (c) PROPERTY OF THE BUSINESS. All memoranda, notes, lists, records and other documents or papers (and all copies thereof) relating to the Business, including such items stored in computer memories, on microfiche or by any other means, made or compiled by or on behalf of the Shareholder or the Corporation or made available to them relating to the Business, but excluding any materials (other than the minute books of the Corporation) maintained by any attorneys for the Corporation or the Shareholder prior to the Closing, are and shall be the property of WCI and have been delivered or will be delivered or made available to WCI at the Closing. The Shareholder has the right on reasonable request to inspect and copy during normal business hours any of such property relating to the Business. (d) NON-SOLICITATION. Without the consent of WCI, which may be granted or withheld by WCI in its discretion, the Shareholder and his Affiliates shall not solicit any employees of the Corporation to leave the employ of the Corporation and join the Shareholder or any Affiliate in any business endeavor owned or pursued by the Shareholder. (e) NO DISPARAGEMENT. From and after the Closing Date, the Shareholder shall not, in any way or to any person or entity or governmental or regulatory body or agency, denigrate or derogate WCI or any of its subsidiaries, or any officer, director or employee, or any product or service or procedure of any such company whether or not such denigrating or derogatory statements shall be true and are based on acts or omissions which are learned by the Shareholder from and after the date hereof or on acts or omissions which occur from and after the date hereof, or otherwise. A statement shall be deemed denigrating or derogatory to any person or entity if it adversely affects the regard or esteem in which such person or entity is held by investors, lenders or licensing, rating, or regulatory entities. Without limiting the generality of the foregoing, the Shareholder shall not, directly or indirectly in any way in respect of any such company or any such directors or officers, communicate with, or take any action which is adverse to the position of any such company with any person, entity or governmental or regulatory body or agency who or which has dealings or prospective dealings with any such company or jurisdiction or prospective jurisdiction over any such company. This paragraph does not apply to the extent that testimony is required by legal process, provided that WCI has received not less than five days' prior written notice of such proposed testimony. 8.2 RIGHTS AND REMEDIES UPON BREACH. If the Shareholder or any Affiliate breaches, or threatens to commit a breach of, any of the provisions of Section 8.1 herein (the "RESTRICTIVE COVENANTS"), WCI shall have the following rights and remedies, each of which 32 34 rights and remedies shall be independent of the others and severally enforceable, and each of which is in addition to, and not in lieu of, any other rights and remedies available to WCI at law or in equity: (a) SPECIFIC PERFORMANCE. The right and remedy to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to WCI and that money damages would not provide an adequate remedy to WCI. Accordingly, in addition to any other rights or remedies, WCI shall be entitled to injunctive relief to enforce the terms of the Restrictive Covenants and to restrain the Shareholder from any violation thereof. (b) ACCOUNTING. The right and remedy to require the Shareholder to account for and pay over to WCI all compensation, profits, monies, accruals, increments or other benefits derived or received by the Shareholder as the result of any transactions constituting a breach of the Restrictive Covenants. (c) SEVERABILITY OF COVENANTS. The Shareholder acknowledges and agrees that the Restrictive Covenants are reasonable and valid in geographical and temporal scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions. (d) BLUE-PENCILING. If any court determines that any of the Restrictive Covenants, or any part thereof, is unenforceable because of the duration or geographic scope of such provision, such court shall reduce the duration or scope of such provision, as the case may be, to the extent necessary to render it enforceable and, in its reduced form, such provision shall then be enforced. (e) ENFORCEABILITY IN JURISDICTION. WCI and the Shareholder intend to and hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographic scope of the Restrictive Covenants. If the courts of any one or more of such jurisdictions hold the Restrictive Covenants unenforceable by reason of the breadth of such scope or otherwise, it is the intention of WCI and the Shareholder that such determination not bar or in any way affect WCI's right to the relief provided above in the courts of any other jurisdiction within the geographic scope of the Restrictive Covenants as to breaches of such covenants in such other respective jurisdictions, such covenants as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants. 9. GENERAL 9.1 ADDITIONAL CONVEYANCES. Following the Closing, the Shareholder and WCI shall 33 35 each deliver or cause to be delivered at such times and places as shall be reasonably agreed upon such additional instruments as WCI or the Shareholder may reasonably request for the purpose of carrying out this Agreement. The Shareholder and WCI and/or the Corporation will cooperate with one another on and after the Closing Date in furnishing information, evidence, testimony and other assistance in connection with any actions, proceedings or disputes of any nature with respect to matters pertaining to all periods prior to the date of this Agreement. 9.2 ASSIGNMENT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, the successors or assigns of WCI and the heirs, legal representatives or assigns of the Shareholder; provided, however, that any such assignment shall be subject to the terms of this Agreement and shall not relieve the assignor of its or his responsibilities under this Agreement. 9.3 PUBLIC ANNOUNCEMENTS. Except as required by law, no party shall make any public announcement or filing with respect to the transactions provided for herein prior to the Closing Date without the prior consent of the other parties hereto. 9.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. 9.5 NOTICES. All notices, requests, demands and other communications hereunder shall be deemed to have been duly given if in writing and either delivered personally, sent by facsimile transmission or by air courier service, or mailed by postage prepaid registered or certified U.S. mail, return receipt requested, to the addresses designated below or such other addresses as may be designated in writing by notice given hereunder, and shall be effective upon personal delivery or facsimile transmission thereof or upon delivery by registered or certified U.S. mail or one business day following deposit with an air courier service: If to the Shareholder: at his address set forth on Schedule 3.2 With a copy to: Thomas E. Brady, P.C. Post Office Box 726 Spearfish, South Dakota 97783-0726 Facsimile: (605) 642-1480 If to WCI: Waste Connections, Inc. 2260 Douglas Boulevard, Suite 280 Roseville, California 95661 Attention: Ronald J. Mittelstaedt Facsimile: (916) 772-2920 With a copy to: Robert D. Evans, Esq. Shartsis, Friese & Ginsburg LLP 34 36 One Maritime Plaza, 18th Floor San Francisco, California 94111 Facsimile: (415) 421-2922 9.6 ATTORNEYS' FEES. In the event of any dispute or controversy between WCI on the one hand and the Corporation or the Shareholder on the other hand relating to the interpretation of this Agreement or to the transactions contemplated hereby, the prevailing party shall be entitled to recover from the other party reasonable attorneys' fees and expenses incurred by the prevailing party. Such award shall include post-judgment attorney's fees and costs. 9.7 APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of South Dakota without regard to its conflict of laws provisions. 9.8 PAYMENT OF FEES AND EXPENSES. Whether or not the transactions herein contemplated shall be consummated, each party hereto will pay its own fees, expenses and disbursements incurred in connection herewith and all other costs and expenses incurred in the performance and compliance with all conditions to be performed hereunder (including, in the case of the Shareholder, any such fees, expenses and disbursements paid or accrued by, or charged to, the Corporation). 9.9 INCORPORATION BY REFERENCE. All Schedules and Exhibits attached hereto are incorporated herein by reference as though fully set forth at each point referred to in this Agreement. 9.10 CAPTIONS. The captions in this Agreement are for convenience only and shall not be considered a part hereof or affect the construction or interpretation of any provisions of this Agreement. 9.11 NUMBER AND GENDER OF WORDS; CORPORATION. Whenever the singular number is used herein, the same shall include the plural where appropriate, and shall apply to all of such number, and to each of them, jointly and severally, and words of any gender shall include each other gender where appropriate. 9.12 ENTIRE AGREEMENT. This Agreement (including the Schedules and Exhibits hereto) and the other documents delivered pursuant hereto constitute the entire Agreement and understanding between the Corporation, the Shareholder and WCI and supersedes any prior agreement and understanding relating to the subject matter of this Agreement. This Agreement may be modified or amended only by a written instrument executed by the Corporation, the Shareholder and WCI acting through its officers, thereunto duly authorized by its Board of Directors. 9.13 WAIVER. No waiver by any party hereto at any time of any breach of, or compliance with, any condition or provision of this Agreement to be performed by any other 35 37 party hereto may be deemed a waiver of similar or dissimilar provisions or conditions at the same time or at any prior or subsequent time. 9.14 CONSTRUCTION. The language in all parts of this Agreement must be in all cases construed simply according to its fair meaning. Unless expressly set forth otherwise, all references herein to a "day" are deemed to be a reference to a calendar day. All references to "BUSINESS DAY" mean any day of the year other than a Saturday, Sunday or a public or bank holiday in South Dakota or California. Unless expressly stated otherwise, cross-references herein refer to provisions within this Agreement and are not references to the overall transaction or to any other document. 36 38 10. GLOSSARY The definitions of the terms used below can be found at the Section indicated:
Term Section ---- ------- Affiliate Section 3.11 Balance Sheet Date Section 3.7 Business Section 8.1 business day Section 9.14 Claim Section 7.3 Claims Notice Section 7.3(a) Closing Section 2 Closing Date Section 2 Closing Date Debt Section 3.22(a) Closing Date Current Assets Section 3.22(b) Closing Date Current Liabilities Section 3.22(b) Collection Franchises Section 3.10(a) Confidential Information Section 8.1(b) Corporate Property Section 3.12(b) Corporation Parties Corporation Debt Section 1.2(c) Corporation's Stock Second Recital Environmental Laws Section 3.24 Environmental Site Section 7.1(b) Environmental Site Losses Section 7.1 Environmental Site Losses Section 7.1(b) Ewing Parties ERISA Section 3.17(a) Excluded Assets Section 1.5 Facility Section 3.10(c) Facilities Section 3.10(c) Facility Property Section 3.10(c)(iii) Facility Surveys/Site Plans Section 3.10(c)(iii) Financial Statements Section 3.7 General Deductible Amount Section 7.2(a) Governmental Permits Section 3.10(a) Hazardous Material Section 3.24(e) Hazardous Waste Section 3.24(e) Indemnifying Party Section 7.3(a) 7.1 Indemnity Events Section 7.1 7.3 Indemnity Events Section 7.3 knowledge Section 3.36 Laws
37 39 Note Section 1.2(b) Permitted Liens Section 3.12(c) Purchase Price Section 1.1 RCRA Section 3.24(a) Recipient Section 3.17(c) Records, Notifications and Reports Section 3.10(b) Release Section 7.1(b) Representations and Warranties Section 7.4 Restricted Counties Section 8.1(a) Restricted Period Section 8.1(a) Restrictive Covenants Section 8.2 Required Governmental Consents Section 3.10(a) SEC Section 3.38(g) Shareholder Parties Shareholder Debt Section 1.2(c) Shareholder Indemnitees Section 7.3 UST Section 3.26 WCI Indemnitees Section 7.1 WCI Parties
38 40 IN WITNESS WHEREOF, the parties hereto have executed this Agreement by persons thereunto duly authorized as of the date first above written. WCI: WASTE CONNECTIONS, INC. By: ___________________________________ Ronald J. Mittelstaedt Chief Executive Officer & President THE CORPORATION: SUNSHINE SANITATION, INCORPORATED By: ___________________________________ Robert E. Ewing President THE SHAREHOLDER: _______________________________________ Robert E. Ewing _______________________________________ Sherry D. Ewing 39 41 TABLE OF CONTENTS
Page ---- 1. PURCHASE OF CORPORATION'S STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Shares to be Purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 Allocation of the Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.4 Excluded Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2. CLOSING TIME AND PLACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION AND THE SHAREHOLDER . . . . . . . . . . . . . 3 3.1 Organization, Standing and Qualification . . . . . . . . . . . . . . . . . . . . . . . . 3 3.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.3 All Stock Being Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.4 Authority for Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.5 No Breach or Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.6 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.7 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.8 Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.9 Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.10 Permits and Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.11 Certain Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.12 Fixed Assets and Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.13 Acquisition/Disposal of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.14 Contracts and Agreements; Adverse Restrictions . . . . . . . . . . . . . . . . . . . . . 9 3.15 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.16 Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.17 Benefit Plans and Union Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.18 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.19 Copies Complete; Required Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.20 Customers, Billings, Current Receipts and Receivables . . . . . . . . . . . . . . . . . 12 3.21 No Change With Respect to the Corporation . . . . . . . . . . . . . . . . . . . . . . . 12 3.22 Closing Date Debt; Closing Date Current Assets and Closing Date Current Liabilities . . 14 3.23 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.24 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.25 Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.26 Underground Storage Tanks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.27 Patents, Trademarks, Trade Names, etc. . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.28 Assets, etc., Necessary to Business . . . . . . . . . . . . . . . . . . . . . . . . . . 17
i 42 3.29 Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.30 Suppliers and Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.31 Absence of Certain Business Practices . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.32 Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.33 Disclosure Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.34 No Misleading Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.35 Accurate and Complete Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.36 Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.37 Brokers; Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4. REPRESENTATIONS AND WARRANTIES OF WCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.1 Existence and Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.2 No Contractual Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 4.3 Authorization of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.4 No Misleading Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.5 Brokers; Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.6 Disclosure Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5. CLOSING DELIVERIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.1 WCI Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 5.2 Shareholder Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 6. ADDITIONAL COVENANTS OF WCI, THE CORPORATION AND THE SHAREHOLDER . . . . . . . . . . . . . . . . 21 6.1 Release of Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 6.2 Release of Security Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.3 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.4 Brokers and Finders Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.5 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.6 Short Year Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.7 Certain Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Title Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6.10 General Release by Shareholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 7. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 7.1 Indemnity by the Shareholder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 7.2 Limitations on Shareholder's Indemnities . . . . . . . . . . . . . . . . . . . . . . . . 26 7.3 Indemnity by WCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 7.4 Limitations on WCI's Indemnities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.5 Notice of Indemnity Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ii 43 7.6 Survival of Representations, Warranties and Agreements . . . . . . . . . . . . . . . . . 29 7.7 No Exhaustion of Remedies or Subrogation; Right of Set Off . . . . . . . . . . . . . . . 29 8. OTHER POST-CLOSING COVENANTS OF THE SHAREHOLDER AND WCI . . . . . . . . . . . . . . . . . . . . 29 8.1 Restrictive Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 8.2 Rights and Remedies Upon Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 9. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 9.1 Additional Conveyances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 9.2 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 9.3 Public Announcements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 9.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.6 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.7 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.8 Payment of Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.9 Incorporation by Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.10 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.11 Number and Gender of Words; Corporation . . . . . . . . . . . . . . . . . . . . . . . . 34 9.12 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.13 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.14 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 10. GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
iii EX-10.25 5 STOCK PURCHASE AGREEMENT-- SOWERS' SANITATION 1 EXHIBIT 10.25 STOCK PURCHASE AGREEMENT Dated as of May 8, 1998, by and among Waste Connections, Inc. Sowers' Sanitation, Inc. James C. Sowers Mildred A. Sowers 2 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT, dated as of May 8, 1998, is entered into by and among Waste Connections, Inc., a Delaware corporation ("WCI"), Sowers' Sanitation, Inc., a South Dakota corporation (the "CORPORATION"), and James C. Sowers ("CLARK") and Mildred A. Sowers (collectively, the "SHAREHOLDERS"). WHEREAS, the Corporation is engaged in the collection and transport of solid waste and recyclables in the Cities of Deadwood, Whitewood, Nisland and Central City, South Dakota, the unincorporated areas of Lawrence County, South Dakota and Butte County, South Dakota and other related activities; WHEREAS, the Shareholders own all of the issued and outstanding capital stock of the Corporation (the "CORPORATION'S STOCK"); WHEREAS, WCI wishes to acquire from the Shareholders all of the Corporation's Stock; WHEREAS, concurrent with the execution of this Agreement, WCI, as lessee, and the Shareholders, as lessor (the "LESSOR"), will enter into a Lease (the "LEASE") of certain real estate located in Deadwood, South Dakota, used in the Corporation's business; NOW, THEREFORE, in consideration of the premises and of the mutual agreements, representations, warranties, provisions and covenants herein contained, the parties hereto, each intending to be bound hereby, agree as follows: 1. PURCHASE OF CORPORATION'S STOCK 1.1 SHARES TO BE PURCHASED. At the Closing (as defined in Section 2), the Shareholders shall sell and deliver to WCI all of the issued and outstanding shares of the Corporation's Stock, being the number of shares of the Corporation set forth on Schedule 3.2 opposite each Shareholder's name. At the Closing, WCI shall purchase the Corporation's Stock and in exchange therefor shall deliver to the Shareholders at the Closing or thereafter as provided by this Agreement the purchase price described in Section 1.2 (the "PURCHASE PRICE"). 1.2 PURCHASE PRICE. The Purchase Price is: (a) six hundred thousand dollars ($600,000), (i) minus the Closing Date Debt (as defined in Section 3.22(a)), and (ii) plus or minus, as the case may be, the amount by which the Closing Date Current Assets (as defined in Section 3.22(b)) are greater or less than the Closing Date Current Liabilities (as defined in Section 3.22(b)). The $600,000 minus the Closing Date Debt shall be payable to the Shareholders at Closing in cash by 1 3 wire transfer or check payable in clearinghouse funds. Within 120 days after the Closing Date, WCI shall perform all necessary calculations, adjustments and other acts necessary to convert the Corporation from a cash to accrual basis of financial reporting, and then, based on such accrual method, WCI shall determine the actual Closing Date Debt. If the difference between the actual amount and the estimated amount provided at the Closing Date of Closing Date Debt results in an increase in the amount that should have been paid at the Closing over the amount that was so paid, WCI shall promptly pay such amount to the Shareholder; if the result is a decrease in the amount that should have been paid at the Closing from the amount that was so paid, the Shareholders shall promptly pay such amount to WCI. In addition, within 120 days after the Closing Date, WCI shall determine the actual Closing Date Current Assets and Closing Date Current Liabilities. If the Closing Date Current Assets are greater than the Closing Date Current Liabilities, WCI shall promptly pay the difference between the two amounts to the Shareholder; if the Closing Date Current Liabilities are greater than the Closing Date Current Assets, the Shareholders shall promptly the difference between the two amounts to WCI; (b) 27,272 shares (the "SHARES") of the WCI's Common Stock, $0.01 par value (the "WCI STOCK"), which shall be delivered by WCI to the Shareholders at the Closing; (c) At the Closing, WCI shall deliver to the Shareholders a Promissory Note (the "SHAREHOLDER NOTE") in the aggregate principal amount of two hundred fifty thousand dollars ($250,000), which Shareholder Note shall be payable in three equal annual installments of eighty-three thousand three hundred thirty-three dollars ($83,333) each. These annual installments shall be paid on the first, second and third anniversaries of the Closing Date. The Shareholder Note shall be non-interest bearing and shall be secured by a lien on all of the assets of the Corporation; (d) At the Closing, WCI shall deliver to Clark a Promissory Note (the "CLARK NOTE") in the aggregate principal amount of one hundred fifteen thousand five hundred dollars ($115,500), which Clark Note shall be payable in thirty-six equal monthly installments of three thousand two hundred eight dollars and thirty-three cents ($3,208.33) each. These monthly installments shall be paid on the same day of each month as the date on which the Closing Date occurs; and (e) If a Shareholder owes the Corporation money ("SHAREHOLDER DEBT") and the Corporation owes a Shareholder money ("CORPORATION DEBT"), the amount by which the Shareholder Debt exceeds the Corporation Debt will be deducted from the Purchase Price payable to that Shareholder or the amount by which the Corporation Debt exceeds the Shareholder Debt will be added to the Purchase Price payable to that Shareholder and the remaining Corporation Debt and Shareholder Debt shall be cancelled. 1.3 PRICE PROTECTION FOR SHARES OF THE WCI STOCK. If the gross offering price of the WCI Stock in the IPO (as defined below), before underwriting discounts and commissions and 2 4 payment of expenses of the offering (the "IPO PRICE"), is less than nine dollars ($9.00) per share, WCI will, within 15 days after the closing of the IPO, issue to Seller a number of additional shares of the WCI Stock determined by multiplying (x) the difference between the IPO Price and nine dollars ($9.00) and (y) 27,272 shares and dividing that product by the IPO price. In lieu of issuing any fractional shares, WCI shall pay cash to Seller an amount equal to the fraction of a share that would have been delivered times the IPO Price. For purposes of this agreement, "IPO" means a public offering of the WCI Stock registered under the Securities Act of 1933 (the "ACT") and sold through underwriters pursuant to a firm commitment in the amount of at least five million dollars at an IPO Price of at least five dollars ($5.00) per share. If the closing of the IPO shall not have occurred by July 31, 1998, Seller may, at its option exercised no later than August 15, 1998, by written notice to WCI, cause WCI to repurchase all or any portion of the WCI Stock issued to Seller for eleven dollars ($11.00) per share, payable by wire transfer to the account of Seller. Promptly upon exercise of such option, Seller and WCI shall arrange for a closing of the sale of such WCI Stock, such closing to occur no later than August 31, 1998. 1.4 ALLOCATION OF THE PURCHASE PRICE. Ten thousand dollars ($10,000) of the Purchase Price shall be allocated to the covenant not to compete as described in Section 8.1(a) hereof, and the balance of the Purchase Price shall be allocated to the Corporation's Stock. 1.5 EXCLUDED ASSETS. The Assets of the Corporation listed on Schedule 1.5 (the "EXCLUDED ASSETS") shall be distributed to the Shareholders prior to the Closing, and WCI shall acquire no interest in or claim to any of the Excluded Assets. 2. CLOSING TIME AND PLACE Subject to the terms and conditions of this Agreement, the closing of the transactions contemplated herein (the "CLOSING") shall take place concurrent with the execution of this Agreement or on such date as WCI and the Shareholders' Representative shall agree (the "CLOSING DATE"). The Closing shall take place through an exchange of consideration and signed documents by facsimile, to be promptly followed by an exchange of documents bearing original signatures by overnight courier service. At the Closing, WCI, the Corporation and the Shareholders shall deliver to each other the documents, instruments and other items described in Section 5 of this Agreement. 3. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION AND THE SHAREHOLDERS The Corporation and the Shareholders, jointly and severally, (i) represent and warrant that each of the following representations and warranties is true as of the Closing Date, and (ii) agree that such representations and warranties shall survive the Closing. 3.1 ORGANIZATION, STANDING AND QUALIFICATION. The Corporation is duly organized, validly existing and in good standing under the laws of the State of South Dakota. The 3 5 Corporation has full corporate power and authority to own and lease its properties and to carry on its business as now conducted. The Corporation is not required to be qualified or licensed to conduct business as a foreign corporation in any other jurisdiction. 3.2 CAPITALIZATION. Schedule 3.2 sets forth, as of the Closing Date, the authorized and outstanding capital of the Corporation, the names, addresses and social security numbers or taxpayer identification numbers of the record and beneficial owners thereof, the number of shares so owned, the allocation of the cash and Shares among the Shareholders as agreed to among themselves, and wire transfer instructions for each Shareholder relating to the bank account to which the Purchase Price should be sent. On the Closing Date, all of the issued and outstanding shares of the capital stock of the Corporation are owned of record and beneficially by the Shareholders, as set forth in Schedule 3.2, and are free and clear of all liens, security interests, encumbrances and claims of every kind except as set forth in Schedule 3.2. Each share of the capital stock of the Corporation is duly and validly authorized and issued, fully paid and nonassessable, and was not issued in violation of any preemptive rights of any past or present shareholder of the Corporation. No option, warrant, call, conversion right or commitment of any kind (including any of the foregoing created in connection with any indebtedness of the Corporation) exists which obligates the Corporation to issue any of its authorized but unissued capital stock or other equity interest or which obligates any Shareholder to transfer the Corporation's Stock to any person. 3.3 ALL STOCK BEING ACQUIRED. The Corporation's Stock being acquired by WCI hereunder constitutes all of the outstanding capital stock of the Corporation. 3.4 AUTHORITY FOR AGREEMENT. The Corporation and each of the Shareholders have full right, power and authority to enter into this Agreement and to perform its, his or her obligations hereunder. The execution and delivery of this Agreement by the Corporation and the consummation of the transactions contemplated hereby by the Corporation have been duly authorized by its Board of Directors. This Agreement has been duly and validly executed and delivered by the Corporation and each of the Shareholders and, subject to the due authorization, execution and delivery by WCI, constitutes the legal, valid and binding obligation of the Corporation and each of the Shareholders enforceable against each of them in accordance with its terms. 3.5 NO BREACH OR DEFAULT. Except as disclosed on Schedule 3.5, the execution and delivery by the Corporation and the Shareholders of this Agreement, and the consummation by the Shareholders of the transactions contemplated hereby, will not: (a) result in the breach of any of the terms or conditions of, or constitute a default under, or allow for the acceleration or termination of, or in any manner release any party from any obligation under, any mortgage, lease, note, bond, indenture, or material contract, agreement, license or other instrument or obligation of any kind or nature to which the Corporation or any of the Shareholders is a party, or by which the Corporation or any of the Shareholders, or any of its or their assets, is or may be bound 4 6 or affected; or (b) violate any law or any order, writ, injunction or decree of any court, administrative agency or governmental authority, or require the approval, consent or permission of any governmental or regulatory authority; or (c) violate the Articles of Incorporation or Bylaws of the Corporation. 3.6 SUBSIDIARIES. Schedule 3.6 lists as of the Closing Date any and all subsidiaries of the Corporation and any securities of any other corporation or any securities or other interest in any other business entity owned by the Corporation or any of its subsidiaries. 3.7 FINANCIAL STATEMENTS. The Corporation has delivered to WCI, as Schedule 3.7, copies of financial statements ("FINANCIAL STATEMENTS") for its three most recent fiscal years, compiled by Lang & Spidel and unaudited interim financial statements for the Corporation, prepared by David Pummel & Associates, Certified Public Accountants, for the period ended January 31, 1998 (the "BALANCE SHEET DATE"). The Financial Statements are true and correct and fairly present (i) the financial position of the Corporation as of the respective dates of the balance sheets included in said statements, and (ii) the results of operations for the respective periods indicated. Except to the extent reflected or reserved against in the Corporation's balance sheet as of the Balance Sheet Date, or as disclosed on Schedule 3.7 or Schedule 3.8, the Corporation had as of the Balance Sheet Date, and has as of the Closing Date, no liabilities of any nature, whether accrued, absolute, contingent or otherwise, including, without limitation, tax liabilities due or to become due. 3.8 LIABILITIES. Parts I, II, III and IV of Schedule 3.8, are accurate lists and descriptions of all liabilities of the Corporation required to be described below in the format set forth below. (a) Part I of Schedule 3.8 lists, as of the Closing Date, other than with respect to trade payables and as of the end of the month prior to the Closing Date with respect to trade payables, all indebtedness for money borrowed and all other fixed and uncontested liabilities of any kind, character and description (excluding all real and personal property leasehold interests included in Part IV of Schedule 3.8), whether reflected or not reflected on the Financial Statements and whether accrued or absolute, and states as to each such liability the amount of such liability and to whom payable. From the date as of which information is provided with respect to trade payables, trade payables have been incurred only in the ordinary course of business consistent with comparable prior periods. (b) Part II of Schedule 3.8 lists, as of the Closing Date, all claims, suits and proceedings which are pending against the Corporation, all contingent liabilities, and, to the knowledge of the Corporation and the Shareholders, all contingent liabilities and all claims, suits and proceedings threatened or anticipated against the Corporation. Part II of Schedule 3.8 includes a summary description of each such liability, including, without 5 7 limitation, (A) the name of each court, agency, bureau, board or body before which any such claim, suit or proceeding is pending, (B) the date such claim, suit or proceeding was instituted, (C) the parties to such claim, suit or proceeding, (D) a brief description of the factual basis alleged to underlie such claim, suit or proceeding, including the date or dates of all material occurrences, and (E) the amount claimed and other relief sought, together with copies of all material documents, reports and other records relating thereto to the extent that they are in the Corporation's or the Shareholders' possession or control. (c) Part III of Schedule 3.8 list, as of the Closing Date and to the extent not otherwise included in Part I of Schedule 3.8, all liens, claims and encumbrances secured by or otherwise affecting any asset of the Corporation (including any Corporate Property, as hereafter defined), including a description of the nature of such lien, claim or encumbrance, the amount secured if it secures a liability, the nature of the obligation secured, and the party holding such lien, claim or encumbrance. (d) Part IV of Schedule 3.8 lists, as of the Closing Date and to the extent not otherwise included in Part I or Part III of Schedule 3.8, all real and personal property leasehold interests to which the Corporation is a party as lessor or lessee or, to the knowledge of the Corporation or the Shareholders, affecting or relating to any Corporate Property, and includes a description of the nature and principal terms of such leasehold interest, including, without limitation, the identity of the other party thereto, the term of such leasehold interest (including renewal options), the base rent and any additional rent owing thereunder (including any adjustments thereto), security deposits, rights of first offer or first refusal, purchase options, and restrictions on transfer. Except as described on the applicable part of Schedule 3.8, neither the Corporation nor any of the Shareholders has made any payment or committed to make any payment since the Balance Sheet Date on or with respect to any of the liabilities or obligations listed on Schedule 3.8 except, in the case of liabilities and obligations listed on Parts I, III and IV of Schedule 3.8, periodic payments required to be made under the terms of the agreements or instruments governing such obligations or liabilities or made in the ordinary course of business. Between the Balance Sheet Date and the Closing Date, trade payables have been incurred only in the ordinary course of business consistent with comparable prior periods. 3.9 CONDUCT OF BUSINESS. Except as set forth on Schedule 3.21, since the Balance Sheet Date: (a) The business of the Corporation has been conducted only in the ordinary course; and (b) There has been no change in the condition (financial or otherwise) of the assets, liabilities or operations of the Corporation other than changes in the ordinary course of business, none of which either singly or in the aggregate has been materially adverse. 6 8 3.10 PERMITS AND LICENSES. (a) Schedule 3.10(a) is a full and complete list, and includes copies, of all material permits, licenses, franchises, and service agreements pursuant to which the Corporation is authorized to collect and haul industrial, commercial and residential solid waste (the "COLLECTION FRANCHISES"), and of all other material permits, licenses, titles (including motor vehicle titles and current registrations), fuel permits, zoning and land use approvals and authorizations, including, without limitation, any conditional or special use approvals or zoning variances, occupancy permits, and any other similar documents constituting a material authorization or entitlement or otherwise material to the operation of the business of the Corporation (collectively the "GOVERNMENTAL PERMITS") owned by, issued to, held by or otherwise benefitting the Corporation or the Shareholders as of the Closing Date. The status of the Governmental Permits related to the disposal areas owned or used by the Corporation, including, without limitation, any conditions thereto and, if applicable, the expiration dates thereof, are also described in Schedule 3.10(a). Schedule 3.10(a) also sets forth the name of any governmental agency or other third party from whom the Shareholders, the Corporation or WCI must obtain consent (the "REQUIRED GOVERNMENTAL CONSENTS") in order to effect a direct or indirect transfer of the Collection Franchises or other Governmental Permits required as a result of the consummation of the transactions contemplated by this Agreement. All such consents have been obtained. Except as set forth on Schedule 3.10(a), all of the Collection Franchises and other Governmental Permits enumerated and listed on Schedule 3.10(a) are adequate for the operation of the business of the Corporation and of each Corporate Property as presently operated and are valid and in full force and effect. All of said Collection Franchises and other Governmental Permits and agreements have been duly obtained and are in full force and effect, and there are no proceedings pending or, to the knowledge of the Corporation or the Shareholders, threatened which may result in the revocation, cancellation, suspension or adverse modification of any of the same. Neither the Corporation nor any of the Shareholders has any knowledge of any reason why all such Governmental Permits and agreements will not remain in effect after consummation of the transactions contemplated hereby. (b) Schedule 3.10(b) includes: (i) all records, notifications, reports, permit and license applications, engineering and geologic studies, and environmental impact reports, tests or assessments (collectively, "RECORDS, NOTIFICATIONS AND REPORTS") that (A) are material to the operation of the business of the Corporation, or (B) relate to the discharge or release of materials into the environment and/or the handling or transportation of waste materials or hazardous or toxic substances or otherwise relate to the protection of the public health or the environment, or (C) were filed with or submitted to appropriate governmental agencies during the past 24 months by the Corporation or any of the Shareholders or their agents with respect to the business of the Corporation, and (ii) all material notifications from such governmental agencies to the Corporation, the Shareholders or their agents in response to or relating to any of such Records, 7 9 Notifications and Reports. (c) Schedule 3.10(c) lists, as of the Closing Date, each facility owned, leased, operated or otherwise used by the Corporation, the ownership, lease, operation or use of which is being transferred to, assumed by or otherwise acquired directly or indirectly by WCI pursuant to this Agreement (each, a "FACILITY" and collectively, the "FACILITIES"). Except as otherwise disclosed on Schedule 3.10(c): (i) Each Facility is fully licensed, permitted and authorized to carry on its current business under all applicable federal, state and local statutes, orders, approvals, zoning or land use requirements, rules and regulations, and no Facility or the current use thereof constitutes a non-conforming use or is otherwise subject to any restrictions regarding the operation, renovation or reconstruction thereof. (ii) All activities and operations at each Facility are being and have been conducted in compliance in all material respects with the requirements, criteria, standards and conditions set forth in all applicable federal, state and local statutes, orders, approvals, permits, zoning or land use requirements and restrictions, variances, licenses, rules and regulations. (iii) Each Facility is located on real property owned or leased by the Corporation (each a "FACILITY PROPERTY") and each Facility Property owned by the Corporation is legally described on the preliminary title reports, surveys or site plans attached to Schedule 3.10(c) (the "FACILITY SURVEYS/SITE PLANS"), which accurately depict the respective Facility Property. (iv) There are no circumstances, conditions or reasons which are likely to be the basis for revocation or suspension of any Facility's site assessments, permits, licenses, consents, authorizations, zoning or land use permits, variances or approvals relating to any Facility owned by the Corporation or owned by any of the Shareholders or an Affiliate (as hereinafter defined) of any of the Shareholders and leased to the Corporation, and to the knowledge of the Corporation and the Shareholders there are no circumstances, conditions or reasons which are likely to be the basis for revocation or suspension of any site assessment, permits, licenses, consents, authorizations, zoning or land use permits, variances or approvals relating to any Facility. 3.11 CERTAIN RECEIVABLES. Schedule 3.11 is an accurate list as of the Closing Date of the accounts and notes receivable of the Corporation from and advances to employees, former employees, officers, directors, the Shareholders and Affiliates of the foregoing which have not been repaid. For purposes of this Agreement, the term "AFFILIATE" means, with respect to any person, any person that directly or indirectly through one or more intermediaries controls or has an ownership interest in, or is controlled or owned in whole or in part by, or is under common control or ownership in whole or in part with such person, and in the case of the Corporation 8 10 includes directors and officers, in the case of individuals includes the individual's spouse, father, mother, grandfather, grandmother, brothers, sisters, children and grandchildren and in the case of a trust includes the grantors, trustees and beneficiaries of the trust. 3.12 FIXED ASSETS AND REAL PROPERTY. (a) Schedule 3.12(a) lists, as of the Closing Date, substantially all the fixed assets (other than real estate) of the Corporation, including, without limitation, identification of each vehicle by description and serial number, identification of machinery, equipment and general descriptions of parts, supplies and inventory. Except as described on Schedule 3.12(a), all of the Corporation's containers, vehicles, machinery and equipment necessary for the operation of its business are in operable condition, and all of the motor vehicles and other rolling stock of the Corporation are in material compliance with all applicable laws, rules and regulations. All such containers, vehicles, machinery and equipment are substantially free of known defects that would cause them to fail. All leases of fixed assets are in full force and effect and binding upon the parties thereto; neither the Corporation nor, to the knowledge of the Corporation or the Shareholders, any other party to such leases is in breach of any of the material provisions thereof. (b) Each parcel of real property leased, owned or being purchased by the Corporation as of the Closing Date (the "CORPORATE PROPERTY"), including the street address and, in the case of Corporate Property owned or being purchased, the legal description thereof, is listed on Schedule 3.12(b) - Part I, and attached to said Schedule 3.12(b) - Part I are copies of all leases, deeds, outstanding mortgages, other encumbrances and any existing title insurance policies or lawyer's title opinions relating to each Corporate Property, as well as a current commitment for title insurance issued by a title insurance company satisfactory to WCI with respect to each Corporate Property owned or being purchased by the Corporation, together with copies of all of the title exceptions referred to in each such commitment. All leases listed on Schedule 3.12(b) - Part I are in full force and effect and binding on the parties thereto; neither the Corporation nor any other party to any such lease is in breach of any of the material provisions thereof; the landlord's interest in any such lease has not been assigned to any third party nor has any such interest been mortgaged, pledged or hypothecated; and the Corporation has not assigned any such lease or sublet all or any part of the Corporate Property which is the subject of any such lease. Except as described on Schedule 3.12(b) - Part II, there are no material physical or mechanical defects in any Facility located on any Corporate Property and each such Facility is in good condition and repair. (c) The Corporation has good, valid and marketable title to all properties and assets, real, personal, and mixed, tangible and intangible, actually used or necessary for the conduct of its business, free of any encumbrance or charge of any kind except: (i) liens for current taxes not yet due; (ii) minor imperfections of title and encumbrances, if any, that are not substantial in amount, do not materially reduce the value or impair the 9 11 use of the property subject thereto, do not materially impair the value of the Corporation, and have arisen only in the ordinary course of business and consistent with past practice; and (iii) the liens identified on Part III of Schedule 3.8 (collectively, the "PERMITTED LIENS"). Except as described on Schedule 3.12(b) - Part I, there are no leases, occupancy agreements, options, rights of first refusal or any other agreements or arrangements, either oral or written, that create or confer in any person or entity the right to acquire, occupy or possess, now or in the future, any Facility, any Corporate Property, or any portion thereof, or create in or confer on any person or entity any right, title or interest therein or in any portion thereof. 3.13 ACQUISITION/DISPOSAL OF ASSETS. Except as indicated on Schedule 3.13, since the Balance Sheet Date, the Corporation has not acquired or sold or otherwise disposed of any properties or assets which, singly or in the aggregate, have a value in excess of $10,000, or which are material to the operation of the Corporation's business as presently conducted, without the prior written consent of WCI. 3.14 CONTRACTS AND AGREEMENTS; ADVERSE RESTRICTIONS. (a) Schedule 3.14(a) lists, as of the Closing Date, and includes copies of, all material contracts and agreements (other than leases and documents included with Schedule 3.12(b)) to which the Corporation is a party or by which it or any of its property is bound (including, but not limited to, joint venture or partnership agreements, contracts with any labor organizations, promissory notes, loan agreements, bonds, mortgages, deeds of trust, liens, pledges, conditional sales contracts or other security agreements). Except as disclosed on Schedule 3.14(a), all such contracts and agreements included in Schedule 3.14(a) are in full force and effect and binding upon the parties thereto. Except as described or cross referenced on Schedule 3.14(a), neither the Corporation nor, to the Corporation's or any of the Shareholder's knowledge, any other parties to such contracts and agreements is in breach thereof, and none of the parties has threatened to breach any of the material provisions thereof or notified the Corporation or any of the Shareholders of a default thereunder, or exercised any options thereunder. (b) Except as set forth on Schedule 3.14(b), there is no outstanding judgment, order, writ, injunction or decree against the Corporation, the result of which could materially adversely affect the Corporation or its business or any of the Corporate Properties, nor has the Corporation been notified that any such judgment, order, writ, injunction or decree has been requested. 3.15 INSURANCE. Schedule 3.15 is a complete list and includes copies, as of the Closing Date, of all insurance policies in effect on the Closing Date or, with respect to "occurrence" policies that were in effect, carried by the Corporation in respect of the Corporate Properties or any other property used by the Corporation specifying, for each policy, the name of the insurer, the type of risks insured, the deductible and limits of coverage, and the annual premium therefor. The Corporation currently carries insurance in the type and amount ordinarily carried by owners 10 12 or corporations in similar circumstances, in respect to the Corporation properties, assets and business. WCI shall continue to maintain insurance policies at least equivalent to coverages currently carried by the Corporation and shall use reasonable efforts to designate James C. Sowers and Mildred A. Sowers as additional insureds. During the last five years, there has been no lapse in any material insurance coverage of the Corporation. For each insurer providing coverage for any of the contingent or other liabilities listed on Schedule 3.8, except to the extent otherwise set forth in Part II of Schedule 3.8, each such insurer, if required, has been properly and timely notified of such liability, no reservation of rights letters have been received by the Corporation and the insurer has assumed defense of each suit or legal proceeding. All such proceedings are fully covered by insurance, subject to normal deductibles. 3.16 PERSONNEL. Schedule 3.16 is a complete list, as of the Closing Date, of all officers, directors and employees (by type or classification) of the Corporation and their respective rates of compensation, including (i) the portions thereof attributable to bonuses, (ii) any other salary, bonus, stock option, equity participation, or other compensation arrangement made with or promised to any of them, and (iii) copies of all employment agreements with non-union officers, directors and employees. Schedule 3.16 also lists the driver's license number for each driver of the Corporation's motor vehicles. 11 13 3.17 BENEFIT PLANS AND UNION CONTRACTS. (a) Schedule 3.17(a) is a complete list as of the Closing Date, and includes complete copies (or, in the case of oral arrangements, descriptions), of all employee benefit plans and agreements (written or oral) currently maintained or contributed to by the Corporation, including employment agreements and any other agreements containing "golden parachute" provisions, retirement plans, welfare benefit plans and deferred compensation agreements, together with copies of such plans, agreements and any trusts related thereto, and classifications of employees covered thereby as of the Closing Date. Except for the employee benefit plans described on Schedule 3.17(a), the Corporation has no other pension, retirement, welfare, profit sharing, deferred compensation, stock option, employee stock purchase or other employee benefit plans or arrangements with any party. Except as disclosed on Schedule 3.17(a), all employee benefit plans listed on Schedule 3.17(a) are fully funded and in substantial compliance with all applicable federal, state and local statutes, ordinances and regulations. All such plans that are intended to qualify under Section 401(a) of the Internal Revenue Code have been determined by the Internal Revenue Service to be so qualified, and copies of such determination letters are included as part of Schedule 3.17(a). Except as disclosed on Schedule 3.17(a), all reports and other documents required to be filed with any governmental agency or distributed to plan participants or beneficiaries (including, but not limited to, actuarial reports, audits or tax returns) have been timely filed or distributed, and copies thereof are included as part of Schedule 3.17(a). All employee benefit plans listed on such Schedule have been operated in accordance with the terms and provisions of the plan documents and all related documents and policies. The Corporation has not incurred any liability for excise tax or penalty due to the Internal Revenue Service or U.S. Department of Labor nor any liability to the Pension Benefit Guaranty Corporation for any employee benefit plan, nor has the Corporation, nor party-in-interest or disqualified person, engaged in any transaction or other activity which would give rise to such liability. The Corporation has not participated in or made contributions to any "multi-employer plan" as defined in the Employee Retirement Income Security Act of 1974 ("ERISA"), nor would the Corporation or any affiliate be subject to any withdrawal liability with respect to such a plan if any such employer withdrew from such a plan immediately prior to the Closing Date. No employee pension benefit plan is under funded on a termination basis as of the date of this Agreement. (b) Schedule 3.17(b) is a complete list, as of the Closing Date, and includes complete copies of all union contracts and agreements between the Corporation and any collective bargaining group. The Corporation is in compliance in all material respects with all applicable federal and state laws respecting employment and employment practices, terms and conditions of employment, wages and hours, and nondiscrimination in employment, and is not engaged in any unfair labor practice. There is no charge pending or, to the Corporation's or the Shareholders' knowledge, threatened, against the Corporation before any court or agency and alleging unlawful discrimination in 12 14 employment practices and there is no charge of or proceeding with regard to any unfair labor practice against it pending before the National Labor Relations Board. There is no labor strike, dispute, slow down or stoppage as of the Closing Date, existing or threatened against the Corporation; no union organizational activity exists respecting employees of the Corporation not currently subject to a collective bargaining agreement; the union contracts or other agreements delivered as part of Schedule 3.17(b) constitute all agreements with the unions or other collective bargaining groups, and there are no other arrangements or established practices relating to the employees covered by any collective bargaining agreement; and Schedule 3.17(b) contains as of the date it is delivered a list of all arbitration or grievance proceedings that have occurred since the Balance Sheet Date. No one has petitioned within the last five years, and no one is now petitioning, for union representation of any employees of the Corporation. The Corporation has not experienced any labor strike, slow-down, work stoppage, labor difficulty or other job action during the last five years. (c) No payment made to any employee, officer, director or independent contractor of the Corporation (the "RECIPIENT") pursuant to any employment contract, severance agreement or other arrangement (the "Golden Parachute Payment") will be nondeductible by the Corporation because of the application of Sections 280G and 4999 of the Code to the Golden Parachute Payment, nor will the Corporation be required to compensate any Recipient because of the imposition of an excise tax (including any interest or penalties related thereto) on the Recipient by reason of Sections 280G and 4999 of the Code. 3.18 TAXES. (a) The Corporation has timely filed all requisite federal, state, local and other tax and information returns due for all fiscal periods ended on or before the Closing Date. All such returns are accurate and complete. Except as set forth on Schedule 3.18, there are no open years (other than those within the statute of limitations), examinations in progress, extensions of any statute of limitations or claims against the Corporation relating to federal, state, local or other taxes (including penalties and interest) for any period or periods prior to and including the Closing Date and no notice of any claim for taxes has been received. Copies of (i) any tax examinations, (ii) extensions of statutory limitations and (iii) the federal income, and state franchise, income and sales tax returns of the Corporation for its last three fiscal years are attached as part of Schedule 3.18. Copies of all other federal, state, local and other tax and information returns for all prior years of the Corporation's existence have been made available to WCI and are among the records of the Corporation which will accrue to WCI at the Closing. The Corporation has not been contacted by any federal, state or local taxing authority regarding a prospective examination. (b) Except as set forth on Schedule 3.18 (which schedule also includes the amount due with respect to the Corporation) the Corporation has duly paid all taxes and 13 15 other related charges required to be paid prior to the Closing Date. The reserves for taxes contained in the Financial Statements of the Corporation are adequate to cover its tax liability as of the Closing Date. (c) The Corporation has withheld all required amounts from its employees for all pay periods in full and complete compliance with the withholding provisions of applicable federal, state and local laws. All required federal, state and local and other returns with respect to income tax withholding, social security, and unemployment taxes have been duly filed by the Corporation for all periods for which returns are due, and the amounts shown on all such returns to be due and payable have been paid in full. 3.19 COPIES COMPLETE; REQUIRED CONSENTS. Except as disclosed on Schedule 3.19, the certified copies of the Articles of Incorporation and Bylaws of the Corporation, both as amended to the Closing Date, and the copies of all leases, instruments, agreements, licenses, permits, certificates or other documents that have been delivered to WCI in connection with the transactions contemplated hereby are complete and accurate as of the Closing Date and are true and correct copies of the originals thereof. Except as specifically disclosed on Schedule 3.19, the rights and benefits of the Corporation will not be adversely affected by the transactions contemplated hereby, and the execution of this Agreement and the performance of the obligations hereunder will not violate or result in a breach or constitute a default under any of the terms or provisions thereof. None of such leases, instruments, agreements, licenses, permits, site assessments, certificates or other documents requires notice to, or consent or approval of, any governmental agency or other third party to any of the transactions contemplated hereby, except the Required Governmental Consents, such consents and approvals as are listed on Schedule 3.19; all of which will have been given or obtained prior to the Closing. 3.20 CUSTOMERS, BILLINGS, CURRENT RECEIPTS AND RECEIVABLES. Schedule 3.20 is a current, accurate and complete list of, and includes: (a) the customers the Corporation serves on an ongoing basis, including name, location and current billing rate, as of the Closing Date; (b) an accurate and complete aging of all accounts and notes receivable from customers as of the last day of the month preceding the month in which such Schedule is delivered, showing amounts due in 30-day aging categories. Except to the extent of the allowance for bad debts reflected on the Financial Statements or otherwise disclosed on Schedules 3.11 and 3.20, the Corporation's accounts and notes receivable are collectible in the amounts shown on Schedules 3.11 and 3.20; and (c) the average monthly revenues of the Corporation derived from billings to its customers for each of the twelve months preceding the Closing Date. Except as set forth on Schedule 3.20, the Corporation and the Shareholders have no knowledge of any reason why the Corporation's average monthly revenues derived from billings to its customers after the Closing Date should not continue at approximately the same rate as 14 16 before the Closing Date. 3.21 NO CHANGE WITH RESPECT TO THE CORPORATION. Except as set forth on Schedule 3.21, since the Balance Sheet Date, the business of the corporation has been conducted only in the ordinary course and there has been no change in the condition (financial or otherwise) of the assets, liabilities or operations of the Corporation other than changes in the ordinary course of business, none of which either singly or in the aggregate has been materially adverse. Specifically, and without limiting the generality of the foregoing, except as set forth on Schedule 3.21, with respect to the Corporation, since the Balance Sheet Date, there has not been: (a) any material change in its financial condition, assets, liabilities (contingent or otherwise), income, operations or business which would have a material adverse effect on the financial condition, assets, liabilities (contingent or otherwise), income, operations or business of the Corporation, taken as a whole; (b) any material damage, destruction or loss (whether or not covered by insurance) adversely affecting any material portion of its properties or business; (c) any change in or agreement to change (i) its shareholders, (ii) ownership of its authorized capital or outstanding securities, or (iii) its securities; (d) any declaration or payment of, or any agreement to declare or pay, any dividend or distribution in respect of its capital stock or any direct or indirect redemption, purchase or other acquisition of any of its capital stock; (e) any material increase or bonus or promised increase or bonus in the compensation payable or to become payable by it, in excess of usual and customary practices, to any of its directors, officers, employees or agents, or any accrual or arrangement for or payment of any bonus or other special compensation to any employee or any severance or termination pay paid to any of its present or former officers or other key employees; (f) any labor dispute or any other event or condition of any character with respect to the Corporation's employees, materially adversely affecting its business or future prospects; (g) any sale or transfer, or any agreement to sell or transfer, any of its material assets, property or rights to any other person, including, without limitation, the Shareholders and their Affiliates, other than in the ordinary course of business; (h) any cancellation, or agreement to cancel, any material indebtedness or other material obligation owing to it, including, without limitation, any indebtedness or obligation of any of the Shareholders or any Affiliate thereof; 15 17 (i) any plan, agreement or arrangement granting any preferential rights to purchase or acquire any interest in any of its assets, property or rights or requiring consent of any party to the transfer and assignment of any such assets, property or rights; (j) any purchase or acquisition of, or any agreement, plan or arrangement to purchase or acquire, any of its property, rights or assets outside the ordinary course of its business; (k) any waiver of any of its material rights or claims; (l) any new or any amendment or termination of any existing material contract, agreement, license, permit or other right to which it is a party; (m) any other material transaction outside the ordinary course of its business. 3.22 CLOSING DATE DEBT; CLOSING DATE CURRENT ASSETS AND CLOSING DATE CURRENT LIABILITIES. (a) Schedule 3.22(a) is as of the Closing Date (i) the amount of the aggregate debt (excluding trade payables) of the Corporation outstanding on the Closing Date required to be repaid by WCI at or immediately after the Closing Date and all prepayment penalties incurred or to be incurred by WCI or the Corporation in connection with the repayment of any such debt, (ii) the amount of the aggregate debt (excluding trade payables) of the Corporation outstanding on the Closing Date which will remain outstanding obligations of the Corporation after the Closing Date, and all prepayment penalties applicable to such debt if repaid prior to maturity, including in each case all interest accrued through and including the Closing Date, (iii) the aggregate amount of the present value, discounted at the lease rate factor, if known, inherent in the lease or, if the lease rate factor is not known, at the rate charged to the Corporation by a third party lender in connection with its most recent borrowing to finance equipment, of all lease obligations of the Corporation that are not capitalized lease obligations and (iv) the aggregate amount of the present value of all capitalized lease obligations (determined in accordance with generally accepted accounting principles) of the Corporation (the "CLOSING DATE DEBT"). Schedule 3.22(a) includes wire transfer instructions for creditors whose Closing Date Debt WCI has designated for payment, and attached to Schedule 3.22(a) are pay-off letters or instructions from such creditors in the form provided by WCI's bank. (b) Schedule 3.22(b) is an estimate as of the Closing Date of the amount of the aggregate current liabilities (including any reserve for unpaid taxes and excluding the current portion of long-term debt to the extent such current portion is included in Closing Date Debt) and trade payables of the Corporation as of the Closing Date (the "CLOSING DATE CURRENT LIABILITIES") and the amount of the aggregate cash and other current assets of the Corporation as of the Closing Date, including prepaid expenses the benefit of 16 18 which survives the Closing Date and the accounts receivable of the Corporation earned prior to the Closing Date, and collectible (less an allowance for doubtful accounts) on or after the Closing Date (the "CLOSING DATE CURRENT ASSETS"). The Corporation and the Shareholder expressly acknowledge that in arriving at the Closing Date Current Assets, accounts receivable owed to the Corporation that are outstanding sixty (60) days or less prior to the Closing Date are valued at one hundred percent (100%) of their amount, accounts receivable outstanding sixty-one (61) to ninety (90) days prior to the Closing Date are valued at forty percent (40%) of their amount, and that any amounts outstanding more than ninety (90) days prior to the Closing Date are valued at zero. 3.23 BANK ACCOUNTS. (a) Schedule 3.23(a) is a complete and accurate list, as of the Closing Date, of: (i) the name of each bank in which the Corporation has accounts or safe deposit boxes; (ii) the name(s) in which the accounts or boxes are held; (iii) the type of account; and (iv) the name of each person authorized to draw thereon or have access thereto. (b) Schedule 3.23(b) is a complete and accurate list, as of the Closing Date, of: (i) each credit card or other charge account issued to the Corporation; and (ii) the name of each person to whom such credit cards or other charge accounts have been issued. 3.24 COMPLIANCE WITH LAWS. Except as disclosed on Schedule 3.24, the Corporation has complied with, and the Corporation is presently in compliance with, federal, state and local laws, ordinances, codes, rules, regulations, Governmental Permits, orders, judgments, awards, decrees, consent judgments, consent orders and requirements applicable to it (collectively "LAWS"), including, but not limited to, the Americans with Disabilities Act, the Federal Occupational Safety and Health Act, and Laws relating to the public health, safety or protection of the environment (collectively, "ENVIRONMENTAL LAWS"). Except as disclosed on Schedule 3.24, there has been no assertion by any party that the Corporation is in violation of any Laws. Specifically and without limiting the generality of the foregoing, except as disclosed on Schedule 3.24: 17 19 (a) Except as permitted under applicable laws and regulations, including, without limitation, the federal Resource Conservation Recovery Act, 42 USC Section 6901 et seq. ("RCRA"), the Corporation has not accepted, processed, handled, transferred, generated, treated, stored or disposed of any Hazardous Material (as defined in Section 3.24(e) below) nor has it accepted, processed, handled, transferred, generated, treated, stored or disposed of asbestos, medical waste, radioactive waste or municipal waste, except in compliance with Environmental Laws. (b) During the Corporation's ownership or leasing of the Corporate Property owned or leased by it and, to the knowledge of the Corporation and the Shareholders, prior to the Corporation's ownership or leasing of such Corporate Property, no Hazardous Material, other than that allowed under Environmental Laws, including, without limitation, RCRA, has been disposed of, or otherwise released on any Corporate Property. (c) During the Corporation's ownership or leasing of the Corporate Property owned or leased by it and, to the knowledge of the Corporation and the Shareholders, prior to the Corporation's ownership or leasing of such Corporate Property, no Corporate Property has ever been subject to or received any notice of any private, administrative or judicial action, or notice of any intended private, administrative or judicial action relating to the presence or alleged presence of Hazardous Material in, under, upon or emanating from any Corporate Property or any real property now or previously owned or leased by the Corporation. There are no pending and, to the Corporation's and Shareholders' knowledge, no threatened actions or proceedings from any governmental agency or any other entity involving remediation of any condition of the Corporate Property, including, without limitation, petroleum contamination, pursuant to Environmental Laws. (d) Except as allowed under Environmental Laws, the Corporation has not knowingly sent, transported or arranged for the transportation or disposal of any Hazardous Material, to any site, location or facility. (e) As used in this Agreement, "HAZARDOUS MATERIAL" means the substances (i) defined as "HAZARDOUS WASTE" in 40 CFR 261, and substances defined in any comparable South Dakota statute or regulation; (ii) any substance the presence of which requires remediation pursuant to any Environmental Laws; and (iii) any substance disposed of in a manner not in compliance with Environmental Laws. 3.25 POWERS OF ATTORNEY. The Corporation has not granted any power of attorney (except routine powers of attorney relating to representation before governmental agencies) or entered into any agency or similar agreement whereby a third party may bind or commit the Corporation in any manner. 3.26 UNDERGROUND STORAGE TANKS. Except as set forth on Schedule 3.26, no 18 20 underground storage tanks containing petroleum products or wastes or other hazardous substances regulated by 40 CFR 280 or Environmental Laws are currently or have been located on any Corporate Property. Except as set forth on Schedule 3.26, the Corporation has never owned or leased any real property not included in the Corporate Property having any underground storage tanks containing petroleum products or wastes or other hazardous substances regulated by 40 CFR 280. As to each such underground storage tank ("UST") identified on Schedule 3.26, the Corporation has provided to WCI, on Schedule 3.26: (a) the location of the UST, information and material, including any available drawings and photographs, showing the location, and whether the Corporation currently owns or leases the property on which the UST is located (and if the Corporation does not currently own or lease such property, the dates on which it did and the current owner or lessee of such property); (b) the date of installation and specific use or uses of the UST; (c) copies of tank and piping tightness tests and cathodic protection tests and similar studies or reports for each UST; (d) a copy of each notice to or from a governmental body or agency relating to the UST; (e) other material records with regard to the UST, including, without limitation, repair records, financial assurance compliance records and records of ownership; and (f) to the extent not otherwise set forth pursuant to the above, a summary description of instances, past or present, in which, to the Corporation's, or the Shareholders' knowledge, the UST failed to meet applicable standards and regulations for tightness or otherwise and the extent of such failure, and any other operational or environmental problems with regard to the UST, including, without limitation, spills, including spills in connection with delivery of materials to the UST, releases from the UST and soil contamination. Except to the extent set forth on Schedule 3.26, the Corporation has complied with Environmental Laws regarding the installation, use, testing, monitoring, operation and closure of each UST described on Schedule 3.26. 3.27 PATENTS, TRADEMARKS, TRADE NAMES, ETC. Schedule 3.27 lists all patents, tradenames, fictitious business names, trademarks, service marks, and copyrights owned by the Corporation or which it is licensed to use (other than licenses to use software for personal computer operating systems that were provided when the computer was purchased and licenses to use software for personal computers that are granted to retail purchasers of such software). No patents, trade secrets, know-how, intellectual property, trademarks, trade names, assumed 19 21 names, copyrights, or designations used by the Corporation in its business infringe on any patents, trademarks, or copyrights, or any other rights of any person. Neither the Corporation nor any of the Shareholders knows or has any reason to believe that there are any claims of third parties to the use of any such names or any similar name, or knows of or has any reason to believe that there exists any basis for any such claim or claims. 3.28 ASSETS, ETC., NECESSARY TO BUSINESS. The Corporation owns or leases all properties and assets, real, personal, and mixed, tangible and intangible, and, except as disclosed on Schedules 3.5, 3.10(a), 3.10(c), 3.14(a) and 3.19, is a party to all Collection Franchises and Governmental Permits and other agreements necessary to permit it to carry on its business as presently conducted. All of said Collection Franchises and Governmental Permits and agreements have been duly obtained and, except as disclosed on Schedules 3.5, 3.8-Part II, 3.10(a), 3.10(c) 3.14(a) and 3.19, are in full force and effect and there are no proceedings pending or threatened which may result in the revocation, cancellation, suspension or adverse modification of any of the same. Neither the Corporation nor any of the Shareholders has any knowledge of any reason why all such Collection Franchises and Governmental Permits and agreements will not remain in effect after consummation of the transactions contemplated hereby. 3.29 CONDEMNATION. No Corporate Property owned or leased by the Corporation is the subject of, or would be affected by, any pending condemnation or eminent domain proceedings, and, to the knowledge of the Corporation and the Shareholders, no such proceedings are threatened. 3.30 SUPPLIERS AND CUSTOMERS. The relations between the Corporation and its customers are good. Neither the Corporation nor any of the Shareholders has knowledge of any fact (other than general economic and industry conditions) which indicates that any of the suppliers supplying products, components, materials or providing use of, or access to, landfills or disposal sites to the Corporation intends to cease providing such items to the Corporation, nor does the Corporation or any of the Shareholders have knowledge of any fact (other than general economic and industry conditions) which indicates that any of the customers of the Corporation intends to terminate, limit or reduce its business relations with the Corporation. 3.31 ABSENCE OF CERTAIN BUSINESS PRACTICES. Neither the Corporation nor any of the Shareholders has directly or indirectly within the past five years given or agreed to give any gift or similar benefit to any customer, supplier, governmental employee or other person who is or may be in a position to help or hinder the business of the Corporation in connection with any actual or proposed transaction which (a) might subject the Corporation to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (b) if not given in the past, might have had an adverse effect on the financial condition, business or results of operations of the Corporation, or (c) if not continued in the future, might adversely affect the financial condition, business or operations of the Corporation or which might subject the Corporation to suit or penalty in any private or governmental litigation or proceeding. 3.32 RELATED PARTY TRANSACTIONS. None of the Shareholders or their respective 20 22 Affiliates has entered into any transaction with or is a party to any agreement, lease or other instrument, or as of the date of this Agreement is indebted to or is owed money by, the Corporation not disclosed on the Financial Statements delivered to WCI prior to the date of this Agreement. Except as disclosed in the Financial Statements, none of the Shareholders or their Affiliates owns any direct or indirect interest of any kind in, or controls or is a director, officer, employee, shareholder or partner of, or consultant or lender to or borrower from or has the right to participate in the profits of, any Person which is a competitor, supplier, customer, landlord, tenant, creditor or debtor of the Corporation. 3.33 DISCLOSURE SCHEDULES. Any matter disclosed on any Schedule to this Agreement shall be deemed to have been disclosed on every other Schedule that refers to such Schedule by cross reference so long as the nature of the matter disclosed is obvious from a fair reading of the Schedule on which the matter is disclosed. 3.34 NO MISLEADING STATEMENTS. The representations and warranties of the Corporation and the Shareholders contained in this Agreement, the Exhibits and Schedules hereto and all other documents and information furnished to WCI and its representatives pursuant hereto are complete and accurate in all material respects and do not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements made and to be made not misleading. 3.35 ACCURATE AND COMPLETE RECORDS. The corporate minute books, stock ledgers, books, ledgers, financial records and other records of the Corporation: (a) have been made available to WCI and its agents at the Corporation's offices or at the offices of WCI's attorneys or the Corporation's attorneys; (b) have been, in all material respects, maintained in accordance with all applicable laws, rules and regulations; and (c) are accurate and complete, reflect all material corporate transactions required to be authorized by the Boards of Directors and/or shareholders of the Corporation and do not contain or reflect any material discrepancies. 3.36 KNOWLEDGE. Wherever reference is made in this Agreement to the "KNOWLEDGE" of the Shareholders, such term means the actual knowledge of the Shareholders or any knowledge which should have been obtained by the Shareholders upon reasonable inquiry by a reasonable business person. In the case of a Shareholder that is a trust, the term "knowledge" means the actual knowledge of the trustee or trustees of the trust or any knowledge which should have been obtained by the trustee or trustees upon reasonable inquiry by a reasonable business person. Wherever reference is made in this Agreement to the "knowledge" of the Corporation, such term means the actual knowledge of any management employee, officer or director of the Corporation or any knowledge which should have been obtained by any such person upon reasonable inquiry by a reasonable business person. 21 23 3.37 BROKERS; FINDERS. No person has acted directly or indirectly as a broker, finder or financial advisor for the Corporation or the Shareholders in connection with the transactions contemplated by this Agreement and no person is entitled to any broker's, finder's, financial advisory or similar fee or payment in respect thereof based in any way on any agreement, arrangement or understanding made by or on behalf of the Corporation or the Shareholders. 3.38 INVESTMENT REPRESENTATIONS. The Shareholders further represent that: (a) Each of the Shareholders has such knowledge and experience in financial matters, either alone or with the Shareholder's professional advisors, that he or she is capable of evaluating the merits and risks of the investment in the Shares. (b) Each is a resident of the State of South Dakota. (c) Each of the Shareholders has had access to such information relating to WCI as such Shareholder feels is reasonably necessary to make an informed investment decision with respect to the Shares. (d) Each of the Shareholders has had the opportunity to ask questions and receive answers concerning the terms and conditions of the transactions contemplated by this Agreement and to obtain additional information that WCI possesses or can obtain without unreasonable effort or expense that is necessary to verify the accuracy of the information provided. (e) Each of the Shareholders is acquiring the Shares pursuant to this Agreement for its own account, not as a nominee or agent. No one else has any interest, beneficial or otherwise, in any of the Shares. (f) Each of the Shareholders is able to bear the economic risk of such an investment in the Shares is aware that he, she or it must be prepared to hold such Shares for an indefinite period and is aware that the Shares have not been registered under the Act, or registered or qualified under the securities laws of any state, on the ground, among others, that no unregistered distribution or public offering of Shares is to be effected and the Shares are being issued by WCI without any public offering within the meaning of section 4(2) of the Act. (g) Without in any way limiting the representations herein, each of the Shareholders further agrees that such Shareholder shall not encumber, pledge, hypothecate, sell, transfer, assign or otherwise dispose of, or receive any consideration for, any Shares or any interest in them, unless and until prior to any proposed encumbrance, pledge, hypothecation, sale, transfer, assignment or other disposition, (i) a registration statement on Form S-1 or S-3 (or any other form appropriate for the purpose or replacing such form) under the Act with respect to the shares proposed to be 22 24 transferred or otherwise disposed of shall be then effective (ii)(a) he, she or it shall have furnished WCI with a detailed statement of the circumstances of the proposed disposition, and (b) he, she or it shall have furnished WCI with an opinion of counsel or no-action letter issued by the Staff of the Securities and Exchange Commission ("SEC") (obtained at the Shareholders' expense) in form and substance satisfactory to WCI to the effect that such disposition will not require registration of any such Shares under the Act or qualification of any such Shares under any other securities law; or (iii) Rule 144 is available with respect to such transaction. (h) Each of the Shareholders understands and agrees that each certificate or other instrument representing the Shares will bear a legend on the face thereof (or on the reverse thereof with a reference to such legend on the face thereof) which legend restricts the sale, transfer or other disposition of the Shares otherwise than in accordance with Sections 3.38(g) of this Agreement provided, however, that WCI shall, on the request of any of the Shareholders, cause such legends to be removed from the certificates or other instrument evidencing the Shares if such Shareholder has held such Shares for the period contemplated by Rule 144(k) under the Act and if the Shareholder is not then and has not been during the three months preceding such request an affiliate of WCI (as defined in Rule 144 under the Act). (i) Each of the Shareholders understands and agrees that the Shares will be "restricted securities" as that term is defined in Rule 144 under the Act and, accordingly, that the Shares must be held indefinitely unless subsequently registered under the Act or an exemption from such registration is available. (j) The Shareholders agree to be bound with respect to the Shares by any "lock up" provisions to which the executive officers and directors of WCI are also bound as may be requested by any underwriters of any offering of WCI Stock or securities convertible into WCI Stock. 4. REPRESENTATIONS AND WARRANTIES OF WCI WCI represents and warrants to the Shareholders that each of the following representations and warranties is true as of the date of this Agreement and will be true as of the Closing Date, and agrees that such representations and warranties shall survive the Closing: 4.1 EXISTENCE AND GOOD STANDING. WCI is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. WCI has full corporate power and authority to own and lease its properties and to carry on its business as now conducted. WCI is not required to be qualified or licensed to conduct business as a foreign corporation in any jurisdiction where the failure to be so qualified would have a material adverse effect on its financial condition. 4.2 NO CONTRACTUAL RESTRICTIONS. No provisions exist in any article, document or 23 25 instrument to which WCI is a party or by which it is bound which would be violated by consummation of the transactions contemplated by this Agreement. 4.3 AUTHORIZATION OF AGREEMENT. This Agreement has been duly authorized, executed and delivered by WCI and, subject to the due authorization, execution and delivery by the Corporation and the Shareholders, constitutes a legal, valid and binding obligation of WCI. WCI has full corporate power, legal right and corporate authority to enter into and perform its obligations under this Agreement and to carry on its business as presently conducted. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and the fulfillment of and compliance with the terms and conditions hereof do not and will not, after the giving of notice, or the lapse of time or otherwise: (a) violate any provisions of any judicial or administrative order, award, judgment or decree applicable to WCI; (b) conflict with any of the provisions of the Amended and Restated Certificate of Incorporation or Amended and Restated Bylaws of WCI; or (c) conflict with, result in a breach of or constitute a default under any material agreement or instrument to which WCI is a party or by which it is bound. 4.4 STATUS OF SHARES. The Shares delivered to the Shareholders at the Closing are duly authorized and delivered shares of WCI, and shall be fully paid and nonassessable. 4.5 NO MISLEADING STATEMENTS. The representations and warranties of WCI contained in this Agreement, the Exhibits and Schedules hereto and all other documents and information furnished to the Shareholders pursuant hereto are materially complete and accurate, and do not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements made and to be made not misleading as of the Closing Date. 4.6 BROKERS; FINDERS. No person has acted directly or indirectly as a broker, finder or financial advisor for WCI in connection with the transactions contemplated by this Agreement and no person is entitled to any broker's, finder's, financial advisory or similar fee or payment in respect thereof based in any way on any agreement, arrangement or understanding made by or on behalf of WCI. 4.7 DISCLOSURE SCHEDULES. Any matter disclosed by WCI on any Schedule to this Agreement shall be deemed to have been disclosed on every other Schedule that refers to such Schedule by cross reference so long as the nature disclosed is obvious from a fair reading of the Schedule on which the matter is disclosed. 5. CLOSING DELIVERIES At the Closing, the respective parties shall make the deliveries indicated: 5.1 WCI DELIVERIES. (a) WCI shall deliver the cash portion of the Purchase Price required to be delivered on the Closing Date pursuant to Section 1.2(a). 24 26 (b) WCI shall deliver to the Shareholders certificates for the Shares. (c) WCI shall execute and deliver an Employment Agreement with Clark substantially in the form of the draft included in Exhibit 5.1(d). (d) WCI shall execute and deliver the Lease. (e) WCI shall execute and deliver the Shareholder Note and the accompanying Security Agreement. (f) WCI shall execute and deliver the Clark Note. 5.2 SHAREHOLDERS DELIVERIES. (a) The Shareholders shall deliver to WCI the certificates representing the outstanding Corporation's Stock free and clear of all liens, security interests, claims and encumbrances, accompanied by a stock power duly executed in blank. (b) The Shareholders shall deliver to WCI an opinion of counsel for the Shareholders, dated as of the Closing Date, in substantially the form attached hereto as Exhibit 5.2(c). (c) The Shareholders shall deliver evidence reasonably satisfactory to WCI that all required third-party consents to the transactions contemplated hereby, including without limitation all Required Governmental Consents and all required consents of the landlords under all real estate leases to which the Corporation is a party, were obtained and the Shareholders shall deliver an estoppel certificate from the landlords under all real estate leases to which the Corporation is a party confirming the terms thereof and the rental amount owing thereunder, certifying that such lease is in full force and effect, that the Corporation is not in default under any of the terms or conditions thereof, that there have been no amendments or modifications to any such lease (or specifying the same), and otherwise containing such statements and certifications as the Corporation may require. (d) The Corporation shall deliver to WCI evidence satisfactory to WCI showing that all written employment contracts and all oral employment contracts other than those that are terminable "at will" without payment of severance (other than normal severance benefits approved by WCI) or other benefits with non-union employees of the Corporation (including, without limitation, stock options or other rights to obtain equity in the Corporation) have been terminated, effective on or before the Closing Date. (e) Clark shall execute and deliver the Employment Agreement in the form of Exhibit 5.1(d). 25 27 (f) The Lessor shall execute and deliver the Lease. (g) The Shareholders shall cause each officer and director of the Corporation to deliver a resignation as an officer and/or director of the Corporation. (h) The Shareholders shall execute and deliver the Security Agreement in connection with the Shareholder Note. (i) The Shareholders shall deliver a One Hundred Eighty Day Real Estate Mortgage. (j) The Shareholders shall deliver original motor vehicle titles. 6. ADDITIONAL COVENANTS OF WCI, THE CORPORATION AND THE SHAREHOLDERS 6.1 RELEASE OF GUARANTIES. WCI shall use reasonable efforts to obtain the termination and release promptly after the Closing Date of the personal guaranties of the Shareholders listed on Schedule 6.1, all of which relate to indebtedness of the Corporation included in the Financial Statements as of the Balance Sheet Date or WCI shall indemnify the Shareholders and hold them harmless from and against all losses, expenses or claims by third parties to enforce or collect indebtedness owed by the Corporation as of the Closing Date which is personally guaranteed by the Shareholders pursuant to such guaranties. The Shareholders may notify the obligees under such guaranties that they have terminated their obligations under such guaranties. The Shareholders shall cooperate with WCI in obtaining such releases. 6.2 RELEASE OF SECURITY INTERESTS. On or after the Closing Date, the Shareholders and their respective Affiliates shall cause those security interests in the assets of the Corporation that have been created in favor of financial institutions or other lenders to secure indebtedness (other than indebtedness of the Corporation) of the Shareholders or their respective Affiliates to be released in a manner reasonably satisfactory to WCI, and shall cause all guaranties by the Corporation relating to the indebtedness of the Shareholders to be released to the reasonable satisfaction of WCI. 6.3 CONFIDENTIALITY. Neither the Corporation nor any of the Shareholders shall disclose or make any public announcements of the transactions contemplated by this Agreement without the prior written consent of WCI, unless required to make such disclosure or announcement by law, in which event the party making the disclosure or announcement shall notify WCI at least 24 hours before such disclosure or announcement is expected to be made. WCI shall not disclose or make any public announcement of the transactions contemplated by this Agreement without the prior written consent of the Shareholders' Representative, unless in connection with the initial public offering of WCI Stock or otherwise required to make such disclosure or announcement by law, in which event WCI shall notify the Shareholders' 26 28 Representative at least 24 hours before such disclosure or announcement is expected to be made. 6.4 BROKERS AND FINDERS FEES. Each party shall pay and be responsible for any broker's, finder's or financial advisory fee incurred by such party in connection with the transactions contemplated by this Agreement. 6.5 TAXES. WCI shall reasonably cooperate, at the expense of the Shareholders, with the Shareholders with respect to any matters involving the Shareholders arising out of the Shareholders' ownership of the Corporation prior to the Closing, including matters relating to tax returns and any tax audits, appeals, claims or litigation with respect to such tax returns or the preparation of such tax returns. In connection therewith, WCI shall make available to the Shareholders such files, documents, books and records of the Corporation for inspection and copying as may be reasonably requested by the Shareholders and shall cooperate with the Shareholders with respect to retaining information and documents which relate to such matters. 6.6 SHORT YEAR TAX RETURNS. After the Closing Date, the Shareholders shall prepare at their sole cost and expense, all short year federal, state, county, local and foreign tax returns required by law for the period beginning with the first day of the Corporation's fiscal year in which the Closing occurs and ending with the Closing Date. Each such return shall be prepared in a financially responsible and conservative manner and shall be delivered to WCI together with all necessary supporting schedules within 120 days following the Closing Date for its approval (but such approval shall not relieve the Shareholders of their responsibility for the taxes assessed under these returns). The Shareholders shall be responsible for the payment of all taxes shown to be due or that may come to be due on such returns or otherwise relating to the period prior to the Closing Date in excess of the amount of any reserve for taxes included in Effective Date Current Liabilities. The Shareholders shall also be responsible for all taxes arising from the conversion of the Corporation from a cash to accrual basis of reporting whether or not due on such returns or on the first return filed by the Corporation for the period commencing after the Closing Date. At the time of the delivery of the returns, shall contemporaneously deliver to WCI checks payable to the respective taxing authorities in amounts equal to the amount due. WCI shall sign tax returns and cause such returns to be timely filed with the appropriate authorities. The Shareholders shall be entitled to receive all refunds shown on said returns and any such refunds received by the Corporation or WCI shall be remitted to the Shareholders. 6.7 TITLE INSURANCE. The Shareholders shall arrange for an irrevocable commitment from a title insurance company reasonably acceptable to WCI to issue, within three business days after the Closing Date, a CLTA Owner's Policy of title insurance for the Corporate Property, in an amount as shall be reasonably agreed upon by the Shareholders and WCI, insuring fee simple title to the Corporate Property in the Corporation, subject only to current real property taxes and assessments, standard printed conditions and exceptions, and such title exceptions as shall have been accepted in writing by WCI, and containing such endorsements as WCI may reasonably require. The cost of such title insurance shall be paid one-half by the Shareholders and one-half by WCI. 27 29 6.8 SHAREHOLDERS' REPRESENTATIVE. (a) In order to administer efficiently the rights and obligations of the Shareholders under this Agreement, the Shareholders hereby designate and appoint Clark as the Shareholders' Representative, to serve as the Shareholders' agent, proxy and attorney-in-fact for the limited purposes set forth in this Agreement. (b) Each of the Shareholders hereby appoints the Shareholders' Representative as such Shareholder's agent, proxy and attorney-in-fact, with full power of substitution, for all purposes set forth in this Agreement, including, without limitation, the full power and authority on such Shareholder's behalf (i) to consummate the transactions contemplated by this Agreement, (ii) to disburse any funds received hereunder to the Shareholders, (iii) to execute and deliver on behalf of each Shareholder any amendment or waiver under this Agreement, to agree to the amount of the actual Closing Date Debt, Closing Date Current Assets and Closing Date Current Liabilities pursuant to Section 1.2(a), and to agree to resolution of all Claims hereunder, (iv) to retain legal counsel and other professional services, at the expense of the Shareholders, in connection with the performance by the Shareholders' Representative of this Agreement, and (v) to do each and every act and exercise any and all rights which such Shareholder or Shareholders are permitted or required to do or exercise under this Agreement and the other agreements, documents and certificates executed in connection herewith. Each of the Shareholders agrees that such agency and proxy are coupled with an interest, are therefore irrevocable without the consent of the Shareholders' Representative and shall survive the death, bankruptcy or other incapacity of any Shareholder. (c) Each of the Shareholders hereby agrees that any amendment or waiver under this Agreement, and any action taken on behalf of the Shareholders to enforce the rights of the Shareholders under this Agreement, and any action taken with respect to any adjustment or Claim (including any action taken to object to, defend, compromise or agree to the payment of such adjustment or Claim), shall be effective if approved in writing by persons who were the holders of a majority of the Corporation's Stock immediately prior to the Closing, and that each and every action so taken shall be binding and conclusive on every Shareholder, whether or not such Shareholder had notice of, or approved, such amendment or waiver. (d) Clark shall serve as the Shareholders' Representative until he resigns or is otherwise unable or unwilling to serve. In the event that a Shareholders' Representative resigns from such position or is otherwise unable or unwilling to serve, the remaining Shareholders shall select, by the vote of the holders of a majority of the Corporation's Stock immediately prior to the Closing, a successor representative to fill such vacancy, shall provide prompt written notice to WCI of such change and such substituted representative shall then be deemed to be the Shareholders' Representative for all purposes of this Agreement. 28 30 6.9 GENERAL RELEASE BY SHAREHOLDERS. Except as may be otherwise covered by any policy of insurance carried by the Corporation, each of the Shareholders hereby fully releases and discharges the Corporation and its directors, officers, agents and employees from all rights, claims and actions, known or unknown, of any kind whatsoever, which any of such Shareholders now has or may hereafter have against the Corporation and its directors, officers, agents and employees, arising out of or relating to events arising prior to or on the Closing Date, except (a) as may be described in written contracts disclosed in Schedule 6.9 and expressly described and specifically excepted from this release in Schedule 6.9, (b) compensation as an employee of the Corporation for current periods expressly described and excepted from such release on schedule 6.9, and (c) for the obligations of the Corporation arising after the Closing Date under this Agreement. Specifically, but not by way of limitation, each of the Shareholders waives any right of indemnification, contribution or other recourse against the Corporation which he now has or may hereafter have against the Corporation with respect to representations, warranties or covenants made in this Agreement by the Corporation. Each of the Shareholders hereby waives and relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code, which states as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS TO WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." Each of the Shareholders understands and acknowledges the significance and consequence of this waiver of Section 1542 and nevertheless elects to, and does, release those claims described in this Section 6.9, known or unknown, that it may have now or in the future arising out of or relating to any event arising on or prior to the date of this Agreement. 6.10 CONTINUING EMPLOYEES. WCI shall maintain the same or comparable compensation and insurance coverage for employees of the Corporation after the Closing Date so long as those employees remain employees of the Corporation. 7. INDEMNIFICATION 7.1 INDEMNITY BY THE SHAREHOLDERS. Except as may be otherwise covered by any policy of insurance carried by the Corporation, each of the Shareholders, jointly and severally, subject to the limitations set forth in Section 7.2, covenants and agrees that he or she will indemnify and hold harmless WCI, the Corporation and their respective directors, officers and agents and their respective successors and assigns (collectively the "WCI INDEMNITEES"), from and after the date of this Agreement, against any and all losses, damages, assessments, fines, penalties, adjustments, liabilities, claims, deficiencies, costs, expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation), expenditures, including, without limitation, any "Environmental Site Losses" (as such term is hereinafter defined) identified by a WCI Indemnitee in a Claims Notice (as defined in Section 7.3(a)), or 29 31 asserted by a WCI Indemnitee in litigation commenced against the Shareholders provided that in either case any such Claims Notice shall be given or the litigation commenced prior to the third anniversary of this Agreement (irrespective of the date of discovery), with respect to each of the following contingencies (all, the "7.1 INDEMNITY EVENTS"): (a) Any misrepresentation, breach of warranty, or nonfulfillment of any agreement or covenant on the part of the Shareholders or the Corporation pursuant to the terms of this Agreement or any misrepresentation in or omission from any Exhibit, Schedule, list, certificate, or other instrument furnished or to be furnished to WCI pursuant to the terms of this Agreement, regardless of whether, in the case of a breach of a representation or a warranty, WCI relied on the truth of such representation or warranty or had any knowledge of any breach thereof. (b) The design, development, construction or operation of any Facility or any other "Environmental Site" as hereinafter defined, or the installation or operation of a UST during any period on or prior to the Closing Date, in excess of the amount of liability with respect thereto, if any, set forth on Part II of Schedule 3.8. As used in this Agreement, "ENVIRONMENTAL SITE" shall mean any Facility, any UST and any other waste storage, processing, treatment or disposal facility, and any other business site or any other real property owned, leased, controlled or operated by the Corporation or by any predecessor thereof on or prior to the Closing Date. As used in this Agreement, "ENVIRONMENTAL SITE LOSSES" shall mean any and all losses, damages (including exemplary damages and penalties), liabilities, claims, deficiencies, costs, expenses, and expenditures (including, without limitation, expenses in connection with site evaluations, risk assessments and feasibility studies) arising out of or required by an interim or final judicial or administrative decree, judgment, injunction, mandate, interim or final permit condition or restriction, cease and desist order, abatement order, compliance order, consent order, clean-up order, exhumation order, reclamation order or any other remedial action that is required to be undertaken under federal, state or local law in respect of operating activities on or affecting any Facility, any UST or any other Environmental Site, including, but not limited to (x) any actual or alleged violation of any law or regulation respecting the protection of the environment, including, but not limited to, RCRA and CERCLA or any other law or regulation respecting the protection of the air, water and land and (y) any remedies or violations, whether by a private or public action, alleged or sought to be assessed as a consequence, directly or indirectly, of any "Release" (as defined below) of pollutants (including odors) or Hazardous Substances from any Facility, any UST or any other Environmental Site resulting from activities thereat, whether such Release is into the air, water (including groundwater) or land and whether such Release arose before, during or after the Closing Date. The term "RELEASE" as used herein means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the ambient environment. Notwithstanding anything in this paragraph to the contrary, it is specifically understood and agreed that a Release composed solely of Hazardous Substances contained in household waste lawfully disposed of in a landfill during the time the Corporation owned 30 32 and/or operated such landfill does not constitute an Environmental Site Loss. (c) All matters on Schedule 3.8 - Part II. (d) All actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incident to any of the foregoing. 7.2 LIMITATIONS ON SHAREHOLDERS' INDEMNITIES. (a) Except as may be otherwise covered by any policy of insurance carried by the Corporation, subject to the provisions of 7.2(b) hereof, the obligations of the Shareholders to indemnify the WCI Indemnitees as provided in Section 7.1 shall be equal to the amount by which the cumulative amount of all such liabilities, claims, damages deficiencies, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses, expenditures and Environmental Site Losses with respect to any or all 7.1 Indemnity Events exceed $40,000 (the "GENERAL DEDUCTIBLE AMOUNT"); provided, that the amount of any obligation of indemnity arising pursuant to Section 7.1(a) with respect to any representation, warranty or covenant contained in Sections 3.1 through 3.5, 3.12(c), 3.18, 3.22 and 6.6 hereof and pursuant to Section 7.1(c) shall not be subject to the General Deductible Amount. (b) The maximum amount which WCI can recover as a result of one or more 7.1 Indemnity Events shall not exceed the Purchase Price (as adjusted pursuant to Section 1.2(a) hereof. For this purpose, the Shares shall be valued at the $300,000 in the aggregate. (c) WCI shall use reasonable efforts to pursue any insurance coverage it may have with respect to any matter resulting in a 7.1 Indemnity Event and shall apply any insurance recoveries it receives in connection with any 7.1 Indemnity Event towards its recovery from the Shareholder for such 7.1 Indemnity Event. Nothing herein shall require WCI from pursuing any such insurance coverage prior to pursuing any claim against the Shareholder. 31 33 7.3 NOTICE OF INDEMNITY CLAIM. (a) In the event that any claim ("CLAIM") is hereafter asserted against or arises with respect to any WCI Indemnitee as to which such Indemnitee may be entitled to indemnification hereunder, the WCI Indemnitee shall notify the Shareholders (as applicable collectively, the "INDEMNIFYING PARTY") in writing thereof (the "CLAIMS NOTICE") within 60 days after (i) receipt of written notice of commencement of any third party litigation against such WCI Indemnitee, (ii) receipt by such WCI Indemnitee of written notice of any third party claim pursuant to an invoice, notice of claim or assessment, against such WCI Indemnitee, or (iii) such WCI Indemnitee becomes aware of the existence of any other event in respect of which indemnification may be sought from the Indemnifying Party (including, without limitation, any inaccuracy of any representation or warranty or breach of any covenant). The Claims Notice shall describe the Claim and the specific facts and circumstances in reasonable detail, and shall indicate the amount, if known, or an estimate, if possible, of the losses that have been or may be incurred or suffered by the WCI Indemnitee. (b) The Indemnifying Party may elect to defend any Claim for money damages where the cumulative total of all Claims (including such Claims) do not exceed the limit set forth in Section 7.2 at the time the Claim is made, by the Indemnifying Party's own counsel; provided, however, the Indemnifying Party may assume and undertake the defense of such a third party Claim only upon written agreement by the Indemnifying Party that the Indemnifying Party is obligated to fully indemnify the WCI Indemnitee with respect to such action. The WCI Indemnitee may participate, at the WCI Indemnitee's own expense, in the defense of any Claim assumed by the Indemnifying Party. Without the written approval of the WCI Indemnitee, which approval shall not be unreasonably withheld, the Indemnifying Party shall not agree to any compromise of a Claim defended by the Indemnifying Party. (c) If, within thirty (30) days of the Indemnifying Party's receipt of a Claims Notice, the Indemnifying Party shall not have provided the written agreement required by Section 7.3(b) and elected to defend the Claim, the WCI Indemnitee shall have the right to assume control of the defense and/or compromise of such Claim, and the costs and expenses of such defense, including reasonable attorneys' fees, shall be added to the Claim. The Indemnifying Party shall promptly, and in any event within thirty (30) days after demand therefor, reimburse the WCI Indemnitee for the costs of defending the Claim, including attorneys' fees and expenses. (d) The party assuming the defense of any Claim shall keep the other party reasonably informed at all times of the progress and development of its or their defense of and compromise efforts with respect to such Claim and shall furnish the other party with copies of all relevant pleadings, correspondence and other papers. In addition, the parties to this Agreement shall cooperate with each other and make available to each other and 32 34 their representatives all available relevant records or other materials required by them for their use in defending, compromising or contesting any Claim. The failure to timely deliver a Claims Notice or otherwise notify the Indemnifying Party of the commencement of such actions in accordance with this Section 7.3 shall not relieve the Indemnifying Party from the obligation to indemnify hereunder but only to the extent that the Indemnifying Party establishes by competent evidence that it has been prejudiced thereby. (e) In the event both the WCI Indemnitee and the Indemnifying Party are named as defendants in an action or proceeding initiated by a third party, they shall both be represented by the same counsel (on whom they shall agree), unless such counsel the WCI Indemnitee, or the Indemnifying Party shall determine that such counsel has a conflict of interest in representing both the WCI Indemnitee and the Indemnifying Party in the same action or proceeding and the WCI Indemnitee and the Indemnifying Party do not waive such conflict to the satisfaction of such counsel. 7.4 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The representations and warranties of the parties contained in this Agreement and in any certificate, Exhibit or Schedule delivered pursuant hereto, or in any other writing delivered pursuant to the provisions of this Agreement (the "REPRESENTATIONS AND WARRANTIES") and the liability of the party making such Representations and Warranties for breaches thereof shall survive the consummation of the transactions contemplated hereby. The parties hereto in executing and delivering and in carrying out the provisions of this Agreement are relying solely on the representations, warranties, Schedules, Exhibits, agreements and covenants contained in this Agreement, or in any writing or document delivered pursuant to the provisions of this Agreement, and not upon any representation, warranty, agreement, promise or information, written or oral, made by any persons other than as specifically set forth herein or therein. There are no third party beneficiaries to this Agreement other than the WCI Indemnitees. 7.5 NO EXHAUSTION OF REMEDIES OR SUBROGATION; RIGHT OF SET OFF. The Shareholders waive any right to require any WCI Indemnitee to (i) proceed against the Corporation; (ii) proceed against any other person; or (iii) pursue any other remedy whatsoever in the power of any WCI Indemnitee. WCI may, but shall not be obligated to, set off against any and all payments due any Shareholder any amount to which any WCI Indemnitee is entitled to be indemnified hereunder with respect to any 7.1 Indemnity Event. Such right of set off shall be separate and apart from any and all other rights and remedies that the Indemnities may have against Shareholders or their successors. 8. OTHER POST-CLOSING COVENANTS OF THE SHAREHOLDERS AND WCI 8.1 RESTRICTIVE COVENANTS. As to the Corporation, the Shareholders and their Affiliates acknowledge that (i) WCI, as the purchaser of the Corporation's Stock, is and will be engaged in the same business as the Corporation (the "BUSINESS"); (ii) the Shareholders and their Affiliates are intimately familiar with the Business; (iii) the Business is currently conducted in the State of South Dakota and WCI intends to continue the Business in South Dakota and intends, by 33 35 acquisition or otherwise, to expand the Business into other geographic areas of South Dakota where it is not presently conducted; (iv) the Shareholders and their Affiliates have had access to trade secrets of, and confidential information concerning, the Business; (v) the agreements and covenants contained in this Section 8.1 are essential to protect the Business and the goodwill being acquired; and (vi) the Shareholders and their Affiliates have the means to support themselves and their dependents other than by engaging in a business substantially similar to the Business and the provisions of this Section 8 will not impair such ability. The Shareholders covenant and agree as set forth in (a), (b) and (c) below with respect to the Corporation: (a) NON-COMPETE. For a period commencing on the Closing Date and terminating five years thereafter (the "RESTRICTED PERIOD"), neither the Shareholders nor any of their Affiliates shall, anywhere in the Cities of Deadwood, Whitewood, Nisland or Central City, South Dakota; the Counties of Lawrence, Perkins, Meade, Butte, Harding, Pennington and Custer, South Dakota, the Counties of Campbell, Crook and Westin, Wyoming, or Carter County, Montana; where WCI or one of its subsidiaries owns or operates a business similar to the Business (the "RESTRICTED COUNTIES"), directly or indirectly, acting individually or as the owner, shareholder, partner, or employee of any entity, (i) engage in the operation of a solid waste collection, transporting, disposal and/or composting business, transfer facility, recycling facility, materials recovery facility or solid waste landfill; (ii) enter the employ of, or render any personal services to or for the benefit of, or assist in or facilitate the solicitation of customers for, or receive remuneration in the form of salary, commissions or otherwise from, any business engaged in such activities; (iii) as owner or lessor of real estate or personal property, rent to lease any facility, equipment or other assets to any business engaged in the same business as the Corporation; or (iv) receive or purchase a financial interest in, make a loan to, or make a gift in support of, any such business in any capacity, including, without limitation, as a sole proprietor, partner, shareholder, officer, director, principal, agent, trustee or lender; provided, however, that any of the Shareholders may own, directly or indirectly, solely as an investment, securities of any business traded on any national securities exchange or NASDAQ, provided none of the Shareholders is a controlling person of, or a member of a group which controls, such business and further provided that the Shareholders do not, in the aggregate, directly or indirectly, own 2% or more of any class of securities of such business. (b) CONFIDENTIAL INFORMATION. During the Restricted Period and thereafter, the Shareholders and their Affiliates shall keep secret and retain in strictest confidence, and shall not use for the benefit of themselves or others, all data and information relating to the Business ("CONFIDENTIAL INFORMATION"), including without limitation, know-how, trade secrets, customer lists, supplier lists, details of contracts, pricing policies, operational methods, marketing plans or strategies, bidding information, practices, policies or procedures, product development techniques or plans, and technical processes; provided, however, that the term "Confidential Information" shall not include information that (i) is or becomes generally available to the public other than as a result of disclosure by the Shareholders or (ii) is general knowledge in the solid waste handling and landfill 34 36 business and not specifically related to the Business. (c) PROPERTY OF THE BUSINESS. All memoranda, notes, lists, records and other documents or papers (and all copies thereof) relating to the Business, including such items stored in computer memories, on microfiche or by any other means, made or compiled by or on behalf of the Shareholders or the Corporation or made available to them relating to the Business, but excluding any materials (other than the minute books of the Corporation) maintained by any attorneys for the Corporation or the Shareholders prior to the Closing, are and shall be the property of WCI and have been delivered or will be delivered or made available to WCI at the Closing. (d) NON-SOLICITATION. Without the consent of WCI, which may be granted or withheld by WCI in its discretion, the Shareholders and their Affiliates shall not solicit any employees of the Corporation to leave the employ of the Corporation and join the Shareholders or any Affiliate in any business endeavor owned or pursued by the Shareholders. (e) NO DISPARAGEMENT. From and after the Closing Date, none of the Shareholders shall, in any way or to any person or entity or governmental or regulatory body or agency, denigrate or derogate WCI or any of its subsidiaries, or any officer, director or employee, or any product or service or procedure of any such company whether or not such denigrating or derogatory statements shall be true and are based on acts or omissions which are learned by the Shareholders from and after the date hereof or on acts or omissions which occur from and after the date hereof, or otherwise. A statement shall be deemed denigrating or derogatory to any person or entity if it adversely affects the regard or esteem in which such person or entity is held by investors, lenders or licensing, rating, or regulatory entities. Without limiting the generality of the foregoing, none of the Shareholders shall, directly or indirectly in any way in respect of any such company or any such directors or officers, communicate with, or take any action which is adverse to the position of any such company with any person, entity or governmental or regulatory body or agency who or which has dealings or prospective dealings with any such company or jurisdiction or prospective jurisdiction over any such company. This paragraph does not apply to the extent that testimony is required by legal process, provided that WCI has received not less than five days' prior written notice of such proposed testimony. 8.2 RIGHTS AND REMEDIES UPON BREACH. If any of the Shareholders or any Affiliate breaches, or threatens to commit a breach of, any of the provisions of Section 8.1 herein (the "RESTRICTIVE COVENANTS"), WCI shall have the following rights and remedies, each of which rights and remedies shall be independent of the others and severally enforceable, and each of which is in addition to, and not in lieu of, any other rights and remedies available to WCI at law or in equity: (a) SPECIFIC PERFORMANCE. The right and remedy to have the Restrictive 35 37 Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to WCI and that money damages would not provide an adequate remedy to WCI. Accordingly, in addition to any other rights or remedies, WCI shall be entitled to injunctive relief to enforce the terms of the Restrictive Covenants and to restrain the Shareholders from any violation thereof. (b) ACCOUNTING. The right and remedy to require the Shareholders to account for and pay over to WCI all compensation, profits, monies, accruals, increments or other benefits derived or received by the Shareholders as the result of any transactions constituting a breach of the Restrictive Covenants. (c) SEVERABILITY OF COVENANTS. The Shareholders acknowledge and agree that the Restrictive Covenants are reasonable and valid in geographical and temporal scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions. (d) BLUE-PENCILING. If any court determines that any of the Restrictive Covenants, or any part thereof, is unenforceable because of the duration or geographic scope of such provision, such court shall reduce the duration or scope of such provision, as the case may be, to the extent necessary to render it enforceable and, in its reduced form, such provision shall then be enforced. (e) ENFORCEABILITY IN JURISDICTION. WCI and the Shareholders intend to and hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographic scope of the Restrictive Covenants. If the courts of any one or more of such jurisdictions hold the Restrictive Covenants unenforceable by reason of the breadth of such scope or otherwise, it is the intention of WCI and the Shareholders that such determination not bar or in any way affect WCI's right to the relief provided above in the courts of any other jurisdiction within the geographic scope of the Restrictive Covenants as to breaches of such covenants in such other respective jurisdictions, such covenants as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants. 9. GENERAL 9.1 ADDITIONAL CONVEYANCES. Following the Closing, the Shareholders and WCI shall each deliver or cause to be delivered at such times and places as shall be reasonably agreed upon such additional instruments as WCI or the Shareholders may reasonably request for the purpose of carrying out this Agreement. The Shareholders will cooperate with WCI and/or the Corporation on and after the Closing Date in furnishing information, evidence, testimony and other assistance in connection with any actions, proceedings or disputes of any nature with 36 38 respect to matters pertaining to all periods prior to the date of this Agreement. 9.2 ASSIGNMENT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, the successors or assigns of WCI and the heirs, legal representatives or assigns of the Shareholders; provided, however, that any such assignment shall be subject to the terms of this Agreement and shall not relieve the assignor of its or his responsibilities under this Agreement. 9.3 PUBLIC ANNOUNCEMENTS. Except as required by law, no party shall make any public announcement or filing with respect to the transactions provided for herein prior to the Closing Date without the prior consent of the other parties hereto. 9.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. 9.5 NOTICES. All notices, requests, demands and other communications hereunder shall be deemed to have been duly given if in writing and either delivered personally, sent by facsimile transmission or by air courier service, or mailed by postage prepaid registered or certified U.S. mail, return receipt requested, to the addresses designated below or such other addresses as may be designated in writing by notice given hereunder, and shall be effective upon personal delivery or facsimile transmission thereof or upon delivery by registered or certified U.S. mail or one business day following deposit with an air courier service: If to the Shareholders: at their respective addresses set forth on Schedule 3.2 With a copy to: Richard A. Pluimer, Esq. Law Offices 907 State Street Belle Fourche, South Dakota 57717 Facsimile: (605) 892-6386 If to WCI: Waste Connections, Inc. 2260 Douglas Boulevard, Suite 280 Roseville, California 95661 Attention: Ronald J. Mittelstaedt Facsimile: (916) 772-2920 With a copy to: Robert D. Evans, Esq. Shartsis, Friese & Ginsburg LLP One Maritime Plaza, 18th Floor San Francisco, California 94111 Facsimile: (415) 421-2922 37 39 9.6 ATTORNEYS' FEES. In the event of any dispute or controversy between WCI on the one hand and the Corporation or the Shareholders on the other hand relating to the interpretation of this Agreement or to the transactions contemplated hereby, the prevailing party shall be entitled to recover from the other party reasonable attorneys' fees and expenses incurred by the prevailing party. Such award shall include post-judgment attorney's fees and costs. 9.7 APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of South Dakota without regard to its conflict of laws provisions. 9.8 PAYMENT OF FEES AND EXPENSES. Whether or not the transactions herein contemplated shall be consummated, each party hereto will pay its own fees, expenses and disbursements incurred in connection herewith and all other costs and expenses incurred in the performance and compliance with all conditions to be performed hereunder (including, in the case of the Shareholders, any such fees, expenses and disbursements paid or accrued by, or charged to, the Corporation). 9.9 INCORPORATION BY REFERENCE. All Schedules and Exhibits attached hereto are incorporated herein by reference as though fully set forth at each point referred to in this Agreement. 9.10 CAPTIONS. The captions in this Agreement are for convenience only and shall not be considered a part hereof or affect the construction or interpretation of any provisions of this Agreement. 9.11 NUMBER AND GENDER OF WORDS; CORPORATION. Whenever the singular number is used herein, the same shall include the plural where appropriate, and shall apply to all of such number, and to each of them, jointly and severally, and words of any gender shall include each other gender where appropriate. 9.12 ENTIRE AGREEMENT. This Agreement (including the Schedules and Exhibits hereto) and the other documents delivered pursuant hereto constitute the entire Agreement and understanding between the Corporation, the Shareholders and WCI and supersedes any prior agreement and understanding relating to the subject matter of this Agreement. This Agreement may be modified or amended only by a written instrument executed by the Corporation, the Shareholders (or the Shareholders' Representative on their behalf) and WCI acting through its officers, thereunto duly authorized by its Board of Directors. 9.13 WAIVER. No waiver by any party hereto at any time of any breach of, or compliance with, any condition or provision of this Agreement to be performed by any other party hereto may be deemed a waiver of similar or dissimilar provisions or conditions at the same time or at any prior or subsequent time. 38 40 9.14 CONSTRUCTION. The language in all parts of this Agreement must be in all cases construed simply according to its fair meaning and not strictly for or against any party. Unless expressly set forth otherwise, all references herein to a "day" are deemed to be a reference to a calendar day. All references to "BUSINESS DAY" mean any day of the year other than a Saturday, Sunday or a public or bank holiday in South Dakota or California. Unless expressly stated otherwise, cross-references herein refer to provisions within this Agreement and are not references to the overall transaction or to any other document. 10. GLOSSARY The definitions of the terms used below can be found at the Section indicated:
Term Section ---- ------- Act Section 1.6 Affiliate Section 3.11 Balance Sheet Date Section 3.7 Business Section 8.1 Business Day Section 9.14 Claim Section 7.3 Claims Notice Section 7.3(a) Clark Parties Clark Note Section 1.2(d) Closing Section 2 Closing Date Section 2 Closing Date Debt Section 3.22(a) Closing Date Current Assets Section 3.22(b) Closing Date Current Liabilities Section 3.22(b) Collection Franchises Section 3.10(a) Confidential Information Section 8.1(b) Corporate Property Section 3.12(b) Corporation Parties Corporation Debt Section 1.2(c) Corporation's Stock Second Recital Environmental Laws Section 3.24 Environmental Site Section 7.1(b) Environmental Site Losses Section 7.1 Environmental Site Losses Section 7.1(b) ERISA Section 3.17(a) Excluded Assets Section 1.5 Facility Section 3.10(c) Facilities Section 3.10(c) Facility Property Section 3.10(c)(iii) Facility Surveys/Site Plans Section 3.10(c)(iii)
39 41 Financial Statements Section 3.7 General Deductible Amount Section 7.2(a) Governmental Permits Section 3.10(a) Hazardous Material Section 3.24(e) Hazardous Waste Section 3.24(e)
40 42 Indemnifying Party Section 7.3(a) 7.1 Indemnity Events Section 7.1 IPO Section 1.6 IPO Price Section 1.6 Knowledge Section 3.36 Laws Section 3.24 Lease Fourth Recital Lessor Fourth Recital Permitted Liens Section 3.12(c) Purchase Price Section 1.1 RCRA Section 3.24(a) Recipient Section 3.17(c) Records, Notifications and Reports Section 3.10(b) Release Section 7.1(b) Representations and Warranties Section 7.4 Restricted Counties Section 8.1(a) Restricted Period Section 8.1(a) Restrictive Covenants Section 8.2 Required Governmental Consents Section 3.10(a) SEC Section 3.38(g) Shareholder Debt Section 1.2(e) Shareholder Note Section 1.2(c) Shareholders Parties Shares Section 1.2(b) UST Section 3.26 WCI Indemnitees Section 7.1 WCI Parties WCI Stock Section 1.2(b)
41 43 IN WITNESS WHEREOF, the parties hereto have executed this Agreement by persons thereunto duly authorized as of the date first above written. THE CORPORATION: SOWERS' SANITATION, INC. By: ____________________________________ James C. Sowers President WCI: WASTE CONNECTIONS, INC. By: ____________________________________ Ronald J. Mittelstaedt Chief Executive Officer & President THE SHAREHOLDERS: ________________________________________ James C. Sowers ________________________________________ Mildred A. Sowers 42 44 TABLE OF CONTENTS
Page ---- 1. PURCHASE OF CORPORATION'S STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Shares to be Purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 Price Protection for Shares of the WCI Stock . . . . . . . . . . . . . . . . . . . . . . . 2 1.4 Allocation of the Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. CLOSING TIME AND PLACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION AND THE SHAREHOLDERS . . . . . . . . . . . . . . 3 3.1 Organization, Standing and Qualification . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.3 All Stock Being Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.4 Authority for Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.5 No Breach or Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.6 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.7 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.8 Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.9 Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.10 Permits and Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.11 Certain Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.12 Fixed Assets and Real Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.13 Acquisition/Disposal of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.14 Contracts and Agreements; Adverse Restrictions . . . . . . . . . . . . . . . . . . . . . . 10 3.15 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.16 Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.17 Benefit Plans and Union Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.18 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3.19 Copies Complete; Required Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.20 Customers, Billings, Current Receipts and Receivables . . . . . . . . . . . . . . . . . . 13 3.21 No Change With Respect to the Corporation . . . . . . . . . . . . . . . . . . . . . . . . 13 3.22 Closing Date Debt; Closing Date Current Assets and Closing Date Current Liabilities . . . 15 3.23 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.24 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.25 Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.26 Underground Storage Tanks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3.27 Patents, Trademarks, Trade Names, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.28 Assets, etc., Necessary to Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
i 45
Page ---- 3.29 Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.30 Suppliers and Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.31 Absence of Certain Business Practices . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.32 Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.33 Disclosure Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.34 No Misleading Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.35 Accurate and Complete Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.36 Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.37 Brokers; Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.38 Investment Representations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4. REPRESENTATIONS AND WARRANTIES OF WCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4.1 Existence and Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4.2 No Contractual Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4.3 Authorization of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4.4 Status of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4.5 No Misleading Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4.6 Brokers; Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.7 Disclosure Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5. CLOSING DELIVERIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5.1 WCI Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 5.2 Shareholders Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6. ADDITIONAL COVENANTS OF WCI, THE CORPORATION AND THE SHAREHOLDERS . . . . . . . . . . . . . . . . 24 6.1 Release of Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.2 Release of Security Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 6.3 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 6.4 Brokers and Finders Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 6.5 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 6.6 Short Year Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 6.7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Title Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 6.8 Shareholders' Representative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 6.9 General Release by Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 6.10 Continuing Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7.1 Indemnity by the Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 7.2 Limitations on Shareholders' Indemnities . . . . . . . . . . . . . . . . . . . . . . . . . 29 7.3 Notice of Indemnity Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ii 46
Page ---- 7.4 Survival of Representations, Warranties and Agreements . . . . . . . . . . . . . . . . . . 31 7.5 No Exhaustion of Remedies or Subrogation; Right of Set Off . . . . . . . . . . . . . . . . 31 8. OTHER POST-CLOSING COVENANTS OF THE SHAREHOLDERS AND WCI . . . . . . . . . . . . . . . . . . . . . 31 8.1 Restrictive Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 8.2 Rights and Remedies Upon Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.1 Additional Conveyances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.2 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.3 Public Announcements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.6 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.7 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.8 Payment of Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.9 Incorporation by Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.10 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.11 Number and Gender of Words; Corporation . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.12 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.13 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.14 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 10. GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
iii EX-10.26 6 STOCK PURCHASE AGREEMENT-- T&T DISPOSAL 1 EXHIBIT 10.26 STOCK PURCHASE AGREEMENT Dated as of May 11, 1998, by and among Waste Connections, Inc. T & T Disposal, Inc. Timothy Thomas 2 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT, dated as of May 11, 1998, is entered into by and among Waste Connections, Inc., a Delaware corporation ("WCI"), T & T Disposal, Inc., a Wyoming corporation (the "CORPORATION"), and Timothy Thomas (the "SHAREHOLDERS"). WHEREAS, the Corporation is engaged in the collection and transport of solid waste and recyclables in Albany, Campbell, Crook, Converse, Goshen, Niobrara, Natrona, Platte and Weston Counties, Wyoming and other related activities; WHEREAS, the Shareholders own all of the issued and outstanding capital stock of the Corporation (the "CORPORATION'S STOCK"); WHEREAS, WCI wishes to acquire from the Shareholders all of the Corporation's Stock; NOW, THEREFORE, in consideration of the premises and of the mutual agreements, representations, warranties, provisions and covenants herein contained, the parties hereto, each intending to be bound hereby, agree as follows: 1. PURCHASE OF CORPORATION'S STOCK 1.1 SHARES TO BE PURCHASED. At the Closing (as defined in Section 2), the Corporation shall issue to WCI one hundred ninety-nine (199) new shares of the Corporation's Stock in exchange for WCI's payment of the Closing Date Debt (as defined in Section 3.22) in the total amount of three hundred twenty eight thousand three hundred seventeen dollars ($328,317). Further, WCI shall purchase, and the Shareholders shall sell and deliver to WCI, all of the issued and outstanding shares of the Corporation's Stock before the new issuance to WCI described above, being the number of shares of the Corporation set forth on Schedule 3.2 opposite each Shareholder's name. At the Closing, and in exchange therefor WCI shall deliver to the Shareholders at the Closing or thereafter as provided by this Agreement the purchase price described in Section 1.2 (the "PURCHASE PRICE"). 1 3 1.2 PURCHASE PRICE. The Purchase Price is: (a) one hundred sixty four thousand six hundred eighty three dollars ($164,683) plus or minus, as the case may be, the amount by which the Closing Date Current Assets (as defined in Section 3.22(b)) are greater or less than the Closing Date Current Liabilities (as defined in Section 3.22(b)). The $164,683 shall be payable to the Shareholders at Closing in cash by wire transfer or check payable in clearinghouse funds. Within 120 days after the Closing Date, WCI and the Shareholders' Representative shall determine the actual Closing Date Current Assets and Closing Date Current Liabilities. If the Closing Date Current Assets are greater than the Closing Date Current Liabilities, WCI shall promptly pay the difference between the two amounts to the Shareholders; if the Closing Date Current Liabilities are greater than the Closing Date Current Assets, the Shareholder shall promptly pay the difference between the two amounts to WCI; (b) Thirteen thousand six hundred and thirty-six (13,636) shares (the "SHARES") of WCI's Common Stock, $0.01 par value (the "WCI STOCK"), which shall be delivered by WCI to the Shareholders at the Closing. (c) WCI shall deliver to Timothy Thomas a promissory note (the "NOTE") in the form of Exhibit 1.2(d) hereto. The Note shall be in an amount equal to thirty thousand dollars ($30,000) to be paid in twelve (12) equal monthly installments starting on the first day of the month following the Closing and continuing on the first day of each of the eleven months thereafter. The Note shall be non-interest bearing and shall be secured by a lien on all of the assets of the Corporation. 1.3 ALLOCATION OF THE PURCHASE PRICE. Ten thousand dollars ($ 10,000) of the Purchase Price shall be allocated to the covenant not to compete as described in Section 8.1(a) hereof, and the balance of the Purchase Price shall be allocated to the Corporation's Stock. 1.4 EXCLUDED ASSETS. The Assets of the Corporation listed on Schedule 1.4 (the "EXCLUDED ASSETS") shall be distributed to the Shareholders prior to the Closing, and WCI shall acquire no interest in or claim to any of the Excluded Assets. 2 4 1.5 PRICE PROTECTION FOR SHARES OF THE WCI STOCK. If the gross offering price of the WCI Stock in the IPO (as defined below), before underwriting discounts and commissions and payment of expenses of the offering (the "IPO PRICE"), is less than nine dollars ($9.00) per share, WCI will, within 15 days after the closing of the IPO, issue to the Shareholders a number of additional shares of the WCI Stock determined by multiplying (x) the difference between the IPO Price and nine dollars ($9.00) and (y) 13,636 shares and dividing that product by the IPO Price. In lieu of issuing any fractional shares, WCI shall pay cash to the Shareholders in an amount equal to the fraction of a share that would have been delivered times the greater of the IPO Price and nine dollars ($9.00). For purposes of this agreement, "IPO" means a public offering of the WCI Stock registered under the Securities Act of 1933 (the "ACT") and sold through underwriters pursuant to a firm commitment in the amount of at least five million dollars at an IPO Price of at least five dollars ($5.00) per share. If the closing of the IPO shall not have occurred by July 31, 1998, the Shareholders may, at their option exercised no later than August 15, 1998, by written notice to WCI, cause WCI to repurchase all or any portion of the WCI Stock issued to the Shareholders for eleven dollars ($11.00) per share, payable by wire transfer to the account of the Shareholders. Promptly upon exercise of such option, the Shareholders and WCI shall arrange for a closing of the sale of such WCI Stock, such closing to occur no later than August 31, 1998. 2. CLOSING TIME AND PLACE Subject to the terms and conditions of this Agreement, the closing of the transactions contemplated herein (the "CLOSING") shall take place concurrent with the execution of this Agreement or as the Shareholders' Representative shall agree (the "CLOSING DATE"). The Closing shall take place at the Law Offices of Shartsis, Friese & Ginsburg LLP, One Maritime Plaza, Suite 1800, San Francisco, California 94111, or through an exchange of consideration and signed documents using overnight courier service. At the Closing, WCI, the Corporation and the Shareholders shall deliver to each other the documents, instruments and other items described in Section 5 of this Agreement. 3. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION AND THE SHAREHOLDERS The Corporation and the Shareholders, jointly and severally, (i) represent and warrant that each of the following representations and warranties is true as of the Closing Date, and (ii) agree that such representations and warranties shall survive the Closing. 3.1 ORGANIZATION, STANDING AND QUALIFICATION. The Corporation is duly organized, validly existing and in good standing under the laws of the State of Wyoming. The Corporation has full corporate power and authority to own and lease its properties and to carry on its business as now conducted. As the business of the Corporation is currently conducted, the Corporation is not required to be qualified or licensed to conduct business as a foreign corporation in any other jurisdiction. 3.2 CAPITALIZATION. Schedule 3.2 sets forth, as of the Closing Date, the authorized 3 5 and outstanding capital of the Corporation, the names, addresses and social security numbers or taxpayer identification numbers of the record and beneficial owners thereof, the number of shares so owned, the allocation of the cash and Shares among the Shareholders as agreed to among themselves, and wire transfer instructions for each Shareholder relating to the bank account to which the Purchase Price should be sent. On the Closing Date, all of the issued and outstanding shares of the capital stock of the Corporation are owned of record and beneficially by the Shareholders, as set forth in Schedule 3.2, and are free and clear of all liens, security interests, encumbrances and claims of every kind except as set forth in Schedule 3.2. Each share of the capital stock of the Corporation is duly and validly authorized and issued, fully paid and nonassessable, and was not issued in violation of any preemptive rights of any past or present shareholder of the Corporation. No option, warrant, call, conversion right or commitment of any kind (including any of the foregoing created in connection with any indebtedness of the Corporation) exists which obligates the Corporation to issue any of its authorized but unissued capital stock or other equity interest or which obligates any Shareholder to transfer the Corporation's Stock to any person. 3.3 ALL STOCK BEING ACQUIRED. The Corporation's Stock being acquired by WCI hereunder constitutes all of the outstanding capital stock of the Corporation. 3.4 AUTHORITY FOR AGREEMENT. The Corporation and each of the Shareholders have full right, power and authority to enter into this Agreement and to perform its, his or her obligations hereunder. The execution and delivery of this Agreement by the Corporation and the consummation of the transactions contemplated hereby by the Corporation have been duly authorized by its Shareholders. This Agreement has been duly and validly executed and delivered by the Corporation and each of the Shareholders and, subject to the due authorization, execution and delivery by WCI, constitutes the legal, valid and binding obligation of the Corporation and each of the Shareholders enforceable against each of them in accordance with its terms. 3.5 NO BREACH OR DEFAULT. Except as disclosed on Schedule 3.5, the execution and delivery by the Corporation and the Shareholders of this Agreement, and the consummation by the Shareholders of the transactions contemplated hereby, will not: (a) result in the breach of any of the terms or conditions of, or constitute a default under, or allow for the acceleration or termination of, or in any manner release any party from any obligation under, any mortgage, lease, note, bond, indenture, or material contract, agreement, license or other instrument or obligation of any kind or nature to which the Corporation or any of the Shareholders is a party, or by which the Corporation or the Shareholders, or any of its or their assets, is or may be bound or affected; or (b) violate any law or any order, writ, injunction or decree of any court, administrative agency or governmental authority, or require the approval, consent or permission of any governmental or regulatory authority; or (c) violate the Articles of Incorporation of the Corporation. 4 6 3.6 SUBSIDIARIES. Schedule 3.6 lists as of the Closing Date any and all subsidiaries of the Corporation and any securities of any other corporation or any securities or other interest in any other business entity owned by the Corporation or any of its subsidiaries. 3.7 FINANCIAL STATEMENTS. The Corporation has delivered to WCI, as Schedule 3.7, copies of financial statements ("FINANCIAL STATEMENTS") for its three most recent fiscal years, compiled internally by the Corporation, and interim financial statements for the Corporation for the period ended March 31, 1998 (the "BALANCE SHEET DATE"). The Financial Statements are true and correct and fairly present (i) the financial position of the Corporation as of the respective dates of the balance sheets included in said statements, and (ii) the results of operations for the respective periods indicated. The Financial Statements have been prepared consistently with prior periods. Except to the extent reflected or reserved against in the Corporation's balance sheet as of the Balance Sheet Date, or as disclosed on Schedule 3.7 or Schedule 3.8, the Corporation had as of the Balance Sheet Date, and has as of the Closing Date, no liabilities of any nature, whether accrued, absolute, contingent or otherwise, including, without limitation, tax liabilities due or to become due. 3.8 LIABILITIES. Parts I, II, III and IV of Schedule 3.8, are accurate lists and descriptions of all liabilities of the Corporation required to be described below in the format set forth below. (a) Part I of Schedule 3.8 lists, as of the Closing Date, other than with respect to trade payables and as of the end of the month prior to the Closing Date with respect to trade payables, all indebtedness for money borrowed and all other fixed and uncontested liabilities of any kind, character and description (excluding all real and personal property leasehold interests included in Part IV of Schedule 3.8), whether reflected or not reflected on the Financial Statements and whether accrued or absolute, and states as to each such liability the amount of such liability and to whom payable. From the date as of which information is provided with respect to trade payables, trade payables have been incurred only in the ordinary course of business consistent with comparable prior periods. (b) Part II of Schedule 3.8 lists, as of the Closing Date, all claims, suits and proceedings which are pending against the Corporation, all contingent liabilities, and, to the knowledge of the Corporation and the Shareholders, all contingent liabilities and all claims, suits and proceedings threatened or anticipated against the Corporation. Part II of Schedule 3.8 includes a summary description of each such liability, including, without limitation, (A) the name of each court, agency, bureau, board or body before which any such claim, suit or proceeding is pending, (B) the date such claim, suit or proceeding was instituted, (C) the parties to such claim, suit or proceeding, (D) a brief description of the factual basis alleged to underlie such claim, suit or proceeding, including the date or dates of all material occurrences, and (E) the amount claimed and other relief sought, together with copies of all material documents, reports and other records relating thereto to the extent that they are in the Corporation's or the Shareholders' possession or control. (c) Part III of Schedule 3.8 lists, as of the Closing Date and to the extent not 5 7 otherwise included in Part I of Schedule 3.8, all liens, claims and encumbrances secured by or otherwise affecting any asset of the Corporation (including any Corporate Property, as hereafter defined), including a description of the nature of such lien, claim or encumbrance, the amount secured if it secures a liability, the nature of the obligation secured, and the party holding such lien, claim or encumbrance. (d) Part IV of Schedule 3.8 lists, as of the Closing Date and to the extent not otherwise included in Part I or Part III of Schedule 3.8, all real and personal property leasehold interests to which the Corporation is a party as lessor or lessee or, to the knowledge of the Corporation or the Shareholders, affecting or relating to any Corporate Property, and includes a description of the nature and principal terms of such leasehold interest, including, without limitation, the identity of the other party thereto, the term of such leasehold interest (including renewal options), the base rent and any additional rent owing thereunder (including any adjustments thereto), security deposits, rights of first offer or first refusal, purchase options, and restrictions on transfer. Except as described on the applicable part of Schedule 3.8, neither the Corporation nor any of the Shareholders has made any payment or committed to make any payment since the Balance Sheet Date on or with respect to any of the liabilities or obligations listed on Schedule 3.8 except, in the case of liabilities and obligations listed on Parts I, III and IV of Schedule 3.8, periodic payments required to be made under the terms of the agreements or instruments governing such obligations or liabilities or made in the ordinary course of business. Between the Balance Sheet Date and the Closing Date, trade payables have been incurred only in the ordinary course of business consistent with comparable prior periods. 3.9 CONDUCT OF BUSINESS. Except as set forth on Schedule 3.21, since the Balance Sheet Date: (a) The business of the Corporation has been conducted only in the ordinary course; and (b) There has been no change in the condition (financial or otherwise) of the assets, liabilities or operations of the Corporation other than changes in the ordinary course of business, none of which either singly or in the aggregate has been materially adverse. 6 8 3.10 PERMITS AND LICENSES. (a) Schedule 3.10(a) is a full and complete list, and includes copies, of all material permits, licenses, franchises, and service agreements pursuant to which the Corporation is authorized to collect and haul industrial, commercial and residential solid waste (the "COLLECTION FRANCHISES"), and of all other material permits, licenses, titles (including motor vehicle titles and current registrations), fuel permits, zoning and land use approvals and authorizations, including, without limitation, any conditional or special use approvals or zoning variances, occupancy permits, and any other similar documents constituting a material authorization or entitlement or otherwise material to the operation of the business of the Corporation (collectively the "GOVERNMENTAL PERMITS") owned by, issued to, held by or otherwise benefitting the Corporation or the Shareholders as of the Closing Date. The status of the Governmental Permits related to the disposal areas owned or used by the Corporation, including, without limitation, any conditions thereto and, if applicable, the expiration dates thereof, are also described in Schedule 3.10(a). Schedule 3.10(a) also sets forth the name of any governmental agency or other third party from whom the Shareholders, the Corporation or WCI must obtain consent (the "REQUIRED GOVERNMENTAL CONSENTS") in order to effect a direct or indirect transfer of the Collection Franchises or other Governmental Permits required as a result of the consummation of the transactions contemplated by this Agreement. All such consents, if any, have been obtained. Except as set forth on Schedule 3.10(a), all of the Collection Franchises and other Governmental Permits enumerated and listed on Schedule 3.10(a) are adequate for the operation of the business of the Corporation and of each Corporate Property as presently operated and are valid and in full force and effect. All of said Collection Franchises and other Governmental Permits and agreements have been duly obtained and are in full force and effect, and there are no proceedings pending or, to the knowledge of the Corporation or the Shareholders, threatened which may result in the revocation, cancellation, suspension or adverse modification of any of the same. Neither the Corporation nor any of the Shareholders has any knowledge of any reason why all such Governmental Permits and agreements will not remain in effect after consummation of the transactions contemplated hereby. (b) Schedule 3.10(b) includes: (i) all records, notifications, reports, permit and license applications, engineering and geologic studies, and environmental impact reports, tests or assessments (collectively, "RECORDS, NOTIFICATIONS AND REPORTS") that (A) are material to the operation of the business of the Corporation, or (B) relate to the discharge or release of materials into the environment and/or the handling or transportation of waste materials or hazardous or toxic substances or otherwise relate to the protection of the public health or the environment, or (C) were filed with or submitted to appropriate governmental agencies during the past 24 months by the Corporation or any of the Shareholders or their agents with respect to the business of the Corporation, and (ii) all material notifications from such governmental agencies to the Corporation, the Shareholders or their agents in response to or relating to any of such Records, Notifications and Reports. 7 9 (c) Schedule 3.10(c) lists, as of the Closing Date, each facility owned, leased, operated or otherwise used by the Corporation, the ownership, lease, operation or use of which is being transferred to, assumed by or otherwise acquired directly or indirectly by WCI pursuant to this Agreement (each, a "FACILITY" and collectively, the "FACILITIES"). Except as otherwise disclosed on Schedule 3.10(c), to the knowledge of the Shareholders: (i) Each Facility is fully licensed, permitted and authorized to carry on its current business under all applicable federal, state and local statutes, orders, approvals, zoning or land use requirements, rules and regulations, and no Facility or the current use thereof constitutes a non-conforming use or is otherwise subject to any restrictions regarding the operation, renovation or reconstruction thereof. (ii) All activities and operations at each Facility are being and have been conducted in compliance in all material respects with the requirements, criteria, standards and conditions set forth in all applicable federal, state and local statutes, orders, approvals, permits, zoning or land use requirements and restrictions, variances, licenses, rules and regulations. (iii) Each Facility is located on real property owned or leased by the Corporation (each a "FACILITY PROPERTY") and each Facility Property owned by the Corporation is legally described on the preliminary title reports, surveys or site plans attached to Schedule 3.10(c) (the "FACILITY SURVEYS/SITE PLANS"), which accurately depict the respective Facility Property. (iv) There are no circumstances, conditions or reasons which are likely to be the basis for revocation or suspension of any Facility's site assessments, permits, licenses, consents, authorizations, zoning or land use permits, variances or approvals relating to any Facility owned by the Corporation or owned by any of the Shareholders or an Affiliate (as hereinafter defined) of any of the Shareholders and leased to the Corporation, and to the knowledge of the Corporation and the Shareholders there are no circumstances, conditions or reasons which are likely to be the basis for revocation or suspension of any site assessment, permits, licenses, consents, authorizations, zoning or land use permits, variances or approvals relating to any Facility. 3.11 CERTAIN RECEIVABLES. Schedule 3.11 is an accurate list as of the Closing Date of the accounts and notes receivable of the Corporation from and advances to employees, former employees, officers, directors, the Shareholders and Affiliates of the foregoing which have not been repaid. For purposes of this Agreement, the term "AFFILIATE" means, with respect to any person, any person that directly or indirectly through one or more intermediaries controls or has an ownership interest in, or is controlled or owned in whole or in part by, or is under common control or ownership in whole or in part with such person, and in the case of the Corporation includes directors and officers, in the case of individuals includes the individual's spouse, father, mother, grandfather, grandmother, brothers, sisters, children and grandchildren and in the case of a trust includes the grantors, trustees and beneficiaries of the trust. 8 10 3.12 FIXED ASSETS AND REAL PROPERTY. (a) Schedule 3.12(a) lists, as of the Closing Date, substantially all the fixed assets (other than real estate) of the Corporation, including, without limitation, identification of each vehicle by description and serial number, identification of machinery, equipment and general descriptions of parts, supplies and inventory. Except as described on Schedule 3.12(a), all of the Corporation's containers, vehicles, machinery and equipment necessary for the operation of its business are in operable condition, and all of the motor vehicles and other rolling stock of the Corporation are in material compliance with all applicable laws, rules and regulations. All such containers, vehicles, machinery and equipment are substantially free of known defects, excepting therefrom defects from reasonable wear, tear and use, that would cause them to fail. All leases of fixed assets are in full force and effect and binding upon the parties thereto; neither the Corporation nor, to the knowledge of the Corporation or the Shareholders, any other party to such leases is in breach of any of the material provisions thereof. (b) Each parcel of real property leased, owned or being purchased by the Corporation as of the Closing Date (the "CORPORATE PROPERTY"), including the street address and, in the case of Corporate Property owned or being purchased, the legal description thereof, is listed on Schedule 3.12(b) - Part I, and attached to said Schedule 3.12(b) - Part I are copies of all leases, deeds, outstanding mortgages, other encumbrances and any existing title insurance policies or lawyer's title opinions relating to each Corporate Property. All leases listed on Schedule 3.12(b) - Part I are in full force and effect and binding on the parties thereto; neither the Corporation nor any other party to any such lease is in breach of any of the material provisions thereof; the landlord's interest in any such lease has not been assigned to any third party nor has any such interest been mortgaged, pledged or hypothecated; and the Corporation has not assigned any such lease or sublet all or any part of the Corporate Property which is the subject of any such lease. Except as described on Schedule 3.12(b) - Part II, there are no known material physical or mechanical defects in any Facility located on any Corporate Property. (c) The Corporation has good, valid and marketable title to all properties and assets, real, personal, and mixed, tangible and intangible, actually used or necessary for the conduct of its business, free of any encumbrance or charge of any kind except: (i) liens for current taxes not yet due; (ii) minor imperfections of title and encumbrances, if any, that are not substantial in amount, do not materially reduce the value or impair the use of the property subject thereto, do not materially impair the value of the Corporation, and have arisen only in the ordinary course of business and consistent with past practice; and (iii) the liens identified on Part III of Schedule 3.8 (collectively, the "PERMITTED LIENS") and those liens and encumbrances disclosed on Schedule 3.8-Part I. Except as described on Schedule 3.12(b) - Part I, there are no leases, occupancy agreements, options, rights of first refusal or any other agreements or arrangements, either oral or written, that create or confer in any person or entity the right to acquire, occupy or possess, now or in the future, any Facility, any Corporate Property, or any portion thereof, or create in or confer on any person or entity any right, title or interest therein or 9 11 in any portion thereof. 3.13 ACQUISITION/DISPOSAL OF ASSETS. Except as indicated on Schedule 3.13, since the Balance Sheet Date, the Corporation has not acquired or sold or otherwise disposed of any properties or assets which, singly or in the aggregate, have a value in excess of $10,000, or which are material to the operation of the Corporation's business as presently conducted, without the prior written consent of WCI. 3.14 CONTRACTS AND AGREEMENTS; ADVERSE RESTRICTIONS. (a) Schedule 3.14(a) lists, as of the Closing Date, and includes copies of, all material contracts and agreements (other than leases and documents included with Schedule 3.12(b)) to which the Corporation is a party or by which it or any of its property is bound (including, but not limited to, joint venture or partnership agreements, contracts with any labor organizations, promissory notes, loan agreements, bonds, mortgages, deeds of trust, liens, pledges, conditional sales contracts or other security agreements). Except as disclosed on Schedule 3.14(a), all such contracts and agreements included in Schedule 3.14(a) are in full force and effect and binding upon the parties thereto. Except as described or cross referenced on Schedule 3.14(a), neither the Corporation nor, to the Corporation's or any of the Shareholder's knowledge, any other parties to such contracts and agreements is in breach thereof, and none of the parties has threatened to breach any of the material provisions thereof or notified the Corporation or any of the Shareholders of a default thereunder, or exercised any options thereunder. (b) Except as set forth on Schedule 3.14(b), there is no outstanding judgment, order, writ, injunction or decree against the Corporation, the result of which could materially adversely affect the Corporation or its business or any of the Corporate Properties, nor has the Corporation been notified that any such judgment, order, writ, injunction or decree has been requested. 3.15 INSURANCE. Schedule 3.15 is a complete list and includes copies, as of the Closing Date, of all insurance policies in effect on the Closing Date or, with respect to "OCCURRENCE" policies that were in effect, carried by the Corporation in respect of the Corporate Properties or any other property used by the Corporation specifying, for each policy, the name of the insurer, the type of risks insured, the deductible and limits of coverage, and the annual premium therefor. The Corporation currently carries insurance in the type and amount ordinarily carried by owners or corporations in similar circumstances, in respect to the Corporation' properties, assets and business. During the last five years, there has been no lapse in any material insurance coverage of the Corporation. For each insurer providing coverage for any of the contingent or other liabilities listed on Schedule 3.8, except to the extent otherwise set forth in Part II of Schedule 3.8, each such insurer, if required, has been properly and timely notified of such liability, no reservation of rights letters have been received by the Corporation and the insurer has assumed defense of each suit or legal proceeding. All such proceedings are fully covered by insurance, subject to normal deductibles. 3.16 PERSONNEL. Schedule 3.16 is a complete list, as of the Closing Date, of all 10 12 officers, directors and employees (by type or classification) of the Corporation and their respective rates of compensation, including (i) the portions thereof attributable to bonuses, (ii) any other salary, bonus, stock option, equity participation, or other compensation arrangement made with or promised to any of them, and (iii) copies of all employment agreements with non-union officers, directors and employees. Schedule 3.16 also lists the driver's license number for each driver of the Corporation's motor vehicles. 3.17 BENEFIT PLANS AND UNION CONTRACTS. (a) Schedule 3.17(a) is a complete list as of the Closing Date, and includes complete copies (or, in the case of oral arrangements, descriptions), of all employee benefit plans and agreements (written or oral) currently maintained or contributed to by the Corporation, including employment agreements and any other agreements containing "GOLDEN PARACHUTE" provisions, retirement plans, welfare benefit plans and deferred compensation agreements, together with copies of such plans, agreements and any trusts related thereto, and classifications of employees covered thereby as of the Closing Date. Except for the employee benefit plans described on Schedule 3.17(a), the Corporation has no other pension, retirement, welfare, profit sharing, deferred compensation, stock option, employee stock purchase or other employee benefit plans or arrangements with any party. Except as disclosed on Schedule 3.17(a), all employee benefit plans listed on Schedule 3.17(a) are fully funded and in substantial compliance with all applicable federal, state and local statutes, ordinances and regulations. All such plans that are intended to qualify under Section 401(a) of the Internal Revenue Code have been determined by the Internal Revenue Service to be so qualified, and copies of such determination letters are included as part of Schedule 3.17(a). Except as disclosed on Schedule 3.17(a), all reports and other documents required to be filed with any governmental agency or distributed to plan participants or beneficiaries (including, but not limited to, actuarial reports, audits or tax returns) have been timely filed or distributed, and copies thereof are included as part of Schedule 3.17(a). All employee benefit plans listed on such Schedule have been operated in accordance with the terms and provisions of the plan documents and all related documents and policies. The Corporation has not incurred any liability for excise tax or penalty due to the Internal Revenue Service or U.S. Department of Labor nor any liability to the Pension Benefit Guaranty Corporation for any employee benefit plan, nor has the Corporation, nor party-in-interest or disqualified person, engaged in any transaction or other activity which would give rise to such liability. The Corporation has not participated in or made contributions to any "MULTI-EMPLOYER PLAN" as defined in the Employee Retirement Income Security Act of 1974 ("ERISA"), nor would the Corporation or any affiliate be subject to any withdrawal liability with respect to such a plan if any such employer withdrew from such a plan immediately prior to the Closing Date. No employee pension benefit plan is under funded on a termination basis as of the date of this Agreement. (b) Schedule 3.17(b) is a complete list, as of the Closing Date, and includes complete copies of all union contracts and agreements between the Corporation and any collective bargaining group. The Corporation is in compliance in all material respects with all applicable federal and state laws respecting employment and employment 11 13 practices, terms and conditions of employment, wages and hours, and nondiscrimination in employment, and is not engaged in any unfair labor practice. There is no charge pending or, to the Corporation's or the Shareholders' knowledge, threatened, against the Corporation before any court or agency and alleging unlawful discrimination in employment practices and there is no charge of or proceeding with regard to any unfair labor practice against it pending before the National Labor Relations Board. There is no labor strike, dispute, slow down or stoppage as of the Closing Date, existing or threatened against the Corporation; no union organizational activity exists respecting employees of the Corporation not currently subject to a collective bargaining agreement; the union contracts or other agreements delivered as part of Schedule 3.17(b) constitute all agreements with the unions or other collective bargaining groups, and there are no other arrangements or established practices relating to the employees covered by any collective bargaining agreement; and Schedule 3.17(b) contains as of the date it is delivered a list of all arbitration or grievance proceedings that have occurred since the Balance Sheet Date. No one has petitioned within the last five years, and no one is now petitioning, for union representation of any employees of the Corporation. The Corporation has not experienced any labor strike, slow-down, work stoppage, labor difficulty or other job action during the last five years. (c) No payment made to any employee, officer, director or independent contractor of the Corporation (the "RECIPIENT") pursuant to any employment contract, severance agreement or other arrangement (the "GOLDEN PARACHUTE PAYMENT") will be nondeductible by the Corporation because of the application of Sections 280G and 4999 of the Code to the Golden Parachute Payment, nor will the Corporation be required to compensate any Recipient because of the imposition of an excise tax (including any interest or penalties related thereto) on the Recipient by reason of Sections 280G and 4999 of the Code. 3.18 TAXES. (a) The Corporation has timely filed all requisite federal, state, local and other tax and information returns due for all fiscal periods ended on or before the Closing Date. All such returns are accurate and complete. Except as set forth on Schedule 3.18, there are no open years (other than those within the statute of limitations), examinations in progress, extensions of any statute of limitations or claims against the Corporation relating to federal, state, local or other taxes (including penalties and interest) for any period or periods prior to and including the Closing Date and no notice of any claim for taxes has been received. Copies of (i) any tax examinations, (ii) extensions of statutory limitations and (iii) the federal income, and state franchise, income and sales tax returns of the Corporation for its last three fiscal years are attached as part of Schedule 3.18. Copies of all other federal, state, local and other tax and information returns for all prior years of the Corporation's existence have been made available to WCI and are among the records of the Corporation which will accrue to WCI at the Closing. The Corporation has not been contacted by any federal, state or local taxing authority regarding a prospective examination. 12 14 (b) Except as set forth on Schedule 3.18 (which schedule also includes the amount due with respect to the Corporation) the Corporation has duly paid all taxes and other related charges required to be paid prior to the Closing Date. The reserves for taxes contained in the Financial Statements of the Corporation are adequate to cover its tax liability as of the Closing Date. (c) The Corporation has withheld all required amounts from its employees for all pay periods in full and complete compliance with the withholding provisions of applicable federal, state and local laws. All required federal, state and local and other returns with respect to income tax withholding, social security, and unemployment taxes have been duly filed by the Corporation for all periods for which returns are due, and the amounts shown on all such returns to be due and payable have been paid in full. 3.19 COPIES COMPLETE; REQUIRED CONSENTS. Except as disclosed on Schedule 3.19, the copies of the Articles of Incorporation of the Corporation, both as amended to the Closing Date, and the copies of all leases, instruments, agreements, licenses, permits, certificates or other documents that have been delivered to WCI in connection with the transactions contemplated hereby are complete and accurate as of the Closing Date and are true and correct copies of the originals thereof. Except as specifically disclosed on Schedule 3.19, the rights and benefits of the Corporation will not be adversely affected by the transactions contemplated hereby, and the execution of this Agreement and the performance of the obligations hereunder will not violate or result in a breach or constitute a default under any of the terms or provisions thereof. None of such leases, instruments, agreements, licenses, permits, site assessments, certificates or other documents requires notice to, or consent or approval of, any governmental agency or other third party to any of the transactions contemplated hereby, except the Required Governmental Consents, such consents and approvals as are listed on Schedule 3.19; all of which will have been given or obtained prior to the Closing. 3.20 CUSTOMERS, BILLINGS, CURRENT RECEIPTS AND RECEIVABLES. Schedule 3.20 is a current, accurate and complete list of, and includes: (a) the customers the Corporation serves on an ongoing basis, including name, location and current billing rate, as of the Closing Date; (b) an accurate and complete aging of all accounts and notes receivable from customers as of the last day of the month preceding the month in which such Schedule is delivered, showing amounts due in 30-day aging categories; and (c) the average monthly revenues of the Corporation derived from billings to its customers for each of the twelve months preceding the Closing Date. Except as set forth on Schedule 3.20, the Corporation and the Shareholders have no knowledge of any reason why the Corporation's average monthly revenues derived from billings to its customers after the Closing Date should not continue at approximately the same rate as before the Closing Date. 3.21 NO CHANGE WITH RESPECT TO THE CORPORATION. Except as set forth on 13 15 Schedule 3.21, since the Balance Sheet Date, the business of the corporation has been conducted only in the ordinary course and there has been no change in the condition (financial or otherwise) of the assets, liabilities or operations of the Corporation other than changes in the ordinary course of business, none of which either singly or in the aggregate has been materially adverse. Specifically, and without limiting the generality of the foregoing, except as set forth on Schedule 3.21, with respect to the Corporation, since the Balance Sheet Date, there has not been: (a) any material change in its financial condition, assets, liabilities (contingent or otherwise), income, operations or business which would have a material adverse effect on the financial condition, assets, liabilities (contingent or otherwise), income, operations or business of the Corporation, taken as a whole; (b) any material damage, destruction or loss (whether or not covered by insurance) adversely affecting any material portion of its properties or business; (c) any change in or agreement to change (i) its shareholders, (ii) ownership of its authorized capital or outstanding securities, or (iii) its securities; (d) any declaration or payment of, or any agreement to declare or pay, any dividend or distribution in respect of its capital stock or any direct or indirect redemption, purchase or other acquisition of any of its capital stock; (e) any material increase or bonus or promised increase or bonus in the compensation payable or to become payable by it, in excess of usual and customary practices, to any of its directors, officers, employees or agents, or any accrual or arrangement for or payment of any bonus or other special compensation to any employee or any severance or termination pay paid to any of its present or former officers or other key employees; (f) any labor dispute or any other event or condition of any character with respect to the Corporation's employees, materially adversely affecting its business or future prospects; (g) any sale or transfer, or any agreement to sell or transfer, any of its material assets, property or rights to any other person, including, without limitation, the Shareholders and their Affiliates, other than in the ordinary course of business; (h) any cancellation, or agreement to cancel, any material indebtedness or other material obligation owing to it, including, without limitation, any indebtedness or obligation of any of the Shareholders or any Affiliate thereof; (i) any plan, agreement or arrangement granting any preferential rights to purchase or acquire any interest in any of its assets, property or rights or requiring consent of any party to the transfer and assignment of any such assets, property or rights; (j) any purchase or acquisition of, or any agreement, plan or arrangement to 14 16 purchase or acquire, any of its property, rights or assets outside the ordinary course of its business; (k) any waiver of any of its material rights or claims; (l) any new or any amendment or termination of any existing material contract, agreement, license, permit or other right to which it is a party; (m) any other material transaction outside the ordinary course of its business. 3.22 DEBT; CURRENT ASSETS AND CURRENT LIABILITIES. (a) At the Closing, the Shareholders shall prepare and deliver to WCI Schedule 3.22(a), which shall be a statement, as of the Closing Date, of (i) the amount of the aggregate debt (excluding trade payables) of the Corporation outstanding on the Closing Date required to be repaid by WCI at the Closing or immediately after the Closing Date and all prepayment penalties incurred or to be incurred by WCI or the Corporation in connection with the repayment of any such debt, (ii) the amount of the aggregate debt (excluding trade payables) of the Corporation outstanding on the Closing Date which will remain outstanding obligations of the Corporation after the Closing Date, and all prepayment penalties applicable to such debt if repaid prior to maturity, including in each case all interest accrued through and including the Closing Date, (iii) the aggregate amount of the present value, discounted at the lease rate factor, if known, inherent in the lease or, if the lease rate factor is not known, at the rate charged to the Corporation by a third party lender in connection with its most recent borrowing to finance equipment, of all lease obligations of the Corporation that are not capitalized lease obligations and (iv) the aggregate amount of the present value of all capitalized lease obligations (determined in accordance with generally accepted accounting principles) of the Corporation (the "CLOSING DATE DEBT"). Schedule 3.22(a) shall include wire transfer instructions for creditors whose Closing Date Debt WCI has designated for payment, and attached to Schedule 3.22(a) shall be pay off letters or instructions from such creditors in the form provided by WCI's bank; (b) At the Closing, the Shareholders shall prepare and deliver to WCI Schedule 3.22(b), which shall be an estimate as of the Closing Date of the amount of the aggregate current liabilities (including any reserve for unpaid taxes and excluding the current portion of long-term debt to the extent such current portion is included in Closing Date Debt) and trade payables of the Corporation as of the Closing Date (the "CLOSING DATE CURRENT LIABILITIES") and the amount of the aggregate cash and other current assets of the Corporation as of the Closing Date, including prepaid expenses the benefit of which survives the Closing Date and the accounts receivable of the Corporation earned prior to the Closing Date, and collectible on or after the Closing Date (the "CLOSING DATE CURRENT ASSETS"). The Corporation and the Shareholders expressly acknowledge that in arriving at the Closing Date Current Assets, accounts receivable owed to the Corporation that are outstanding sixty (60) days or less prior to the Closing Date are valued at one hundred percent (100%) of their amount, accounts receivable outstanding sixty-one (61) 15 17 to ninety (90) days prior to the Closing Date are valued at forty percent (40%) of their amount, and that any amounts outstanding more than ninety (90) days prior to the Closing Date are valued at zero. 3.23 BANK ACCOUNTS. (a) Schedule 3.23(a) is a complete and accurate list, as of the Closing Date, of: (i) the name of each bank in which the Corporation has accounts or safe deposit boxes; (ii) the name(s) in which the accounts or boxes are held; (iii) the type of account; and (iv) the name of each person authorized to draw thereon or have access thereto. (b) Schedule 3.23(b) is a complete and accurate list, as of the Closing Date, of: (i) each credit card or other charge account issued to the Corporation; and (ii) the name of each person to whom such credit cards or other charge accounts have been issued. 3.24 COMPLIANCE WITH LAWS. Except as disclosed on Schedule 3.24, the Corporation has complied with, and the Corporation is presently in compliance with, federal, Wyoming state and local laws, ordinances, codes, rules, regulations, Governmental Permits, orders, judgments, awards, decrees, consent judgments, consent orders and requirements applicable to it (collectively "LAWS"), including, but not limited to, the Americans with Disabilities Act, the Federal Occupational Safety and Health Act, and Laws relating to the public health, safety or protection of the environment (collectively, "ENVIRONMENTAL LAWS"). Except as disclosed on Schedule 3.24, there has been no assertion by any party that the Corporation is in violation of any Laws. Specifically and without limiting the generality of the foregoing, except as disclosed on Schedule 3.24: (a) Except as permitted under applicable laws and regulations, including, without limitation, the federal Resource Conservation Recovery Act, 42 USC Section 6901 et seq. ("RCRA"), the Corporation has not accepted, processed, handled, transferred, generated, treated, stored or disposed of any Hazardous Material (as defined in Section 3.24(e) below) nor has it accepted, processed, handled, transferred, generated, treated, stored or disposed of asbestos, medical waste, radioactive waste or municipal waste, except in compliance with Environmental Laws. 16 18 (b) During the Corporation's ownership or leasing of the Corporate Property owned or leased by it and, to the knowledge of the Corporation and the Shareholders, prior to the Corporation's ownership or leasing of such Corporate Property, no Hazardous Material, other than that allowed under Environmental Laws, including, without limitation, RCRA, has been disposed of, or otherwise released on any Corporate Property. (c) During the Corporation's ownership or leasing of the Corporate Property owned or leased by it and, to the knowledge of the Corporation and the Shareholders, prior to the Corporation's ownership or leasing of such Corporate Property, no Corporate Property has ever been subject to or received any notice of any private, administrative or judicial action, or notice of any intended private, administrative or judicial action relating to the presence or alleged presence of Hazardous Material in, under, upon or emanating from any Corporate Property or any real property now or previously owned or leased by the Corporation. There are no pending and, to the Corporation's and Shareholders' knowledge, no threatened actions or proceedings from any governmental agency or any other entity involving remediation of any condition of the Corporate Property, including, without limitation, petroleum contamination, pursuant to Environmental Laws. (d) Except as allowed under Environmental Laws, the Corporation has not knowingly sent, transported or arranged for the transportation or disposal of any Hazardous Material, to any site, location or facility. (e) As used in this Agreement, "HAZARDOUS MATERIAL" means the substances (i) defined as "HAZARDOUS WASTE" in 40 CFR 261, and substances defined in any comparable Wyoming statute or regulation; (ii) any substance the presence of which requires remediation pursuant to any Environmental Laws; and (iii) any substance disposed of in a manner not in compliance with Environmental Laws. 3.25 POWERS OF ATTORNEY. The Corporation has not granted any power of attorney (except routine powers of attorney relating to representation before governmental agencies) or entered into any agency or similar agreement whereby a third party may bind or commit the Corporation in any manner. 3.26 UNDERGROUND STORAGE TANKS. Except as set forth on Schedule 3.26, no underground storage tanks containing petroleum products or wastes or other hazardous substances regulated by 40 CFR 280 or Environmental Laws are currently or have been located on any Corporate Property. Except as set forth on Schedule 3.26, the Corporation has never owned or leased any real property not included in the Corporate Property having any underground storage tanks containing petroleum products or wastes or other hazardous substances regulated by 40 CFR 280. As to each such underground storage tank ("UST") identified on Schedule 3.26, the Corporation has provided to WCI, on Schedule 3.26: (a) the location of the UST, information and material, including any available drawings and photographs, showing the location, and whether the Corporation currently 17 19 owns or leases the property on which the UST is located (and if the Corporation does not currently own or lease such property, the dates on which it did and the current owner or lessee of such property); (b) the date of installation and specific use or uses of the UST; (c) copies of tank and piping tightness tests and cathodic protection tests and similar studies or reports for each UST; (d) a copy of each notice to or from a governmental body or agency relating to the UST; (e) other material records with regard to the UST, including, without limitation, repair records, financial assurance compliance records and records of ownership; and (f) to the extent not otherwise set forth pursuant to the above, a summary description of instances, past or present, in which, to the Corporation's, or the Shareholders' knowledge, the UST failed to meet applicable standards and regulations for tightness or otherwise and the extent of such failure, and any other operational or environmental problems with regard to the UST, including, without limitation, spills, including spills in connection with delivery of materials to the UST, releases from the UST and soil contamination. Except to the extent set forth on Schedule 3.26, the Corporation has complied with Environmental Laws regarding the installation, use, testing, monitoring, operation and closure of each UST described on Schedule 3.26. 3.27 PATENTS, TRADEMARKS, TRADE NAMES, ETC. Schedule 3.27 lists all patents, tradenames, fictitious business names, trademarks, service marks, and copyrights owned by the Corporation or which it is licensed to use (other than licenses to use software for personal computer operating systems that were provided when the computer was purchased and licenses to use software for personal computers that are granted to retail purchasers of such software). No patents, trade secrets, know-how, intellectual property, trademarks, trade names, assumed names, copyrights, or designations used by the Corporation in its business infringe on any patents, trademarks, or copyrights, or any other rights of any person. Neither the Corporation nor any of the Shareholders knows or has any reason to believe that there are any claims of third parties to the use of any such names or any similar name, or knows of or has any reason to believe that there exists any basis for any such claim or claims. 3.28 ASSETS, ETC., NECESSARY TO BUSINESS. The Corporation owns or leases all properties and assets, real, personal, and mixed, tangible and intangible, and, except as disclosed on Schedules 3.5, 3.10(a), 3.10(c), 3.14(a) and 3.19, is a party to all Collection Franchises and Governmental Permits and other agreements necessary to permit it to carry on its business as presently conducted. All of said Collection Franchises and Governmental Permits and agreements have been duly obtained and, except as disclosed on Schedules 3.5, 3.8-Part II, 18 20 3.10(a), 3.10(c) 3.14(a) and 3.19, are in full force and effect and there are no proceedings pending or threatened which may result in the revocation, cancellation, suspension or adverse modification of any of the same. Neither the Corporation nor any of the Shareholders has any knowledge of any reason why all such Collection Franchises and Governmental Permits and agreements will not remain in effect after consummation of the transactions contemplated hereby. 3.29 CONDEMNATION. No Corporate Property owned or leased by the Corporation is the subject of, or would be affected by, any pending condemnation or eminent domain proceedings, and, to the knowledge of the Corporation and the Shareholders, no such proceedings are threatened. 3.30 SUPPLIERS AND CUSTOMERS. The relations between the Corporation and its customers are good. Neither the Corporation nor any of the Shareholders has knowledge of any fact (other than general economic and industry conditions) which indicates that any of the suppliers supplying products, components, materials or providing use of, or access to, landfills or disposal sites to the Corporation intends to cease providing such items to the Corporation, nor does the Corporation or any of the Shareholders have knowledge of any fact (other than general economic and industry conditions) which indicates that any of the customers of the Corporation intends to terminate, limit or reduce its business relations with the Corporation. 3.31 ABSENCE OF CERTAIN BUSINESS PRACTICES. Neither the Corporation nor any of the Shareholders has directly or indirectly within the past five years given or agreed to give any gift or similar benefit to any customer, supplier, governmental employee or other person who is or may be in a position to help or hinder the business of the Corporation in connection with any actual or proposed transaction which (a) might subject the Corporation to any damage or penalty in any civil, criminal or governmental litigation or proceeding, (b) if not given in the past, might have had an adverse effect on the financial condition, business or results of operations of the Corporation, or (c) if not continued in the future, might adversely affect the financial condition, business or operations of the Corporation or which might subject the Corporation to suit or penalty in any private or governmental litigation or proceeding. 3.32 RELATED PARTY TRANSACTIONS. None of the Shareholders or their respective Affiliates has entered into any transaction with or is a party to any agreement, lease or other instrument, or as of the date of this Agreement is indebted to or is owed money by, the Corporation not disclosed on the Financial Statements delivered to WCI prior to the date of this Agreement. Except as disclosed in the Financial Statements, none of the Shareholders or their Affiliates owns any direct or indirect interest of any kind in, or controls or is a director, officer, employee, shareholder or partner of, or consultant or lender to or borrower from or has the right to participate in the profits of, any Person which is a competitor, supplier, customer, landlord, tenant, creditor or debtor of the Corporation. 3.33 DISCLOSURE SCHEDULES. Any matter disclosed on any Schedule to this Agreement shall be deemed to have been disclosed on every other Schedule that refers to such Schedule by cross reference so long as the nature of the matter disclosed is obvious from a fair reading of the Schedule on which the matter is disclosed. 19 21 3.34 NO MISLEADING STATEMENTS. The representations and warranties of the Corporation and the Shareholders contained in this Agreement, the Exhibits and Schedules hereto and all other documents and information furnished to WCI and its representatives pursuant hereto are complete and accurate in all material respects and do not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements made and to be made not misleading. 3.35 ACCURATE AND COMPLETE RECORDS. The corporate minute books, stock ledgers, books, ledgers, financial records and other records of the Corporation: (a) have been made available to WCI and its agents at the Corporation's offices or at the offices of WCI's attorneys or the Corporation's attorneys; (b) have been, in all material respects, maintained in accordance with all applicable laws, rules and regulations; and (c) are accurate and complete, reflect all material corporate transactions required to be authorized by the Boards of Directors and/or shareholders of the Corporation and do not contain or reflect any material discrepancies. 3.36 KNOWLEDGE. Wherever reference is made in this Agreement to the "KNOWLEDGE" of the Shareholders, such term means the actual knowledge of the Shareholders or any knowledge which should have been obtained by the Shareholders upon reasonable inquiry by a reasonable business person. In the case of a Shareholders that is a trust, the term "KNOWLEDGE" means the actual knowledge of the trustee or trustees of the trust or any knowledge which should have been obtained by the trustee or trustees upon reasonable inquiry by a reasonable business person. Wherever reference is made in this Agreement to the "KNOWLEDGE" of the Corporation, such term means the actual knowledge of any management employee, officer or director of the Corporation or any knowledge which should have been obtained by any such person upon reasonable inquiry by a reasonable business person. 3.37 BROKERS; FINDERS. No person has acted directly or indirectly as a broker, finder or financial advisor for the Corporation or the Shareholders in connection with the transactions contemplated by this Agreement and no person is entitled to any broker's, finder's, financial advisory or similar fee or payment in respect thereof based in any way on any agreement, arrangement or understanding made by or on behalf of the Corporation or the Shareholders. 3.38 INVESTMENT REPRESENTATIONS. The Shareholders further represent that: (a) Each of the Shareholders has such knowledge and experience in financial matters, either alone or with the Shareholder's professional advisors, that he or she is capable of evaluating the merits and risks of the investment in the Shares. (b) Each is a resident of the State of Wyoming. (c) Each of the Shareholders has had access to such information relating to 20 22 WCI as such Shareholder feels is reasonably necessary to make an informed investment decision with respect to the Shares, including, without limitation, WCI's Prospectus dated May, 1998. Each of the Shareholders understands that the Shares are not covered by the Prospectus, but rather that such Prospectus has been given to the Shareholders to provide them information about WCI. (d) Each of the Shareholders has had the opportunity to ask questions and receive answers concerning the terms and conditions of the transactions contemplated by this Agreement and to obtain additional information that WCI possesses or can obtain without unreasonable effort or expense that is necessary to verify the accuracy of the information provided. (e) Each of the Shareholders is acquiring the Shares pursuant to this Agreement for its own account, not as a nominee or agent. No one else has any interest, beneficial or otherwise, in any of the Shares. (f) Each of the Shareholders is able to bear the economic risk of such an investment in the Shares is aware that he, she or it must be prepared to hold such Shares for an indefinite period (unless exempt from registration or subsequently registered under the Act or as otherwise provided in Section 1.5) and is aware that the Shares have not been registered under the Act, or registered or qualified under the securities laws of any state, on the ground, among others, that no unregistered distribution or public offering of Shares is to be effected and the Shares are being issued by WCI without any public offering within the meaning of section 4(2) of the Act. (g) Without in any way limiting the representations herein, each of the Shareholders further agrees that such Shareholder shall not encumber, pledge, hypothecate, sell, transfer, assign or otherwise dispose of, or receive any consideration for, any Shares or any interest in them, unless and until prior to any proposed encumbrance, pledge, hypothecation, sale, transfer, assignment or other disposition, (i) a registration statement on Form S-1 or S-3 (or any other form appropriate for the purpose or replacing such form) under the Act with respect to the shares proposed to be transferred or otherwise disposed of shall be then effective (ii)(a) he, she or it shall have furnished WCI with a detailed statement of the circumstances of the proposed disposition, and (b) he, she or it shall have furnished WCI with an opinion of counsel or no-action letter issued by the Staff of the Securities and Exchange Commission ("SEC") (obtained at the Shareholders' expense) in form and substance satisfactory to WCI to the effect that such disposition will not require registration of any such Shares under the Act or qualification of any such Shares under any other securities law; or (iii) Rule 144 is available with respect to such transaction. (h) Each of the Shareholders understands and agrees that each certificate or other instrument representing the Shares will bear a legend on the face thereof (or on the reverse thereof with a reference to such legend on the face thereof) which legend restricts the sale, transfer or other disposition of the Shares otherwise than in accordance with Sections 3.38(g) of this Agreement provided, however, that WCI shall, on the request of 21 23 any of the Shareholders, cause such legends to be removed from the certificates or other instrument evidencing the Shares if such Shareholder has held such Shares for the period contemplated by Rule 144(k) under the Act and if the Shareholder is not then and has not been during the three months preceding such request an affiliate of WCI (as defined in Rule 144 under the Act). (i) Each of the Shareholders understands and agrees that the Shares will be "RESTRICTED SECURITIES" as that term is defined in Rule 144 under the Act and, accordingly, that the Shares must be held indefinitely unless subsequently registered under the Act or an exemption from such registration is available. (j) The Shareholders agree to be bound with respect to the Shares by any "LOCK UP" provisions to which the executive officers and directors of WCI are also bound as may be requested by any underwriters of any offering of WCI Stock or securities convertible into WCI Stock. 3.39 S CORPORATION. The Corporation has elected to be taxed as an S Corporation under the Internal Revenue Code of 1986, as amended, for all of the years listed on Schedule 3.39. 4. REPRESENTATIONS AND WARRANTIES OF WCI WCI represents and warrants to the Shareholders that each of the following representations and warranties is true as of the date of this Agreement and will be true as of the Closing Date, and agrees that such representations and warranties shall survive the Closing: 4.1 EXISTENCE AND GOOD STANDING. WCI is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. WCI has full corporate power and authority to own and lease its properties and to carry on its business as now conducted. WCI is not required to be qualified or licensed to conduct business as a foreign corporation in any jurisdiction where the failure to be so qualified would have a material adverse effect on its financial condition. 4.2 NO CONTRACTUAL RESTRICTIONS. No provisions exist in any article, document or instrument to which WCI is a party or by which it is bound which would be violated by consummation of the transactions contemplated by this Agreement. 4.3 AUTHORIZATION OF AGREEMENT. This Agreement has been duly authorized, executed and delivered by WCI and, subject to the due authorization, execution and delivery by the Corporation and the Shareholders, constitutes a legal, valid and binding obligation of WCI. WCI has full corporate power, legal right and corporate authority to enter into and perform its obligations under this Agreement and to carry on its business as presently conducted. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby and the fulfillment of and compliance with the terms and conditions hereof do not and will not, after the giving of notice, or the lapse of time or otherwise: (a) violate any provisions of any judicial or administrative order, award, judgment or decree applicable to WCI; (b) conflict with 22 24 any of the provisions of the Amended and Restated Certificate of Incorporation or Amended and Restated Bylaws of WCI; or (c) conflict with, result in a breach of or constitute a default under any material agreement or instrument to which WCI is a party or by which it is bound. 4.4 STATUS OF SHARES. The Shares delivered to the Shareholders at the Closing are duly authorized and delivered shares of WCI, and shall be fully paid and nonassessable. 4.5 NO MISLEADING STATEMENTS. The representations and warranties of WCI contained in this Agreement, the Exhibits and Schedules hereto and all other documents and information furnished to the Shareholders pursuant hereto are materially complete and accurate, and do not include any untrue statement of a material fact or omit to state any material fact necessary to make the statements made and to be made not misleading as of the Closing Date. 4.6 BROKERS; FINDERS. No person has acted directly or indirectly as a broker, finder or financial advisor for WCI in connection with the transactions contemplated by this Agreement and no person is entitled to any broker's, finder's, financial advisory or similar fee or payment in respect thereof based in any way on any agreement, arrangement or understanding made by or on behalf of WCI. 4.7 DISCLOSURE SCHEDULES. Any matter disclosed by WCI on any Schedule to this Agreement shall be deemed to have been disclosed on every other Schedule that refers to such Schedule by cross reference so long as the nature disclosed is obvious from a fair reading of the Schedule on which the matter is disclosed. 5. CLOSING DELIVERIES At the Closing, the respective parties shall make the deliveries indicated: 5.1 WCI DELIVERIES. (a) WCI shall deliver the cash portion of the Purchase Price required to be delivered on the Closing Date pursuant to Section 1.2(a). (b) WCI shall deliver to the Shareholders certificates for the Shares. (c) WCI shall deliver to the Shareholders the Note substantially in the form of the draft included in Exhibit 1.2(d). (d) WCI shall execute and deliver an Employment Agreement with Timothy Thomas substantially in the form of the draft included in Exhibit 5.1(d). (e) If WCI does not pay off the Closing Date Debt on the Closing Date, WCI shall either provide the Shareholders with a written release from each creditor or place an amount equal to the Closing Date Debt into an escrow account. 23 25 5.2 SHAREHOLDERS DELIVERIES. (a) The Shareholders shall deliver to WCI the certificates representing the outstanding Corporation's Stock free and clear of all liens, security interests, claims and encumbrances, accompanied by a stock power duly executed in blank. (b) The Shareholders shall deliver to WCI Uniform Commercial Code financing statement searches from the State of Wyoming, dated within thirty (30) days prior to the Closing Date, with an unofficial update on the Closing Date obtained from Information America or another reporting service, showing that there are no security interests, judgments, taxes, other liens or encumbrances outstanding against the Corporation or its assets, other than as disclosed on Part III of Schedule 3.8. (c) The Shareholders shall deliver to WCI an opinion of counsel for the Shareholders, dated as of the Closing Date, in substantially the form attached hereto as Exhibit 5.2(c). (d) The Shareholders shall deliver evidence reasonably satisfactory to WCI that all required third-party consents to the transactions contemplated hereby, including without limitation all Required Governmental Consents and all required consents of the landlords under all real estate leases to which the Corporation is a party, were obtained and the Shareholders shall deliver an estoppel certificate from the landlords under all real estate leases to which the Corporation is a party confirming the terms thereof and the rental amount owing thereunder, certifying that such lease is in full force and effect, that the Corporation is not in default under any of the terms or conditions thereof, that there have been no amendments or modifications to any such lease (or specifying the same), and otherwise containing such statements and certifications as the Corporation may require. (e) The Corporation shall deliver to WCI evidence satisfactory to WCI showing that all written employment contracts and all oral employment contracts other than those that are terminable "AT WILL" without payment of severance (other than normal severance benefits approved by WCI) or other benefits with non-union employees of the Corporation (including, without limitation, stock options or other rights to obtain equity in the Corporation) have been terminated, effective on or before the Closing Date. (f) The Shareholders shall cause each officer of the Corporation to deliver a resignation as an officer of the Corporation together with a general release releasing the Corporation from all obligations under any indemnification agreements, the charter documents of the Corporation, or otherwise, arising out of or relating to this Agreement or the consummation of the transactions contemplated thereby, other than obligations arising after the Closing Date under this Agreement. 24 26 6. ADDITIONAL COVENANTS OF WCI, THE CORPORATION AND THE SHAREHOLDERS 6.1 RELEASE OF GUARANTIES. WCI shall use reasonable efforts to obtain the termination and release promptly after the Closing Date of the personal guaranties of the Shareholders listed on Schedule 6.2, all of which relate to indebtedness of the Corporation included in the Financial Statements as of the Balance Sheet Date or WCI shall indemnify the Shareholders and hold them harmless from and against all losses, expenses or claims by third parties to enforce or collect indebtedness owed by the Corporation as of the Closing Date which is personally guaranteed by the Shareholders pursuant to such guaranties. The Shareholders may notify the obligees under such guaranties that they have terminated their obligations under such guaranties. The Shareholders shall cooperate with WCI in obtaining such releases. 6.2 RELEASE OF SECURITY INTERESTS. On or after the Closing Date, the Shareholders and their respective Affiliates shall cause those security interests in the assets of the Corporation that have been created in favor of financial institutions or other lenders to secure indebtedness (other than indebtedness of the Corporation) of the Shareholders or their respective Affiliates to be released in a manner reasonably satisfactory to WCI, and shall cause all guaranties by the Corporation relating to the indebtedness of the Shareholders to be released to the reasonable satisfaction of WCI. 6.3 CONFIDENTIALITY. Neither the Corporation nor any of the Shareholders shall disclose or make any public announcements of the transactions contemplated by this Agreement without the prior written consent of WCI, unless required to make such disclosure or announcement by law, in which event the party making the disclosure or announcement shall notify WCI at least 24 hours before such disclosure or announcement is expected to be made. WCI shall not disclose or make any public announcement of the transactions contemplated by this Agreement without the prior written consent of the Shareholders' Representative, unless in connection with the initial public offering of WCI Stock or otherwise required to make such disclosure or announcement by law, in which event WCI shall notify the Shareholders' Representative at least 24 hours before such disclosure or announcement is expected to be made. 6.4 BROKERS AND FINDERS FEES. Each party shall pay and be responsible for any broker's, finder's or financial advisory fee incurred by such party in connection with the transactions contemplated by this Agreement. 6.5 TAXES. WCI shall reasonably cooperate, at the expense of the Shareholders, with the Shareholders with respect to any matters involving the Shareholders arising out of the Shareholders' ownership of the Corporation prior to the Closing, including matters relating to tax returns and any tax audits, appeals, claims or litigation with respect to such tax returns or the preparation of such tax returns. In connection therewith, WCI shall make available to the Shareholders such files, documents, books and records of the Corporation for inspection and copying as may be reasonably requested by the Shareholders and shall cooperate with the Shareholders with respect to retaining information and documents which relate to such matters. 25 27 6.6 SHORT YEAR TAX RETURNS. After the Closing Date, the Shareholders shall prepare at their sole cost and expense, all short year federal, state, county, local and foreign tax returns required by law for the period beginning with the first day of the Corporation's fiscal year in which the Closing occurs and ending with the Closing Date. Each such return shall be prepared in a financially responsible and conservative manner and shall be delivered to WCI together with all necessary supporting schedules within 120 days following the Closing Date for its approval (but such approval shall not relieve the Shareholders of their responsibility for the taxes assessed under these returns). The Shareholders shall be responsible for the payment of all taxes shown to be due or that may come to be due on such returns or otherwise relating to the period prior to the Closing Date in excess of the amount of any reserve for taxes included in Effective Date Current Liabilities. The Shareholders shall also be responsible for all taxes arising from the conversion of the Corporation from a cash to accrual basis of reporting whether or not due on such returns or on the first return filed by the Corporation for the period commencing after the Closing Date. At the time of the delivery of the returns, shall contemporaneously deliver to WCI checks payable to the respective taxing authorities in amounts equal to the amount due. WCI shall sign tax returns and cause such returns to be timely filed with the appropriate authorities. The Shareholders shall be entitled to receive all refunds shown on said returns and any such refunds received by the Corporation or WCI shall be remitted to the Shareholders. 6.7 CERTAIN TAX MATTERS. The Shareholders acknowledge that WCI may make an election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended. The Shareholders agree that WCI, in its discretion, may make such election; provided, however, that such election shall be made no later than the due date for such election. If such election is made by WCI: (a) WCI shall be authorized to complete Form 8023-A; (b) The Shareholders shall sign such completed Form 8023-A at the Closing; and (c) WCI and the Shareholders shall agree upon the allocation of the Purchase Price among the assets (including intangible assets) of the Corporation. (d) If WCI does make its election under Section 338(h)(10) of the Internal Revenue Code of 1986, as amended, WCI shall reimburse the Shareholders and the Corporation for any additional taxes, penalties, interest and costs of preparation of amended income tax returns incurred due to such election resulting from the recapture of depreciation previously taken on various assets of the Corporation at ordinary income instead of capital gain rates. Such reimbursement shall be in a sum computed by a simultaneous equation computing the additional tax owed by stockholders, as well as the tax on the payment of that sum. 26 28 6.8 SHAREHOLDERS' REPRESENTATIVE. (a) In order to administer efficiently the rights and obligations of the Shareholders under this Agreement, the Shareholders hereby designate and appoint Timothy Thomas as the Shareholders' Representative, to serve as the Shareholders' agent, proxy and attorney-in-fact for the limited purposes set forth in this Agreement. (b) Each of the Shareholders hereby appoints the Shareholders' Representative as such Shareholder's agent, proxy and attorney-in-fact, with full power of substitution, for all purposes set forth in this Agreement, including, without limitation, the full power and authority on such Shareholder's behalf (i) to consummate the transactions contemplated by this Agreement, (ii) to disburse any funds received hereunder to the Shareholders, (iii) to execute and deliver on behalf of each Shareholder any amendment or waiver under this Agreement, to agree to the amount of the actual Closing Date Debt, Closing Date Current Assets and Closing Date Current Liabilities pursuant to Section 1.2(a), and to agree to resolution of all Claims hereunder, (iv) to retain legal counsel and other professional services, at the expense of the Shareholders, in connection with the performance by the Shareholders' Representative of this Agreement, and (v) to do each and every act and exercise any and all rights which such Shareholder or Shareholders are permitted or required to do or exercise under this Agreement and the other agreements, documents and certificates executed in connection herewith. Each of the Shareholders agrees that such agency and proxy are coupled with an interest, are therefore irrevocable without the consent of the Shareholders' Representative and shall survive the death, bankruptcy or other incapacity of any Shareholder. (c) Each of the Shareholders hereby agrees that any amendment or waiver under this Agreement, and any action taken on behalf of the Shareholders to enforce the rights of the Shareholders under this Agreement, and any action taken with respect to any adjustment or Claim (including any action taken to object to, defend, compromise or agree to the payment of such adjustment or Claim), shall be effective if approved in writing by persons who were the holders of a majority of the Corporation's Stock immediately prior to the Closing, and that each and every action so taken shall be binding and conclusive on every Shareholder, whether or not such Shareholder had notice of, or approved, such amendment or waiver. (d) Timothy Thomas shall serve as the Shareholders' Representative until he resigns or is otherwise unable or unwilling to serve. In the event that a Shareholders' Representative resigns from such position or is otherwise unable or unwilling to serve, the remaining Shareholders shall select, by the vote of the holders of a majority of the Corporation's Stock immediately prior to the Closing, a successor representative to fill such vacancy, shall provide prompt written notice to WCI of such change and such substituted representative shall then be deemed to be the Shareholders' Representative for all purposes of this Agreement. 6.9 GENERAL RELEASE BY SHAREHOLDERS. Each of the Shareholders hereby fully 27 29 releases and discharges the Corporation and its directors, officers, agents and employees from all rights, claims and actions, known or unknown, of any kind whatsoever, which any of such Shareholders now has or may hereafter have against the Corporation and its directors, officers, agents and employees, arising out of or relating to events arising prior to or on the Closing Date, except (a) as may be described in written contracts disclosed in Schedule 6.9 and expressly described and specifically excepted from this release in Schedule 6.9, (b) compensation as an employee of the Corporation for current periods expressly described and excepted from such release on schedule 6.9, and (c) for the obligations of the Corporation arising after the Closing Date under this Agreement. Specifically, but not by way of limitation, each of the Shareholders waives any right of indemnification, contribution or other recourse against the Corporation which he now has or may hereafter have against the Corporation with respect to representations, warranties or covenants made in this Agreement by the Corporation. Each of the Shareholders hereby waives and relinquishes all rights and benefits afforded by Section 1542 of the California Civil Code, which states as follows: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS TO WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." Each of the Shareholders understands and acknowledges the significance and consequence of this waiver of Section 1542 and nevertheless elects to, and does, release those claims described in this Section 6.9, known or unknown, that it may have now or in the future arising out of or relating to any event arising on or prior to the date of this Agreement. 7. INDEMNIFICATION 7.1 INDEMNITY BY THE SHAREHOLDERS. Each of the Shareholders, jointly and severally, subject to the limitations set forth in Section 7.2, covenants and agrees that he or she will indemnify and hold harmless WCI, the Corporation and their respective directors, officers and agents and their respective successors and assigns (collectively the "WCI INDEMNITEES"), from and after the date of this Agreement and until the third anniversary of the Closing Date, against any and all losses, damages, assessments, fines, penalties, adjustments, liabilities, claims, deficiencies, costs, expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation), expenditures, including, without limitation, any "ENVIRONMENTAL SITE LOSSES" (as such term is hereinafter defined) identified by a WCI Indemnitee in a Claims Notice (as defined in Section 7.3(a)), or asserted by a WCI Indemnitee in litigation commenced against the Shareholders provided that in either case any such Claims Notice shall be given or the litigation commenced prior to the earlier of the third anniversary of this Agreement or the expiration of the applicable statute of limitations (irrespective of the date of discovery), with respect to each of the following contingencies (all, the "7.1 INDEMNITY EVENTS"): (a) Any misrepresentation, breach of warranty, or nonfulfillment of any agreement or covenant on the part of the Shareholders or the Corporation pursuant to the 28 30 terms of this Agreement or any misrepresentation in or omission from any Exhibit, Schedule, list, certificate, or other instrument furnished or to be furnished to WCI pursuant to the terms of this Agreement, regardless of whether, in the case of a breach of a representation or a warranty, WCI relied on the truth of such representation or warranty or had any knowledge of any breach thereof. (b) The design, development, construction or operation of any Facility or any other "ENVIRONMENTAL SITE" as hereinafter defined, or the installation or operation of a UST during any period on or prior to the Closing Date, in excess of the amount of liability with respect thereto, if any, set forth on Part II of Schedule 3.8. As used in this Agreement, "ENVIRONMENTAL SITE" shall mean any Facility, any UST and any other waste storage, processing, treatment or disposal facility, and any other business site or any other real property owned, leased, controlled or operated by the Corporation or by any predecessor thereof on or prior to the Closing Date. As used in this Agreement, "ENVIRONMENTAL SITE LOSSES" shall mean any and all losses, damages (including exemplary damages and penalties), liabilities, claims, deficiencies, costs, expenses, and expenditures (including, without limitation, expenses in connection with site evaluations, risk assessments and feasibility studies) arising out of or required by an interim or final judicial or administrative decree, judgment, injunction, mandate, interim or final permit condition or restriction, cease and desist order, abatement order, compliance order, consent order, clean-up order, exhumation order, reclamation order or any other remedial action that is required to be undertaken under federal, state or local law in respect of operating activities on or affecting any Facility, any UST or any other Environmental Site, including, but not limited to (x) any actual or alleged violation of any law or regulation respecting the protection of the environment, including, but not limited to, RCRA and CERCLA or any other law or regulation respecting the protection of the air, water and land and (y) any remedies or violations, whether by a private or public action, alleged or sought to be assessed as a consequence, directly or indirectly, of any "RELEASE" (as defined below) of pollutants (including odors) or Hazardous Substances from any Facility, any UST or any other Environmental Site resulting from activities thereat, whether such Release is into the air, water (including groundwater) or land and whether such Release arose before, during or after the Closing Date. The term "RELEASE" as used herein means any spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing into the ambient environment. Notwithstanding anything in this paragraph to the contrary, it is specifically understood and agreed that a Release composed solely of Hazardous Substances contained in household waste lawfully disposed of in a landfill during the time the Corporation owned and/or operated such landfill does not constitute an Environmental Site Loss. (c) All matters on Schedule 3.8, Part II. (d) All actions, suits, proceedings, demands, assessments, adjustments, costs and expenses (including specifically, but without limitation, reasonable attorneys' fees and expenses of investigation) incident to any of the foregoing. 29 31 7.2 LIMITATIONS ON SHAREHOLDERS' INDEMNITIES. (a) Subject to the provisions of 7.2(b) hereof, the obligations of the Shareholders to indemnify the WCI Indemnitees as provided in Section 7.1 shall be equal to the amount by which the cumulative amount of all such liabilities, claims, damages deficiencies, actions, suits, proceedings, demands, assessments, adjustments, costs and expenses, expenditures and Environmental Site Losses with respect to any or all 7.1 Indemnity Events exceed five thousand dollars ($5,000) (the "GENERAL DEDUCTIBLE AMOUNT"). (b) The maximum amount which WCI can recover as a result of one or more 7.1 Indemnity Events shall not exceed: (i) eighty percent (80%) of the Purchase Price (as adjusted pursuant to Section 1.2(a) hereof), if the 7.1 Indemnity Event occurs during the time period from the Closing Date to, and including, the first anniversary of the Closing Date; (ii) seventy-five percent (75%) of the Purchase Price (as adjusted pursuant to Section 1.2(a) hereof), if the 7.1 Indemnity Event occurs during the time period from the first anniversary of the Closing Date to, and including, the second anniversary of the Closing Date; and (iii) sixty-five percent (65%) of the Purchase Price (as adjusted pursuant to Section 1.2(a) hereof), if the 10.1 Indemnity Event occurs during the time period from the second anniversary of the Closing Date to, and including, the third anniversary of the Closing Date. For this purpose, the Shares shall be valued at one hundred and fifty thousand dollars ($150,000). 30 32 7.3 NOTICE OF INDEMNITY CLAIM. (a) In the event that any claim ("CLAIM") is hereafter asserted against or arises with respect to any WCI Indemnitee as to which such Indemnitee may be entitled to indemnification hereunder, the WCI Indemnitee shall notify the Shareholders (as applicable collectively, the "INDEMNIFYING PARTY") in writing thereof (the "CLAIMS NOTICE") within 60 days after (i) receipt of written notice of commencement of any third party litigation against such WCI Indemnitee, (ii) receipt by such WCI Indemnitee of written notice of any third party claim pursuant to an invoice, notice of claim or assessment, against such WCI Indemnitee, or (iii) such WCI Indemnitee becomes aware of the existence of any other event in respect of which indemnification may be sought from the Indemnifying Party (including, without limitation, any inaccuracy of any representation or warranty or breach of any covenant). The Claims Notice shall describe the Claim and the specific facts and circumstances in reasonable detail, and shall indicate the amount, if known, or an estimate, if possible, of the losses that have been or may be incurred or suffered by the WCI Indemnitee. (b) The Indemnifying Party may elect to defend any Claim for money damages where the cumulative total of all Claims (including such Claims) do not exceed the limit set forth in Section 7.2(b) at the time the Claim is made, by the Indemnifying Party's own counsel; provided, however, the Indemnifying Party may assume and undertake the defense of such a third party Claim only upon written agreement by the Indemnifying Party that the Indemnifying Party is obligated to fully indemnify the WCI Indemnitee with respect to such action. The WCI Indemnitee may participate, at the WCI Indemnitee's own expense, in the defense of any Claim assumed by the Indemnifying Party. Without the written approval of the WCI Indemnitee, which approval shall not be unreasonably withheld, the Indemnifying Party shall not agree to any compromise of a Claim defended by the Indemnifying Party. (c) If, within thirty (30) days of the Indemnifying Party's receipt of a Claims Notice, the Indemnifying Party shall not have provided the written agreement required by Section 7.3(b) and elected to defend the Claim, the WCI Indemnitee shall have the right to assume control of the defense and/or compromise of such Claim, and the costs and expenses of such defense, including reasonable attorneys' fees, shall be added to the Claim. The Indemnifying Party shall promptly, and in any event within thirty (30) days after demand therefor, reimburse the WCI Indemnitee for the costs of defending the Claim, including attorneys' fees and expenses. (d) The party assuming the defense of any Claim shall keep the other party reasonably informed at all times of the progress and development of its or their defense of and compromise efforts with respect to such Claim and shall furnish the other party with copies of all relevant pleadings, correspondence and other papers. In addition, the parties to this Agreement shall cooperate with each other and make available to each other and their representatives all available relevant records or other materials required by them for their use in defending, compromising or contesting any Claim. The failure to timely 31 33 deliver a Claims Notice or otherwise notify the Indemnifying Party of the commencement of such actions in accordance with this Section 7.3 shall not relieve the Indemnifying Party from the obligation to indemnify hereunder but only to the extent that the Indemnifying Party establishes by competent evidence that it has been prejudiced thereby. (e) In the event both the WCI Indemnitee and the Indemnifying Party are named as defendants in an action or proceeding initiated by a third party, they shall both be represented by the same counsel (on whom they shall agree), unless such counsel the WCI Indemnitee, or the Indemnifying Party shall determine that such counsel has a conflict of interest in representing both the WCI Indemnitee and the Indemnifying Party in the same action or proceeding and the WCI Indemnitee and the Indemnifying Party do not waive such conflict to the satisfaction of such counsel. 7.4 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The representations and warranties of the parties contained in this Agreement and in any certificate, Exhibit or Schedule delivered pursuant hereto, or in any other writing delivered pursuant to the provisions of this Agreement (the "REPRESENTATIONS AND WARRANTIES") and the liability of the party making such Representations and Warranties for breaches thereof shall survive the consummation of the transactions contemplated hereby. The parties hereto in executing and delivering and in carrying out the provisions of this Agreement are relying solely on the representations, warranties, Schedules, Exhibits, agreements and covenants contained in this Agreement, or in any writing or document delivered pursuant to the provisions of this Agreement, and not upon any representation, warranty, agreement, promise or information, written or oral, made by any persons other than as specifically set forth herein or therein. 7.5 NO EXHAUSTION OF REMEDIES OR SUBROGATION; RIGHT OF SET OFF. The Shareholders waive any right to require any WCI Indemnitee to (i) proceed against the Corporation; (ii) proceed against any other person; or (iii) pursue any other remedy whatsoever in the power of any WCI Indemnitee. WCI may, but shall not be obligated to, set off against any and all payments due any Shareholder any amount to which any WCI Indemnitee is entitled to be indemnified hereunder with respect to any 7.1 Indemnity Event. Such right of set off shall be separate and apart from any and all other rights and remedies that the Indemnities may have against Shareholders or their successors. 32 34 8. OTHER POST-CLOSING COVENANTS OF THE SHAREHOLDERS AND WCI 8.1 RESTRICTIVE COVENANTS. As to the Corporation, the Shareholders and their Affiliates acknowledge that (i) WCI, as the purchaser of the Corporation's Stock, is and will be engaged in the same business as the Corporation (the "BUSINESS"); (ii) the Shareholders and their Affiliates are intimately familiar with the Business; (iii) the Business is currently conducted in the State of Wyoming and WCI intends to continue the Business in Wyoming and intends, by acquisition or otherwise, to expand the Business into other geographic areas of Wyoming where it is not presently conducted; (iv) the Shareholders and their Affiliates have had access to trade secrets of, and confidential information concerning, the Business; (v) the agreements and covenants contained in this Section 8.1 are essential to protect the Business and the goodwill being acquired; and (vi) the Shareholders and their Affiliates have the means to support themselves and their dependents other than by engaging in a business substantially similar to the Business and the provisions of this Section 8 will not impair such ability. The Shareholders covenant and agree as set forth in (a), (b) and (c) below with respect to the Corporation: (a) NON-COMPETE. For a period commencing on the Closing Date and terminating five years thereafter (the "RESTRICTED PERIOD"), neither the Shareholders nor any of their Affiliates shall, anywhere in the counties of Albany, Crook, Campbell, Converse, Goshen, Niobrara, Natrona, Platte or Weston, Wyoming, where WCI or one of its subsidiaries owns or operates a business similar to the Business (the "RESTRICTED COUNTIES"), directly or indirectly, acting individually or as the owner, shareholder, partner, or employee of any entity, (i) engage in the operation of a solid waste collection, transporting, disposal and/or composting business, transfer facility, recycling facility, materials recovery facility or solid waste landfill; (ii) enter the employ of, or render any personal services to or for the benefit of, or assist in or facilitate the solicitation of customers for, or receive remuneration in the form of salary, commissions or otherwise from, any business engaged in such activities; (iii) as owner or lessor of real estate or personal property, rent to lease any facility, equipment or other assets to any business engaged in the same business as the Corporation; or (iv) receive or purchase a financial interest in, make a loan to, or make a gift in support of, any such business in any capacity, including, without limitation, as a sole proprietor, partner, shareholder, officer, director, principal, agent, trustee or lender; provided, however, that any of the Shareholders may own, directly or indirectly, solely as an investment, securities of any business traded on any national securities exchange or NASDAQ, provided none of the Shareholders is a controlling person of, or a member of a group which controls, such business and further provided that the Shareholders do not, in the aggregate, directly or indirectly, own 2% or more of any class of securities of such business. (b) CONFIDENTIAL INFORMATION. During the Restricted Period and thereafter, the Shareholders and their Affiliates shall keep secret and retain in strictest confidence, and shall not use for the benefit of themselves or others, all data and information relating to the Business ("CONFIDENTIAL INFORMATION"), including without limitation, know-how, trade secrets, customer lists, supplier lists, details of contracts, pricing policies, 33 35 operational methods, marketing plans or strategies, bidding information, practices, policies or procedures, product development techniques or plans, and technical processes; provided, however, that the term "CONFIDENTIAL INFORMATION" shall not include information that (i) is or becomes generally available to the public other than as a result of disclosure by the Shareholders or (ii) is general knowledge in the solid waste handling and landfill business and not specifically related to the Business. (c) PROPERTY OF THE BUSINESS. All memoranda, notes, lists, records and other documents or papers (and all copies thereof) relating to the Business, including such items stored in computer memories, on microfiche or by any other means, made or compiled by or on behalf of the Shareholders or the Corporation or made available to them relating to the Business, but excluding any materials (other than the minute books of the Corporation) maintained by any attorneys for the Corporation or the Shareholders prior to the Closing, are and shall be the property of WCI and have been delivered or will be delivered or made available to WCI at the Closing. (d) NON-SOLICITATION. Without the consent of WCI, which may be granted or withheld by WCI in its discretion, the Shareholders and their Affiliates shall not solicit any employees of the Corporation to leave the employ of the Corporation and join the Shareholders or any Affiliate in any business endeavor owned or pursued by the Shareholders. (e) NO DISPARAGEMENT. From and after the Closing Date, none of the Shareholders shall, in any way or to any person or entity or governmental or regulatory body or agency, denigrate or derogate WCI or any of its subsidiaries, or any officer, director or employee, or any product or service or procedure of any such company whether or not such denigrating or derogatory statements shall be true and are based on acts or omissions which are learned by the Shareholders from and after the date hereof or on acts or omissions which occur from and after the date hereof, or otherwise. A statement shall be deemed denigrating or derogatory to any person or entity if it adversely affects the regard or esteem in which such person or entity is held by investors, lenders or licensing, rating, or regulatory entities. Without limiting the generality of the foregoing, none of the Shareholders shall, directly or indirectly in any way in respect of any such company or any such directors or officers, communicate with, or take any action which is adverse to the position of any such company with any person, entity or governmental or regulatory body or agency who or which has dealings or prospective dealings with any such company or jurisdiction or prospective jurisdiction over any such company. This paragraph does not apply to the extent that testimony is required by legal process, provided that WCI has received not less than five days' prior written notice of such proposed testimony. 8.2 RIGHTS AND REMEDIES UPON BREACH. If any of the Shareholders or any Affiliate breaches, or threatens to commit a breach of, any of the provisions of Section 8.1 herein (the "RESTRICTIVE COVENANTS"), WCI shall have the following rights and remedies, each of which rights and remedies shall be independent of the others and severally enforceable, and each of which is in addition to, and not in lieu of, any other rights and remedies available to WCI at law 34 36 or in equity: (a) SPECIFIC PERFORMANCE. The right and remedy to have the Restrictive Covenants specifically enforced by any court of competent jurisdiction, it being agreed that any breach or threatened breach of the Restrictive Covenants would cause irreparable injury to WCI and that money damages would not provide an adequate remedy to WCI. Accordingly, in addition to any other rights or remedies, WCI shall be entitled to injunctive relief to enforce the terms of the Restrictive Covenants and to restrain the Shareholders from any violation thereof. (b) ACCOUNTING. The right and remedy to require the Shareholders to account for and pay over to WCI all compensation, profits, monies, accruals, increments or other benefits derived or received by the Shareholders as the result of any transactions constituting a breach of the Restrictive Covenants. (c) SEVERABILITY OF COVENANTS. The Shareholders acknowledge and agree that the Restrictive Covenants are reasonable and valid in geographical and temporal scope and in all other respects. If any court determines that any of the Restrictive Covenants, or any part thereof, is invalid or unenforceable, the remainder of the Restrictive Covenants shall not thereby be affected and shall be given full effect, without regard to the invalid portions. (d) BLUE-PENCILING. If any court determines that any of the Restrictive Covenants, or any part thereof, is unenforceable because of the duration or geographic scope of such provision, such court shall reduce the duration or scope of such provision, as the case may be, to the extent necessary to render it enforceable and, in its reduced form, such provision shall then be enforced. (e) ENFORCEABILITY IN JURISDICTION. WCI and the Shareholders intend to and hereby confer jurisdiction to enforce the Restrictive Covenants upon the courts of any jurisdiction within the geographic scope of the Restrictive Covenants. If the courts of any one or more of such jurisdictions hold the Restrictive Covenants unenforceable by reason of the breadth of such scope or otherwise, it is the intention of WCI and the Shareholders that such determination not bar or in any way affect WCI's right to the relief provided above in the courts of any other jurisdiction within the geographic scope of the Restrictive Covenants as to breaches of such covenants in such other respective jurisdictions, such covenants as they relate to each jurisdiction being, for this purpose, severable into diverse and independent covenants. 35 37 9. GENERAL 9.1 ADDITIONAL CONVEYANCES. Following the Closing, the Shareholders and WCI shall each deliver or cause to be delivered at such times and places as shall be reasonably agreed upon such additional instruments as WCI or the Shareholders may reasonably request for the purpose of carrying out this Agreement. The Shareholders will cooperate with WCI and/or the Corporation on and after the Closing Date in furnishing information, evidence, testimony and other assistance in connection with any actions, proceedings or disputes of any nature with respect to matters pertaining to all periods prior to the date of this Agreement. 9.2 ASSIGNMENT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto, the successors or assigns of WCI and the heirs, legal representatives or assigns of the Shareholders; provided, however, that any such assignment shall be subject to the terms of this Agreement and shall not relieve the assignor of its or his responsibilities under this Agreement. 9.3 PUBLIC ANNOUNCEMENTS. Except as required by law, no party shall make any public announcement or filing with respect to the transactions provided for herein prior to the Closing Date without the prior consent of the other parties hereto. 9.4 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. 9.5 NOTICES. All notices, requests, demands and other communications hereunder shall be deemed to have been duly given if in writing and either delivered personally, sent by facsimile transmission or by air courier service, or mailed by postage prepaid registered or certified U.S. mail, return receipt requested, to the addresses designated below or such other addresses as may be designated in writing by notice given hereunder, and shall be effective upon personal delivery or facsimile transmission thereof or upon delivery by registered or certified U.S. mail or one business day following deposit with an air courier service: If to the Shareholders: at their respective addresses set forth on Schedule 3.2 With a copy to: Chad Hooker, Esq. Lubnau, Hand & Bailey 408 S. Gillette Avenue Gillette, WY 82717-1028 Fax: (307) 682-9340 If to WCI: Waste Connections, Inc. 2260 Douglas Boulevard, Suite 280 Roseville, California 95661 Attention: Ronald J. Mittelstaedt 36 38 Fax: (916) 772-2920 With a copy to: Robert D. Evans, Esq. Shartsis, Friese & Ginsburg LLP One Maritime Plaza, 18th Floor San Francisco, California 94111 Fax: (415) 421-2922 9.6 ATTORNEYS' FEES. In the event of any dispute or controversy between WCI on the one hand and the Corporation or the Shareholders on the other hand relating to the interpretation of this Agreement or to the transactions contemplated hereby, the prevailing party shall be entitled to recover from the other party reasonable attorneys' fees and expenses incurred by the prevailing party. Such award shall include post-judgment attorney's fees and costs. 9.7 APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California without regard to its conflict of laws provisions. 9.8 PAYMENT OF FEES AND EXPENSES. Whether or not the transactions herein contemplated shall be consummated, each party hereto will pay its own fees, expenses and disbursements incurred in connection herewith and all other costs and expenses incurred in the performance and compliance with all conditions to be performed hereunder (including, in the case of the Shareholders, any such fees, expenses and disbursements paid or accrued by, or charged to, the Corporation). 9.9 INCORPORATION BY REFERENCE. All Schedules and Exhibits attached hereto are incorporated herein by reference as though fully set forth at each point referred to in this Agreement. 9.10 CAPTIONS. The captions in this Agreement are for convenience only and shall not be considered a part hereof or affect the construction or interpretation of any provisions of this Agreement. 9.11 NUMBER AND GENDER OF WORDS; CORPORATION. Whenever the singular number is used herein, the same shall include the plural where appropriate, and shall apply to all of such number, and to each of them, jointly and severally, and words of any gender shall include each other gender where appropriate. 9.12 ENTIRE AGREEMENT. This Agreement (including the Schedules and Exhibits hereto) and the other documents delivered pursuant hereto constitute the entire Agreement and understanding between the Corporation, the Shareholders and WCI and supersedes any prior agreement and understanding relating to the subject matter of this Agreement. This Agreement may be modified or amended only by a written instrument executed by the Corporation, the Shareholders (or the Shareholders' Representative on their behalf) and WCI acting through its officers, thereunto duly authorized by its Board of Directors. 37 39 9.13 WAIVER. No waiver by any party hereto at any time of any breach of, or compliance with, any condition or provision of this Agreement to be performed by any other party hereto may be deemed a waiver of similar or dissimilar provisions or conditions at the same time or at any prior or subsequent time. 9.14 CONSTRUCTION. The language in all parts of this Agreement must be in all cases construed simply according to its fair meaning and not strictly for or against any party. Unless expressly set forth otherwise, all references herein to a "DAY" are deemed to be a reference to a calendar day. All references to "BUSINESS DAY" mean any day of the year other than a Saturday, Sunday or a public or bank holiday in Oregon or California. Unless expressly stated otherwise, cross-references herein refer to provisions within this Agreement and are not references to the overall transaction or to any other document. 10. GLOSSARY The definitions of the terms used below can be found at the Section indicated:
Terms Section ----- ------- 7.1 Indemnity Events Section 7.1 Accredited investor Section 3.38(a) Act Section 3.38(a) Affiliate Section 3.11 At will Section 5.2(e) Balance Sheet Date Section 1.2(a) Section 3.7 Business Section 8.1 Business day Section 9.14 Claim Section 7.3(a) Claims Notice Section 7.3(a) Closing Section 2 Closing Date Section 2 Closing Date Current Assets Section 3.22(b) Closing Date Current Liabilities Section 3.22(b) Closing Date Debt Section 3.22(a) Collection Franchises Section 3.10(a) Confidential Information Section 8.1(b) Corporate Property Section 3.12(b) Corporation Parties Corporation Debt Section 1.2(c) Corporation's Stock Shareholders Day Section 9.14 Environmental Laws Section 3.24 Environmental Site Section 7.1(b) Environmental Site Losses Section 7.1 ERISA Section 3.17(a)
38 40 Excluded Assets Section 1.4 Facilities Section 3.10(c) Facility Section 3.10(c) Facility Property Section 3.10(c)(iii) Facility Surveys/Site Plans Section 3.10(c)(iii) Financial Statements Section 3.7 General Deductible Amount Section 7.2(a) Golden parachute Section 3.17(a) Golden Parachute Payment Section 3.17(c) Governmental Permits Section 3.10(a) Hazardous Material Section 3.24(e) Hazardous Waste Section 3.24(e) Indemnifying Party Section 7.3(a) Knowledge Section 3.36 Laws Section 3.24 Lock up Section 3.38(j) Multi-employer plan Section 3.17(a) Note Section 1.2(d) Occurrence Section 3.15 Permitted Liens Section 3.12(c) Purchase Price Section 1.1 RCRA Section 3.24(a) Recipient Section 3.17(c) Records, Notifications and Reports Section 3.10(b) Release Section 7.1(b) Representations and Warranties Section 7.4 Required Governmental Consents Section 3.10(a) Restricted Counties Section 8.1(a) Restricted Period Section 8.1(a) Restricted securities Section 3.38(i) Restrictive Covenants Section 8.2 SEC Section 3.38(g) Shareholders Debt Section 1.2(c) Shareholders Parties Shares Section 1.2(b) UST Section 3.26 WCI Parties WCI Indemnitees Section 7.1 WCI Stock Section 1.2(b)
39 41 IN WITNESS WHEREOF, the parties hereto have executed this Stock Purchase Agreement by persons thereunto duly authorized as of the date first above written. THE CORPORATION: T & T DISPOSAL, INC. By: _______________________________________ Timothy Thomas President WCI: WASTE CONNECTIONS, INC. By: _______________________________________ Ronald J. Mittelstaedt Chief Executive Officer & President THE SHAREHOLDERS: ___________________________________________ Timothy Thomas 40 42 TABLE OF CONTENTS
Page(s) ------- 1. PURCHASE OF CORPORATION'S STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Shares to be Purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.3 Allocation of the Purchase Price . . . . . . . . . . . . . . . . . . . . . . . 2 1.4 Excluded Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2. CLOSING TIME AND PLACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3. REPRESENTATIONS AND WARRANTIES OF THE CORPORATION AND THE SHAREHOLDERS . . . . . . . . . 2 3.1 Organization, Standing and Qualification . . . . . . . . . . . . . . . . . . . 3 3.2 Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.3 All Stock Being Acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.4 Authority for Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.5 No Breach or Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3.6 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.7 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.8 Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.9 Conduct of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.10 Permits and Licenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.11 Certain Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3.12 Fixed Assets and Real Property . . . . . . . . . . . . . . . . . . . . . . . . 8 3.13 Acquisition/Disposal of Assets . . . . . . . . . . . . . . . . . . . . . . . . 9 3.14 Contracts and Agreements; Adverse Restrictions . . . . . . . . . . . . . . . . 9 3.15 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.16 Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.17 Benefit Plans and Union Contracts . . . . . . . . . . . . . . . . . . . . . . . 10 3.18 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.19 Copies Complete; Required Consents . . . . . . . . . . . . . . . . . . . . . . 12 3.20 Customers, Billings, Current Receipts and Receivables . . . . . . . . . . . . . 12 3.21 No Change With Respect to the Corporation . . . . . . . . . . . . . . . . . . . 13 3.22 Debt; Current Assets and Current Liabilities . . . . . . . . . . . . . . . . . 14 3.23 Bank Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.24 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.25 Powers of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.26 Underground Storage Tanks . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 3.27 Patents, Trademarks, Trade Names, etc. . . . . . . . . . . . . . . . . . . . . 17 3.28 Assets, etc., Necessary to Business . . . . . . . . . . . . . . . . . . . . . . 17 3.29 Condemnation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.30 Suppliers and Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.31 Absence of Certain Business Practices . . . . . . . . . . . . . . . . . . . . . 18
i 43
Page(s) ------- 3.32 Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.33 Disclosure Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.34 No Misleading Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.35 Accurate and Complete Records . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.36 Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.37 Brokers; Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.38 Investment Representations . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.39 S Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4. REPRESENTATIONS AND WARRANTIES OF WCI . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.1 Existence and Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.2 No Contractual Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.3 Authorization of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.4 Status of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4.5 No Misleading Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4.6 Brokers; Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 4.7 Disclosure Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5. CLOSING DELIVERIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.1 WCI Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 5.2 Shareholders Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6. ADDITIONAL COVENANTS OF WCI, THE CORPORATION AND THE SHAREHOLDERS . . . . . . . . . . . 24 6.1 Release of Guaranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.2 Release of Security Interests . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.3 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.4 Brokers and Finders Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.5 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.6 Short Year Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 6.7 Certain Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 6.8 Shareholders' Representative . . . . . . . . . . . . . . . . . . . . . . . . . 26 6.9 General Release by Shareholders . . . . . . . . . . . . . . . . . . . . . . . . 27 7. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.1 Indemnity by the Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . 27 7.2 Limitations on Shareholders' Indemnities . . . . . . . . . . . . . . . . . . . 29 7.3 Notice of Indemnity Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 7.4 Survival of Representations, Warranties and Agreements . . . . . . . . . . . . 31 7.5 No Exhaustion of Remedies or Subrogation; Right of Set Off . . . . . . . . . . 31 8. OTHER POST-CLOSING COVENANTS OF THE SHAREHOLDERS AND WCI . . . . . . . . . . . . . . . . 31 8.1 Restrictive Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 8.2 Rights and Remedies Upon Breach . . . . . . . . . . . . . . . . . . . . . . . . 33
ii 44
Page(s) ------- 9. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.1 Additional Conveyances . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.2 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.3 Public Announcements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 9.6 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.7 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.8 Payment of Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.9 Incorporation by Reference . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.10 Captions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.11 Number and Gender of Words; Corporation . . . . . . . . . . . . . . . . . . . . 36 9.12 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.13 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.14 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 10. GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
iii EX-23.2 7 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, in Amendment No. 3 to the Registration Statement (Form S-1 No. 333-48029) and related Prospectus of Waste Connections, Inc. for the registration of 2,300,000 shares of its common stock. Our audits also included the financial statement schedule of Waste Connections, Inc. and Predecessors listed in Item 16.b. This schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. We also consent to the reference to our firm under the caption "Experts" and to the use of our report dated February 20, 1998, with respect to the financial statements of Madera Disposal Systems, Inc. included in Amendment No. 3 to the Registration Statement (Form S-1 No. 333-48029) and related Prospectus of Waste Connections, Inc. for the registration of 2,300,000 shares of its common stock. ERNST & YOUNG LLP Sacramento, California May 19, 1998 EX-23.3 8 CONSENT OF WILLIAMS, KASTNER, & GIBBS PLLC 1 EXHIBIT 23.3 CONSENT OF WILLIAMS, KASTNER & GIBBS PLLC We consent to the reference to our firm under the caption "Legal Matters" in Amendment No. 3 to the Registration Statement (Form S-1 No. 333-48029) and related Prospectus of Waste Connections, Inc. for the registration of up to 2,300,000 shares of its Common Stock. WILLIAMS, KASTNER & GIBBS PLLC Seattle, Washington May 19, 1998 -----END PRIVACY-ENHANCED MESSAGE-----